SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K\A
                                (AMENDMENT NO. 5)

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

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
                          COMMISSION FILE NUMBER 1-8137

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

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

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

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

        Securities registered pursuant to Section 12(b) of the Act: None

          Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock ($.10 par value)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 ______

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of December 1, 1997, was approximately $57,600,000. Solely for the
purposes of this  calculation,  shares  held by  directors  and  officers of the
Registrant  have  been  excluded.   Such  exclusion   should  not  be  deemed  a
determination by the Registrant that such  individuals are, in fact,  affiliates
of the Registrant.

The number of shares of Common Stock, $.10 par value, outstanding as of December
1, 1997 was 8,137,537.
<PAGE>
                                     PART II

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Financial  statements  called for hereunder are included  herein on the
         following pages:

                                                                      Page(s)

         Independent Auditors' Report                                   37

         Consolidated Balance Sheets                                    38

         Consolidated Statements of Operations                          39

         Consolidated Statements of Cash Flows                          40

         Consolidated Statements of Changes in Shareholders' Equity     41

         Notes to Consolidated Financial Statements                   42-60






                                      28-A

<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)       (1)     FINANCIAL STATEMENTS

                  (a) See  Part  II,  Item  8  for  index  to  the  Registrant's
                      financial statements and supplementary data.

                  (b) Separate  audited  financial  statements  of Gibson  Ranch
                      Limited  Liability  Company as of and for the years  ended
                      December 31 1997 and 1996,  as required  under  Regulation
                      S-X 210. 3-09. See pages 61-69 herein.

          (2)     FINANCIAL STATEMENT SCHEDULES

                  None applicable.

          (3)     EXHIBITS

                  (a)    The following Exhibits are filed as part of this Report
                         (references are to Regulation S-K Exhibit Numbers):

          3.1     Registrant's    Restated    Certificate   of    Incorporation,
                  incorporated  by  reference  to  Exhibit  3A  to  Registrant's
                  Registration  Statement on Form S-14 (File No. 2-70830),  (the
                  "Form S-14").

          3.2     Registrant's By-Laws,  incorporated by reference to Exhibit 3B
                  to the Form S-14.

          3.3     Articles  of  Amendment  to  the   Restated   Certificate   of
                  Incorporation,  as filed with the Secretary of State, State of
                  Delaware,  on October 7, 1991,  incorporated  by  reference to
                  Exhibit 4.3 to Registrant's Registration Statement on Form S-3
                  (File No. 33-52196) (the "Form S-3").

          3.4     Articles  of  Amendment  to  the   Restated   Certificate   of
                  Incorporation  as filed with the Secretary of State,  State of
                  Delaware,  on April 21,  1992,  incorporated  by  reference to
                  Exhibit 4.4 to the Form S-3.

         10.1     Employment  agreement  dated  November  7,  1994  between  the
                  Registrant  and David N. Keys,  incorporated  by  reference to
                  Exhibit 10.22 of the 1994 10-K.

         10.2     Form of American Pacific  Corporation  Defined Benefit Pension
                  Plan,  incorporated  by  reference  to  Exhibit  10.21  to the
                  Registrant's  Registration  Statement  on Form S-2  (File  No.
                  33-36664) (the "1990 S-2").

         10.3     Lease Agreement between 3770 Hughes Parkway Associates Limited
                  Partnership   and  the   Registrant,   dated  July  31,  1990,
                  incorporated by reference to Exhibit 10.22 to the 1990 S-2.

         10.4     Limited   Partnership   Agreement   of  3770  Hughes   Parkway
                  Associates, Limited Partnership,  incorporated by reference to
                  Exhibit 10.23 to the 1990 S-2.


                                       31
<PAGE>

         10.5     Cooperation  and Stock  Option  Agreement  dated as of July 4,
                  1990 by and  between  Dynamit  Nobel  AG and  the  Registrant,
                  including  exhibits  thereto,  incorporated  by  reference  to
                  Exhibit 10.24 to the 1990 S-2.

         10.6     Stock Option  Agreement  between the  Registrant  and David N.
                  Keys dated  November  12, 1990  incorporated  by  reference to
                  Exhibit 19 to the  Registrant's  quarterly Report on Form 10-Q
                  for the fiscal quarter ended December 31, 1990.

         10.7     American Pacific  Corporation 1991  Nonqualified  Stock Option
                  Plan,  incorporated  by reference to Exhibit 10.26 to the 1990
                  S-2.

         10.8     Indenture dated February 21, 1992,  between the Registrant and
                  American Azide Corporation, a Nevada corporation, and Security
                  Pacific National Bank,  Trustee,  relating to the Registrant's
                  outstanding 11% Subordinated Secured Term Notes,  incorporated
                  by  reference  to  Exhibit  10.1 to the  Registrant's  Current
                  Report on Form 8-K dated February 28, 1992 (the "Form 8-K").

         10.9     Form of  Subordinated  Secured  Term Note dated  February  21,
                  1992, made by Registrant  Incorporated by reference to Exhibit
                  10.2 to the Form 8-K.

        10.10     Form of Note and Warrants  Purchase  Agreement  dated February
                  21, 1992,  relating to the Registrant's  Subordinated  Secured
                  Term Notes,  incorporated  by reference to Exhibit 10.3 to the
                  Form 8-K.

        10.11     Form of Warrant to  purchase  Common  Stock of the  Registrant
                  dated February 21, 1992,  incorporated by reference to Exhibit
                  10.4 to the Form 8-K.

        10.12     Form of Warrant to purchase  Common  Stock of  American  Azide
                  Corporation dated February 21, 1992, incorporated by reference
                  to Exhibit 10.5 to the Form 8-K.

        10.13     Stock  Option  Agreement  between  Registrant  and  Joseph  W.
                  Cuzzupoli dated January 30, 1992, incorporated by reference to
                  Exhibit 4.6 of Registrant's Registration Statement on Form S-8
                  (File No. 33-52898).

        10.14     Articles of  organization  of Gibson Ranch Limited - Liability
                  Company  dated August 25, 1993,  incorporated  by reference to
                  Exhibit 10.33 to the  Registrant's  Annual Report on Form 10-K
                  for the  fiscal  year  ended  September  30,  1993 (the  "1993
                  10-K").

        10.15     Operating  agreement  of  Gibson  Ranch  Limited  -  Liability
                  Company, a Nevada Limited - Liability Company, incorporated by
                  reference to Exhibit 10.34 to the 1993 10-K.

        10.16     American Pacific Corporation 1994 Directors' Stock Option Plan
                  incorporated by reference to Exhibit 10.34 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1995 (the "1995 10-K").

        10.17     Stock  Option   Agreement   between   Registrant  and  General
                  Technical  Services,  Inc. dated July 11, 1995 incorporated by
                  reference to Exhibit 10.35 to the 1995 10-K.

                                       32


<PAGE>
        10.18     Stock Option Agreement  between  Registrant and John R. Gibson
                  dated July 8, 1997  incorporated by reference to Exhibit 10.18
                  to the Registrant's  Annual Report on Form 10-K for the fiscal
                  year ended September 30, 1997 (the "1997 10-K").

        10.19     Stock Option  Agreement  between  Registrant and David N. Keys
                  dated July 8, 1997  incorporated by reference to Exhibit 10.19
                  to the 1997 10-K.

        10.20     Settlement  Agreement  between  Registrant and C. Keith Rooker
                  dated July 17, 1997 incorporated by reference to Exhibit 10.20
                  to the 1997 10-K.

        10.21     Form of Stock Option Agreement between  Registrant and certain
                  Directors  dated May 21, 1997  incorporated  by  reference  to
                  Exhibit 10.21 to the 1997 10-K.

           22     Subsidiaries  of the Registrant  incorporated  by reference to
                  Exhibit 22 to the 1997 10-K.

          *23     Consent of Deloitte & Touche LLP.


           27     Financial Data Schedule  (previously filed electronically with
                  the 1997 10-K)

* FILED HEREWITH.

                  (b)      REPORTS ON FORM 8-K.

                           None.













                                       33


<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
and  Exchange  Act of 1934,  the  Registrant  has duly  caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

Dated: July 27, 1998           AMERICAN PACIFIC CORPORATION
                                           (Registrant)



                                By:/s/ John R. Gibson
                                   -------------------------------------------
                                   John R. Gibson
                                   President & Chief Executive Officer



                                By:/s/ *
                                   -------------------------------------------
                                   David N. Keys
                                   Senior Vice President, Chief Financial
                                   Officer, Secretary and Treasurer, Principal
                                   Financial and Accounting Officer


* By: /s/ John R. Gibson
     -----------------------
     John R. Gibson
     Attorney-in-fact







                                       34


<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
American Pacific Corporation:

We have audited the accompanying consolidated balance sheets of American Pacific
Corporation  and its  Subsidiaries  (the "Company") as of September 30, 1997 and
1996,  and the related  consolidated  statements of  operations,  cash flows and
changes in shareholders'  equity for each of the three years in the period ended
September 30, 1997.  These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of the Company at September 30, 1997
and 1996,  and the results of its  operations and its cash flows for each of the
three years in the period ended  September 30, 1997 in conformity with generally
accepted accounting principles.


/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Las Vegas, Nevada
November 14, 1997


                                       37

<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                       Notes             1997                    1996
                                                                   -----------------------------------------------------
ASSETS
CURRENT ASSETS:
<S>                                                                   <C>            <C>                    <C>         
   Cash and cash equivalents                                          1              $18,881,000            $ 18,501,000
   Short-term investments                                             1                                        2,000,000
   Accounts and notes receivable                                                       5,551,000               4,165,000
   Related party notes receivable                                     1                  637,000                 737,000
   Inventories                                                        1,2             11,116,000              11,297,000
   Prepaid expenses and other assets                                                     979,000                 946,000
                                                                                    ------------------------------------

     Total current assets                                                             37,164,000              37,646,000
PROPERTY, PLANT AND EQUIPMENT, NET                                    1,4,6,13,15     19,314,000              77,217,000
DEVELOPMENT PROPERTY                                                  1,5,6            7,362,000               8,631,000
RESTRICTED CASH                                                       3,6              3,580,000               4,969,000
REAL ESTATE EQUITY INVESTMENTS                                        5,6             20,248,000              18,698,000
DEBT ISSUE COSTS                                                      1                  785,000                 965,000
INTANGIBLE ASSETS                                                     14               1,540,000               1,760,000
OTHER ASSETS                                                                              88,000                 133,000
                                                                                    ------------------------------------
TOTAL ASSETS                                                                         $90,081,000            $150,019,000
                                                                                    ====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable and accrued liabilities                                          $ 7,519,000            $  5,407,000
   Notes payable and current portion of
     long-term debt                                                   3,6,9            6,166,000               7,334,000
                                                                                    ------------------------------------

     Total current liabilities                                                        13,685,000              12,741,000
LONG-TERM PAYABLES                                                    16              2,376,000
LONG-TERM DEBT                                                        3,6,9           24,900,000              29,452,000
DEFERRED INCOME TAXES                                                 1,7                                     10,101,000
                                                                                    ------------------------------------
TOTAL LIABILITIES                                                                     40,961,000              52,294,000
                                                                                    ------------------------------------

COMMITMENTS AND CONTINGENCIES                                         5,10,15
WARRANTS TO PURCHASE COMMON STOCK                                     6,11             3,569,000               3,569,000
SHAREHOLDERS' EQUITY:                                                 6,11
   Common stock - $.10 par value, 20,000,000 authorized:
     issued - 8,289,791 in 1997 and 8,228,791 in 1996                                    829,000                 823,000
     
   Capital in excess of par value                                     1               78,561,000              78,331,000
   Retained earnings (accumulated deficit)                            1              (32,707,000)             15,978,000
   Treasury stock (152,254 shares in 1997 and 130,170 shares in 1996) 1               (1,035,000)               (879,000)
   Note receivable from the sale of stock                             1,11               (97,000)                (97,000)
                                                                                    ------------------------------------
     Total shareholders' equity                                                       45,551,000              94,156,000
                                                                                    ------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           $90,081,000            $150,019,000
                                                                                    ====================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       38
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                                      Notes            1997                  1996                1995
                                             -----------------------------------------------------------------------------

<S>                                            <C>                  <C>                   <C>                <C>
SALES AND OPERATING REVENUES                   1,9,12,13,15         $44,050,000           $42,381,000        $ 39,250,000
COST OF SALES                                  1,9,13,14             36,420,000            32,579,000          29,861,000
                                                                   ------------------------------------------------------
GROSS PROFIT                                                         7,630,000              9,802,000           9,389,000
OPERATING EXPENSES                             1,8,10,12,13,14,16    9,509,000              9,367,000          11,210,000
FIXED ASSET IMPAIRMENT CHARGE                  13                   52,605,000
EMPLOYEE SEPARATION AND MANAGEMENT
   REORGANIZATION COSTS                        16                    3,616,000                                    226,000
                                                                   ------------------------------------------------------
OPERATING INCOME (LOSS)                                            (58,100,000)               435,000          (2,047,000)
EQUITY IN EARNINGS OF REAL ESTATE VENTURE      5                       200,000                700,000
INTEREST AND OTHER INCOME                      1,3,5,11              1,115,000              1,381,000           1,429,000
INTEREST AND OTHER EXPENSE                     1,5,6                 2,001,000              2,836,000           1,709,000
                                                                   ------------------------------------------------------
LOSS BEFORE CREDIT FOR INCOME TAXES                                (58,786,000)              (320,000)         (2,327,000)
CREDIT FOR INCOME TAXES                        1,7                 (10,101,000)              (109,000)           (791,000)
                                                                   ------------------------------------------------------

NET LOSS                                                         $ (48,685,000)           $  (211,000)       $ (1,536,000)
                                                                   ======================================================

NET LOSS PER COMMON SHARE                                        $       (6.01)           $      (.03)       $       (.19)
                                                                   ======================================================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       39
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                                                               1997                1996                1995
                                                                         -----------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                      <C>                   <C>                <C>          
   Net loss                                                              $(48,685,000)         $  (211,000)       $ (1,536,000)
                                                                         --------------------------------------------------------
   Adjustments to reconcile net loss to net cash provided by operating
   activities:
     Depreciation and amortization                                          7,685,000            7,810,000           5,883,000
     Fixed asset impairment charge                                         52,605,000
     Employee separation and management reorganization costs                3,616,000
     Basis in development property sold                                     1,498,000            2,449,000           1,614,000
     Development property additions                                          (229,000)            (784,000)           (384,000)
     Equity in real estate venture                                           (200,000)            (700,000)
     Cash received on equity interest estate venture                          200,000              700,000
     Changes in assets and liabilities:
       Decrease in short-term investments                                   2,000,000
       (Increase) decrease in accounts and notes receivable                (1,286,000)          (1,480,000)          5,525,000
       (Increase) decrease in income tax receivable                                              2,570,000          (2,570,000)
       (Increase) decrease in inventories                                     181,000           (4,203,000)         (1,411,000)
       (Increase) decrease in restricted cash                               1,389,000           (1,226,000)         (2,159,000)
       (Increase) decrease in prepaid expenses and other                       32,000              198,000            (133,000)
       Increase (decrease) in accounts payable and accrued liabilities        870,000             (265,000)            (17,000)
       Increase (decrease) in deferred income taxes                       (10,101,000)            (467,000)          5,170,000
                                                                          ----------------------------------------------------
       Total adjustments                                                   58,260,000           4,602,000           11,518,000
                                                                          ----------------------------------------------------
         Net cash provided by operating activities                          9,575,000           4,391,000            9,982,000
                                                                          ----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                    (1,557,000)          (3,248,000)         (4,462,000)
   Real estate equity advances                                             (2,680,000)          (2,946,000)         (3,199,000)
                                                                          ----------------------------------------------------
   Return of capital on real estate equity advances                         1,130,000            1,973,000
         Net cash used for investing activities                            (3,107,000)          (4,221,000)         (7,661,000)
                                                                          ----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments on debt                                              (6,168,000)          (6,166,000)
   Issuance of common stock                                                   236,000               47,000              82,000
   Treasury stock acquired                                                   (156,000)             (90,000)           (747,000)
                                                                          ----------------------------------------------------
         Net cash used for financing activities                            (6,088,000)          (6,209,000)           (665,000)
                                                                          ----------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          380,000           (6,039,000)          1,656,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             18,501,000           24,540,000          22,884,000
                                                                          ----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                  $18,881,000          $18,501,000        $ 24,540,000
                                                                          ====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest (net of amounts capitalized)         $ 1,427,000          $ 2,197,000        $  1,700,000
                                                                          ==========================================================

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Excess additional pension liability                                                            $ 1,175,000        $    606,000
                                                                      ==============================================================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       40
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND  1995

<TABLE>
<CAPTION>

                                                                            Retained                      Note            Excess
                                  Number of    Par Value of  Capital in     Earnings                      Receivable      Additional
                                  Common       Shares        excess of      (Accumulated      Treasury    from the Sale   Pension
                          Notes   Shares       Issued        Par Value      Deficit)          Stock       of Stock        Liability
                         -----------------------------------------------------------------------------------------------------------

<S>                              <C>            <C>           <C>             <C>             <C>             <C>
BALANCES,                        8,190,691      $820,000      $78,205,000      $17,725,000      $(42,000)     $(97,000)    (765,000)
   OCTOBER 1, 1994                                                              (1,536,000)
Net loss
Issuance of common
 stock                      11      21,400         2,000           80,000
Treasury stock acquired           (111,300)                                                      (747,000)
Excess additional
 pension liability           8                                                                                              606,000
                                ----------------------------------------------------------------------------------------------------
BALANCES,                        8,100,791       822,000       78,285,000       16,189,000       (789,000)     (97,000)    (159,000)
   SEPTEMBER 30, 1995                                                             (211,000)
Net loss
Issuance of common stock    11      12,000         1,000           46,000

Treasury stock acquired            (14,170)                                                       (90,000)
Excess additional
 pension liability           8                                                                                              159,000
                                 ---------------------------------------------------------------------------------------------------
BALANCES,
   SEPTEMBER 30, 1996            8,098,621       823,000       78,331,000       15,978,000       (879,000)     (97,000)
                                 ---------------------------------------------------------------------------------------------------
Net loss                                                                       (48,685,000)
Issuance of common stock
                            11      61,000         6,000          230,000
Treasury stock acquired            (22,084)                                                      (156,000)
                                ----------------------------------------------------------------------------------------------------
BALANCES,
   SEPTEMBER 30, 1997            8,137,537      $829,000      $78,561,000     $(32,707,000)   $(1,035,000)    $(97,000)
                                ====================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.




                                       41


<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        PRINCIPLES OF  CONSOLIDATION  - The  consolidated  financial  statements
        include the accounts of American  Pacific  Corporation and  Subsidiaries
        (the "Company").  All significant intercompany accounts and transactions
        have been eliminated.

        CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - All highly liquid
        investment  securities  with a  maturity  of three  months  or less when
        acquired are considered to be cash equivalents.  Short-term  investments
        consist of investment securities with maturities, when acquired, greater
        than three months but less than one year. The Company adopted  Statement
        of Financial  Accounting  Standards  ("SFAS") No. 115,  "Accounting  for
        Certain  Investments in Debt and Equity Securities," during fiscal 1995.
        In accordance with SFAS No. 115, prior year's financial  statements have
        not been restated to reflect the change in accounting method.  There was
        no cumulative effect as a result of adopting SFAS No. 115 in 1995.

        The Company's  investment  securities,  along with certain cash and cash
        equivalents  that are not  deemed  securities  under SFAS No.  115,  are
        carried  on the  consolidated  balance  sheets  in  the  cash  and  cash
        equivalents and short-term investments categories. SFAS No. 115 requires
        all securities to be classified as either  held-to-maturity,  trading or
        available-for-sale. Management determines the appropriate classification
        of its  investment  securities at the time of purchase and  re-evaluates
        such determination at each balance sheet date.  Pursuant to the criteria
        that are  prescribed  by SFAS No. 115,  the Company has  classified  its
        investment   securities   as   available-for-sale.    Available-for-sale
        securities  are  required  to be carried at fair  value,  with  material
        unrealized  gains  and  losses,  net  of  tax,  reported  in a  separate
        component of shareholders'  equity.  Realized gains and losses are taken
        into income in the period of  realization.  The estimated  fair value of
        the Company's  portfolio of investment  securities at September 30, 1997
        and 1996 closely  approximated  amortized  cost.  There were no material
        unrealized  gains or losses on  investment  securities  and no  recorded
        adjustments to amortized cost at September 30, 1997 or 1996.

        RELATED  PARTY  NOTES   RECEIVABLE  -  Related  party  notes  receivable
        represent  demand notes bearing interest at a bank's prime rate from the
        Chairman and two officers of the Company.

        INVENTORIES  -  Inventories  are  stated at the lower of cost or market.
        Cost  of the  specialty  chemicals  segment  inventories  is  determined
        principally  on a moving  average  basis  and cost of the  environmental
        protection  equipment segment  inventories is determined  principally on
        the specific identification basis.

        PROPERTY,  PLANT AND  EQUIPMENT  -  Property,  plant and  equipment  are
        carried at cost less accumulated depreciation.  The Company periodically
        assesses  the  recoverability  of  property,  plant  and  equipment  and
        evaluates  such  assets  for  impairment  whenever  events or changes in
        circumstances  indicate that the carrying  amount of an asset may not be
        recoverable. Asset impairment is determined to exist if estimated future
        cash

                                                     42
<PAGE>
        flows,  undiscounted  and without  interest  charges,  are less than the
        carrying  amount.  Depreciation  is computed on the straight line method
        over the  estimated  productive  lives of the  assets (3 to 12 years for
        machinery and equipment and 15 to 31 years for buildings and









                                      42-A
<PAGE>

         improvements).  An impairment charge of $52,605,000 relating to certain
         specialty chemical assets was recognized in fiscal 1997. (See Note 13.)

        DEVELOPMENT  PROPERTY - Development  property consists of commercial and
        industrial  land  (principally   improved  land).  During  fiscal  1993,
        approximately 240 acres,  representing  $12,300,000 in carrying value of
        development property, was contributed to a real estate limited-liability
        company  (see Note 5).  Development  property  is carried at cost not in
        excess of estimated net realizable value. Estimated net realizable value
        is based upon the net sales proceeds anticipated in the normal course of
        business,  less  estimated  costs to complete or improve the property to
        the condition used in determining the estimated selling price, including
        future  interest and  property  taxes  through the point of  substantial
        completion.   Cost  includes  the  cost  of  land,   initial   planning,
        development  costs and carrying costs.  Carrying costs include  interest
        and property taxes until projects are substantially  complete.  Interest
        capitalized is the amount of interest on the Company's net investment in
        property under development limited to total interest expense incurred in
        a period. No interest was capitalized on development property during the
        three-year period ended September 30, 1997. Certain development property
        in Nevada is pledged to secure debt. (See Note 6.)

        DEBT ISSUE COSTS - Debt issue costs represent costs associated with debt
        and are amortized on the effective interest method over the terms of the
        related indebtedness.

        FAIR VALUE DISCLOSURE AS OF SEPTEMBER 30, 1997:

        Cash and cash  equivalents,  accounts and notes  receivable,  restricted
        cash, and accounts payable and accrued  liabilities - The carrying value
        of these items is a reasonable estimate of their fair value.

        Notes payable,  current  portion of long-term debt and warrants - Market
        quotations  are not available for any of the  Company's  notes  payable,
        long-term  debt or  warrants.  See  Note 6 for a  description  of  these
        instruments.  Approximately  $40 million of notes and  related  warrants
        were issued in February  1992.  The Company  believes that similar terms
        would be available at September 30, 1997.

        SALES AND REVENUE RECOGNITION - Sales of the specialty chemicals segment
        are  recognized  as the  product  is  shipped  and  billed  pursuant  to
        outstanding  purchase  orders.  Sales  of the  environmental  protection
        equipment  segment are recognized on the percentage of completion method
        for  long-term  contracts  and when the  product  is  shipped  for other
        contracts.  Profit from sales of development  property and the Company's
        equity in real estate equity  investments is recognized  when and to the
        extent permitted by SFAS No. 66, "Accounting for Sales of Real Estate".

        RESEARCH AND DEVELOPMENT - Research and development costs are charged to
        operations  as incurred.  These costs are for  proprietary  research and
        development  activities  that are expected to  contribute  to the future
        profitability of the Company.

        NET LOSS PER  COMMON  SHARE - Net loss per  common  share is  determined
        based on the  weighted  average  number  of  common  shares  outstanding
        (8,105,000,  8,104,000 and  8,177,000 for the years ended  September 30,
        1997, 1996 and 1995). Common share equivalents,  although not considered
        during net loss years, consist of outstanding stock


                                       43
<PAGE>
        options and  warrants.  See Note 6 for a  description  of the  potential
        effects on net income per common share of warrants  issued in connection
        with the issuance of certain notes.

        The  Company has adopted  the  disclosures-only  provision  of SFAS 123,
        "Accounting  for  Stock-Based  Compensation".  The  Company  applies APB
        Opinion No. 25 and related  interpretations  in accounting for its stock
        options.  Under APB 25, no compensation  cost has been recognized in the
        financial  statements for stock options granted.  The fair value of each
        option grant is  estimated on the date of grant using the  Black-Scholes
        option-pricing  model. Had compensation cost for the stock option grants
        been determined  based on the fair value at the date of grant for awards
        consistent  with the  provision of SFAS 123, the  Company's net loss per
        common  share  would  have  been  decreased  to the  pro  forma  amounts
        indicated below for the year ended September 30:

                                                                 1997

             Net loss-as reported                         $ (48,685,000)
             Net loss-pro forma                             (49,791,000)

             Net loss per common share-as reported        $       (6.01)
             Net loss per common share-pro forma                  (6.14)


        The fair value of each option  granted in fiscal year 1997 was estimated
        using the following  assumptions for the  Black-Scholes  options pricing
        model:  (i) no dividends;  (ii) expected  volatility of 55%,  (iii) risk
        free interest rates averaging 6.1% and (iv) the expected average life of
        3.3 years.  The weighted  average  fair value of the options  granted in
        1997 was $2.97.  Because the SFAS 123 method of accounting  has not been
        applied to options  granted prior to October 1, 1995,  the resulting pro
        forma net income may not be  representative  of that to be  expected  in
        future years.

        INCOME  TAXES  -  The  Company  accounts  for  income  taxes  under  the
        provisions of SFAS No. 109, "Accounting for Income Taxes".

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

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


                                       44
<PAGE>
        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 balance  sheet,  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.

        The  FASB  issued  SFAS  No.  131,  "Disclosures  about  Segments  of an
        Enterprise and Related Information," which is effective for fiscal years
        beginning  after  December  15,  1997.  This  statement   redefines  how
        operating segments are determined and requires qualitative disclosure of
        certain   financial  and  descriptive   information  about  a  company's
        operating  segments.  The  Company  will  adopt SFAS No. 131 in the year
        ending September 30, 1999. Management has not yet completed its analysis
        of which  operating  segments  it will report on to comply with SFAS No.
        131.

        In  November   1996,   the  American   Institute  of  Certified   Public
        Accountants'  Accounting  Standards Executive Committee issued Statement
        of Position ("SOP") 96-1, "Environmental  Remediation Liabilities." This
        SOP  provides  guidance  on  accounting  for  environmental  remediation
        liabilities.  This SOP discusses when an environmental  liability should
        be  recognized  in the  financial  statements  and provides  guidance in
        measuring the liability by discussing  the types of costs to be included
        in the liability. This SOP is effective for fiscal years beginning after
        December 15, 1996.  Management does not believe that the  implementation
        of this SOP in fiscal 1998 will have a material  impact on the Company's
        financial statements.

        RECLASSIFICATION - Certain  reclassifications have been made in the 1996
        and 1995  consolidated  financial  statements in order to conform to the
        presentation used in 1997.

2.      INVENTORIES

        Inventories consist of the following:

                                                 -------------------------------
                                                            September 30,
                                                 -------------------------------
                                                         1997          1996
                                                         ----          ----

        Work-in-process                          $ 3,349,000        $  5,011,000
        Raw material and supplies                  7,767,000           6,286,000
                                                 -------------------------------

        Total                                    $11,116,000        $ 11,297,000
                                                 ===============================

3.      RESTRICTED CASH

        At September 30, 1997,  restricted cash consists, in part, of $1,160,000
        held in a cash  collateral  account by Seafirst  Bank,  the lender which
        provided a term loan (the "AP Facility Loan") as the principal financing
        for an ammonium  perchlorate ("AP")  manufacturing  facility erected and
        operated  by the  Company.  Funds in the  cash  collateral  account  are
        restricted  for future  indemnity  payments (if any)  relating to the AP
        Facility  Loan.  The AP Facility Loan was repaid in 1994. The $1,160,000
        will be retained in the cash  collateral  account until May 11, 1999, at
        which time the balance remaining after indemnity  payments (if any) will
        be returned to Thiokol Corporation ("Thiokol"). The

                                       45
<PAGE>
        Company's  obligation to return such funds is included in long-term debt
        at September 30, 1997. Any indemnity  payments made will serve to reduce
        the cash collateral account and the Company's obligation to Thiokol.

        Restricted cash at September 30, 1997 also includes $2,420,000 held in a
        trust account by the Trustee under the indenture relating to $40,000,000
        of notes (the "Azide  Notes") sold in a financing  concluded in February
        1992. (See Note 6.)

















                                      45-A
<PAGE>
4.      PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment are summarized as follows:

                                          --------------------------------------
                                                    September 30,
                                          --------------------------------------
                                            1997                    1996
                                            ----                    ----

    Land                                $   309,000              $   305,000
    Buildings and improvements            1,753,000               13,865,000
    Machinery and equipment              20,759,000               76,935,000
    Construction in progress                380,000                  139,000
                                        ----------------------------------------
    Total                                23,201,000               91,244,000
    Less:  accumulated depreciation       3,887,000               14,027,000
                                        ----------------------------------------

    Property, plant and equipment, net  $19,314,000              $77,217,000
                                        ========================================

        In 1995,  approximately $1,800,000 in interest costs were capitalized on
        assets  constructed for the Company's own use.  Certain of the Company's
        property,  plant and  equipment is pledged as collateral to secure debt.
        (See Note 6.) A fixed asset  impairment  charge was  recognized in 1997.
        (See Note 13.)

5.      REAL ESTATE EQUITY INVESTMENTS

        During fiscal 1993, the Company  contributed  approximately 240 acres of
        development   property  to  Gibson  Ranch  Limited   Liability   Company
        ("GRLLC").  The development property contributed had a carrying value of
        approximately  $12,300,000  at  the  date  of  contribution,  which  was
        transferred  to  Real  Estate  Equity  Investments  on the  accompanying
        consolidated balance sheets. The Company's interest in GRLLC is assigned
        to  secure  the Azide  Notes.  A local  real  estate  development  group
        ("Developer")  contributed an adjacent 80-acre parcel to GRLLC. GRLLC is
        developing the 320-acre parcel  principally as a residential real estate
        development.

        Each of The Company and Developer is obligated to loan to GRLLC, under a
        revolving line of credit, up to $2,400,000 at an annual interest rate of
        10 percent.  However,  Developer  will not be required to advance  funds
        under  its  revolving  line  of  credit  until  the  Company's  line  is
        exhausted.  At September  30, 1996,  the Company had advanced all of its
        committed  amount  under this  line.  In  November,  1995,  the  Company
        committed to advance an additional $1,700,000 to Developer. Developer is
        required to advance any funds  received to GRLLC.  Funds  advanced under
        this additional  commitment  bear annual  interest of 12 percent.  Total
        advances  under these  commitments  were  $3,171,000  and  $2,828,000 at
        September 30, 1997 and 1996.

        Developer is the  managing  member of GRLLC and is managing the business
        conducted by GRLLC. Certain major decisions,  such as incurring debt and
        changes  in the  development  plan  or  budget  may be  made  only  by a
        management  committee on which the Company is equally  represented.  The
        profits  and losses of GRLLC will be split  equally  between the Company
        and  Developer  after the return of advances  and agreed upon values for
        initial contributions.




                                       46
<PAGE>
        GRLLC operates on a calendar  year. The Company  recognizes its share of
        the equity in GRLLC on a current quarterly basis.  Summarized  financial
        information  for GRLLC as of and for the years ended  December  31, 1996
        and 1995 and as of and for the  nine-month  period ended  September  30,
        1997 was as follows:

                            September 30,  December 31,      December 31,
                              1997              1996             1995
                            -------------  -----------       -------------

Income Statement:
   Revenues                $13,776,000      $18,602,000       $ 2,712,000
   Gross Profit              1,557,000        3,182,000           560,000
   Operating Expenses          829,000          984,000           875,000
   Net Income              $   733,000      $ 2,098,000       $  (315,000)

Balance Sheet:
   Assets                  $26,840,000      $24,895,000       $22,554,000
   Liabilities              12,273,000        9,758,000         9,205,000
   Equity                  $14,568,000      $15,136,000       $13,349,000

         The Company has applied the  provisions of SFAS No. 58  "Capitalization
         of Interest  Cost of  Financial  Statements  that  Include  Investments
         Accounted for by the Equity Method" to its  investment in GRLLC.  As of
         September  30, 1997,  the Company has  capitalized  approximately  $6.2
         million of interest since the joint venture began undergoing activities
         to start its planned  principal  operations of real estate  development
         and sale of such real estate.  Capitalization  of interest on the joint
         venture  ceased  in  September   1997  since  the  Company's   recorded
         investment  in GRLLC  approximates  the  amount  of cash  flow  that is
         estimated to be generated from the project

         The Company amortizes the difference  resulting from the application of
         SFAS No. 58 on a current  quarterly basis based upon the ratio of acres
         sold to total salable acres in the joint venture.  Such difference will
         be  completely  amortized  upon the  build-out  and  sale of the  joint
         venture's  real estate  project which is estimated to occur in calendar
         2001. As of September 30, 1997,  approximately $1.0 million of the $6.2
         million in capitalized  interest resulting from the application of SFAS
         No. 58 had been amortized against the equity in earnings of GRLLC.

         GRLLC's balance sheet is not classified.  Assets consist principally of
         inventories and liabilities  consist  principally of Notes and accounts
         payable.  Inventories were $24,308,000,  $21,659,000 and $21,738,000 at
         September   30,  1997,   December  31,  1996  and  December  31,  1995,
         respectively.

        In July 1990, the Company  contributed  $725,000 to Gibson Business Park
        Associates  1986-I, a real estate development  limited  partnership (the
        "Partnership"),  in return for a 70%  interest  as a general and limited
        partner, and other limited partners contributed $315,000 in return for a
        30% interest as limited  partners.  Such other limited partners included
        the Company's Chairman and a former Executive Vice-President and certain
        members of the Company's Board of Directors.  The Partnership,  in turn,
        contributed   $1,040,000  to  3770  Hughes  Parkway  Associates  Limited
        Partnership,  a Nevada limited partnership ("Hughes Parkway"), in return
        for a 33% interest as a limited partner in Hughes  Parkway.  The Company
        entered  into an  agreement  with Hughes  Parkway  pursuant to which the
        Company leases office space in a building in Las Vegas, Nevada (see Note
        10).

                                       47
<PAGE>
6.      NOTES PAYABLE AND LONG-TERM DEBT

        Notes payable and long-term debt,  collateralized by property, plant and
        equipment used in the production of sodium azide, and  collateralized by
        substantially   all   development   property  and  real  estate   equity
        investments of the Company, is summarized as follows:
<TABLE>
<CAPTION>

                                                   -----------------------------------------------------
                                                                     September 30,
                                                   -----------------------------------------------------
                                                            1997                          1996
                                                            ----                          ----

       Subordinated secured term notes
       <S>                                         <C>                            <C>
       (interest at 11%)                           $     28,740,000               $      33,310,000
       Obligation to deliver AP (see Note 9)              1,166,000                       2,334,000
       Indemnity obligation (see Notes 3 and 9)           1,160,000                       1,142,000
                                                   --------------------------------------------------------
       Total                                             31,066,000                      36,786,000
       Less current portion                               6,166,000                       7,334,000
                                                   --------------------------------------------------------

       Total                                       $     24,900,000               $      29,452,000
                                                   ========================================================
</TABLE>

         In February 1992, the Company concluded the issuance of the Azide Notes
         financing for the design,  construction  and start-up of a sodium azide
         facility.  The funds were  provided  by a major state  public  employee
         retirement  fund  and a  leading  investment  management  company.  The
         financing  was  in  the  form  of  $40,000,000   principal   amount  of
         noncallable subordinated secured notes issued at par, providing for the
         semi-annual  payment  in  arrears  of  interest  at the rate of 11% per
         annum. Principal is to be amortized to the extent of $5,000,000 on each
         of the fourth (February 1996) through ninth (February 2001) anniversary
         dates of the funding,  with the remaining  $10,000,000 principal amount
         to be repaid on the tenth anniversary date. The Azide Notes are secured
         by the fixed assets and stock of American Azide Corporation ("AAC"), an
         indirect  wholly-owned  subsidiary  of the  Company,  as  well  as by a
         mortgage on land in Clark County, Nevada being developed by the Company
         and by certain restricted cash (see Note 3). Approximately 240 acres of
         such land has been contributed to GRLLC subject to certain  conditions.
         The Company's interest in GRLLC has been assigned to secure the Azide



                                      47-A


<PAGE>
        Notes (see Note 5). The Company  issued to the  purchasers  of the Notes
        warrants (the "Warrants"),  exercisable for a ten-year period commencing
        on December 31, 1993, to purchase  shares of Common Stock at an exercise
        price of $14.00 per share. The maximum number of shares purchasable upon
        exercise  of  the  Warrants  is  2,857,000  shares.   The  Warrants  are
        exercisable,  at the  option  of their  holders,  to  purchase  up to 20
        percent of the common  stock of AAC,  rather than the  Company's  Common
        Stock.  In the  event of such an  election,  the  exercise  price of the
        Warrants will be based upon a pro rata share of AAC's capital,  adjusted
        for earnings and losses, plus interest from the date of contribution. At
        the option of the Warrant  holders,  the exercise  price of the Warrants
        may be paid by delivering an equal amount of Azide Notes.

        The indenture  imposes various  operating  restrictions upon the Company
        including   restrictions  on  (i)  the  incurrence  of  debt;  (ii)  the
        declaration of dividends and the purchase and repurchase of stock; (iii)
        certain  mergers and  consolidations,  and (iv) certain  dispositions of
        assets.   Management  believes  the  Company  has  complied  with  these
        operating restrictions.

         On each of December  31, 1995,  1997 and 1999,  holders of the Warrants
         have or will have the right to put to the Company as much as  one-third
         thereof based upon the differences  between the Warrant  exercise price
         and prices  determined  by  multiplying  the  Company's  fully  diluted
         earnings per share at multiples of 13, 12 and 11, respectively, but the
         Company's  obligation  in such respect is limited to $5,000,000 on each
         of such dates and to $15,000,000 in the aggregate.  Such put rights may
         not be  exercised  if the  Company's  Common Stock has traded at values
         during the  preceding  90-day  period  that would  yield to the warrant
         holders a 25% internal rate of return to the date of the put (inclusive
         of the 11% Azide  Notes'  yield).  At  September  30,  1997,  it is not
         probable  that the  remaining  put rights will be  exercised  since the
         Company  believes,  based on current market  conditions, that its stock
         will trade at a higher  multiple of fully  diluted  earnings  per share
         than the 11  multiple  used to  determine  the put  value,  if any,  at
         December  31,  1999,  thereby  making  exercise  of the  Warrants  more
         valuable to the holders thereof than exercise of the put rights.  On or
         after  December 31 of each of the years 1995 through 1999,  the Company
         may  call  up to 10% of the  Warrants  (but  no  more  than  50% in the
         aggregate)  at prices that would  provide a 30% internal rate of return
         to the holders  thereof  through the date of call (inclusive of the 11%
         Azide Notes' yield).  The holders of the Warrants were also granted the
         right to require  that the Common  Stock  underlying  the  Warrants  be
         registered on one occasion, as well as certain incidental  registration
         rights.

        The Company has accounted  for the proceeds of the financing  applicable
        to the Warrants (and the potential put right) as temporary capital.  Any
        adjustment  of the  value  assigned  at the  date  of  issuance  will be
        reported as an adjustment to retained  earnings.  The value  assigned to
        the Warrants was  determined in  accordance  with  Accounting  Principle
        Board Opinion No. 14 "Accounting  for  Convertible  Debt and Debt Issued
        with Stock Purchase Warrants" and was based upon the relative fair value
        of the Warrants and  indebtedness at the time of issuance.  Although not
        applicable for the fiscal years ended September 30, 1997, 1996 and 1995,
        net income per common share will be calculated on an "equity" basis or a
        "debt" basis using the more  dilutive of the two  methods.  The "equity"
        basis  assumes the Warrants  will be exercised and the effect of the put
        feature adjustment, if any, on earnings available to common shareholders
        will  be  reversed.  The  treasury  stock  method  will  then be used to
        calculate  net  additional  shares.  The "debt"  basis  assumes that any
        remaining  puts will be exercised (if the rights are  available) and the
        Warrants will not be considered common stock equivalents.

                                       48

<PAGE>
        Notes payable and long-term debt maturities are as follows:

---------------------------------------
       For the Years Ending
         September 30,
---------------------------------------


              1998                                     $ 6,166,000
              1999                                       6,160,000
              2000                                       5,000,000
              2001                                       5,000,000
              2002                                       8,740,000
                                                       -----------
              Total                                    $31,066,000
                                                       ===========

7.      INCOME TAXES

         The Company  accounts  for income  taxes using the asset and  liability
         approach  required  by SFAS  109.  The  asset  and  liability  approach
         requires the recognition of deferred tax liabilities and assets for the
         expected future tax consequences of temporary  differences  between the
         carrying  amounts  and  the  tax  bases  of the  Company's  assets  and
         liabilities.  Future tax benefits attributable to temporary differences
         are recognized to the extent that realization of such benefits are more
         likely than not.  These  future tax  benefits  are measured by applying
         currently enacted tax rates.

         The following  table  provides an analysis of the Company's  credit for
         income taxes for the years ended September 30:

<TABLE>
<CAPTION>

                                                        1997                  1996              1995
                                                  ------------------    --------------     --------------
<S>                                                 <C>                                                 
          Current                                   $                    $(1,349,000)       $(4,888,000)

          Deferred (federal and state)               (10,101,000)          1,240,000          4,097,000
                                                  ------------------    --------------     --------------

          Credit for income taxes                   $(10,101,000)        $  (109,000)       $  (791,000)
                                                  ==================    ==============     ==============
</TABLE>

        A valuation  allowance for the deferred tax asset was established in the
        amount of $10,431,000 in 1997. The valuation  allowance is necessary due
        to the uncertainty  related to the realizability of future tax benefits.
        The deferred tax assets are composed,  for the most part, of alternative
        minimum tax credits and net operating  losses.  The alternative  minimum
        tax credit  carryforward,  valued at  approximately  $1,233,000,  may be
        carried  forward  indefinitely  as a credit against regular tax. The net
        operating loss carryforwards,  valued at approximately $16,278,000, will
        begin to expire for tax purposes in 2008 as follows:
<TABLE>
<CAPTION>

                                                       NOL DEDUCTION                     Tax Rate             NOL Asset
                                                      --------------                   -----------          -------------
          Expiration of net operating losses
<S>            <C>                                     <C>                                 <C>               <C>
               2008                                    $ 3,398,000                         34.0%             $1,155,000
               2009                                     25,607,000                         34.0%              8,706,000
               2010                                     14,080,000                         34.0%              4,787,000
               2011 and thereafter                       4,791,000                         34.0%              1,630,000
                                                      ------------                                          ------------

                       TOTAL                           $47,876,000                                           $16,278,000
                                                      ============                                          ============
</TABLE>



                                       49
<PAGE>
        The   Company's   effective   tax  rate   declined  to  16.7%  with  the
        establishment of the valuation  allowance.  The Company's  effective tax
        rate will be 0% until the net operating losses expire or the Company has
        taxable  income  necessary  to  eliminate  the  need  for the  valuation
        allowance. The credit for income taxes for the years ended September 30,
        1997,  1996 and 1995,  differs  from the amount  computed at the federal
        income tax statutory rate as a result of the following:

<TABLE>
<CAPTION>

                                                       1997            %            1996            %            1995            %
                                               -------------------------------------------------------------------------------------
<S>                                                <C>                <C>        <C>               <C>       <C>              <C>  
          Expected credit for income taxes         $(20,591,000)      34.0%      $ (109,000)       34.0%     $  (814,000)     35.0%
          Adjustment:
             Nondeductible expenses                      59,000       (0.1%)
             Surtax benefit                                                                                       23,000      (1.0%)
             Tax credit limitation due to the
             valuation allowance                     10,431,000      (17.2%)
                                               ----------------              ---------------------        --------------

          Credit for income taxes                  $(10,101,000)      16.7%      $ (109,000)       34.0%     $  (791,000)     34.0%
                                               ================              =====================        ==============
</TABLE>

        The components of the net deferred taxes at September 30, 1997, 1996 and
1995 consisted of the following:

<TABLE>
<CAPTION>

          DEFERRED TAX ASSETS:
          Non-current:
<S>                                                        <C>                  <C>                 <C>        
               Net operating losses                        $16,278,000          $16,618,000         $14,353,000
               Alternative minimum tax credits               1,233,000            1,395,000           1,354,000
               Employee separation and management
                reorganization costs                         1,172,000
               Inventory capitalization                        436,000              349,000             269,000
               Accruals                                        408,000              127,000
               Other                                           250,000
                                                           -----------          -----------         -----------
          Total deferred tax assets:                       $19,777,000          $18,489,000         $15,976,000
                                                           -----------          ------------        -----------
          DEFERRED TAX LIABILITIES:
          Non-current:
               Property (includes azide impairment
                in 1997)                                   $(4,350,000)        $(23,711,000)       $  (25,394,000)
               Accrued income and expenses                    (653,000)            (412,000)             (569,000)
               State Taxes                                    (600,000)            (600,000)             (575,000)
               Other taxes payable                          (1,251,000)          (1,945,000)                 --
               Amortization                                 (1,020,000)            (737,000)                 --
               Other                                        (1,472,000)          (1,185,000)               (6,000)
                                                           -----------          ------------          -------------
          Total deferred tax liabilities:                   (9,346,000)         (28,590,000)          (26,544,000)
                                                           -----------          ------------          -------------
          Preliminary net deferred tax asset                10,431,000          (10,101,000)          (10,568,000)
          Valuation allowance for deferred tax asset       (10,431,000)
                                                           ------------         ------------          -------------
          Net deferred tax credit:                         $         0         $(10,101,000)         $(10,568,000)
                                                           ============         ============          =============
</TABLE>


                                       50
<PAGE>
8.       EMPLOYEE BENEFIT PLANS

         The Company maintains, for the benefit of its employees, a group health
         and life benefit plan, an employee  stock  ownership plan ("ESOP") that
         includes a Section 401(k) feature,










                                      50-A
<PAGE>
        and a defined  benefit  pension  plan  (the  "Plan").  The ESOP  permits
        employees to make  contributions.  The Company does not presently  match
        any portion of employee ESOP contributions.

        All  full-time  employees  age 21 and over with one year of service  are
        eligible  to  participate  in the Plan.  Benefits  are paid  based on an
        average of earnings,  retirement age, and length of service, among other
        factors.

        The discount rate was 7.5% in 1997 and 1996 and 7% in 1995.  The rate of
        salary  progression used to determine the projected benefit  obligations
        was 5% in 1997, 1996 and 1995. The expected  long-term rate of return on
        plan assets was 8% in 1997 and 1996 and 7% in 1995. The following  table
        reconciles the Plan's funded status and summarizes amounts recognized in
        the  Company's  consolidated  financial  statements  for the years ended
        September 30, 1997 and 1996.

<TABLE>
<CAPTION>

                                                                       -----------------------------------------------------
                                                                           1997                      1996
                                                                       -----------------------------------------------------
        Actuarial present value of benefit obligations:
<S>                                                                    <C>                    <C>           
        Vested benefits                                                $ 7,758,000            $    6,524,000
        Nonvested benefits                                               1,219,000                 1,254,000
                                                                       -----------------------------------------------------
        Accumulated benefit                                            $ 8,977,000            $    7,778,000
                                                                       =====================================================
        Projected benefit obligation                                   $11,275,000            $    9,754,000
        Plan assets at fair value                                        9,937,000                 8,459,000
                                                                       -----------------------------------------------------
        Projected benefit obligation in excess of
         Plan assets                                                     1,338,000                 1,295,000
        Unrecognized net transition obligation
         amortized over fifteen years                                     (764,000)                 (916,000)
        Unrecognized net loss and prior service cost                      (174,000)                 (499,000)
                                                                       -----------------------------------------------------
        Accrued (Prepaid) pension                                      $   400,000            $     (120,000)
                                                                       =====================================================
</TABLE>

        Net  periodic  pension cost was  $986,000,  $1,187,000  and  $1,295,000,
        respectively, for the years ended September 30, 1997, 1996 and 1995, and
        consists of the following:
<TABLE>
<CAPTION>

                                                  ----------------------------------------------------------------------------
                                                               1997                    1996                  1995
                                                  ----------------------------------------------------------------------------
<S>                                                   <C>                     <C>                      <C>            
        Service cost                                  $       687,000         $       765,000          $       787,000
        Interest cost                                         772,000                 696,000                  620,000
        Return on Plan assets                              (1,415,000)               (519,000)                (708,000)
        Net total of other components                         942,000                 245,000                  596,000
                                                  ----------------------------------------------------------------------------

        Net periodic pension cost                     $       986,000         $     1,187,000          $     1,295,000
                                                  ============================================================================
</TABLE>

         See Note 16 for a discussion of the Company's  Supplemental  Retirement
         Plan.

9.      AGREEMENTS WITH THIOKOL CORPORATION

        In 1989,  the Company  entered into an Advance  Agreement  and Surcharge
        Agreement and certain other agreements  (collectively  the "NASA/Thiokol
        Agreements")  with Thiokol.  Under the Advance and Surcharge  Agreements
        Thiokol  was  required  to place  sufficient  orders  for AP such  that,
        combined with orders from other AP customers, the Company


                                       51
<PAGE>
         would  receive  revenues  in respect of at least 20 million  pounds per
         year,  5 million per quarter,  over seven years (140 million  pounds in
         the  aggregate),  beginning  with initial  production.  The Company was
         required  to  impose  a  surcharge  on all  sales of AP  sufficient  to
         amortize the AP Facility Loan over or during the period of such revenue
         assurance.

         On May 10, 1994,  the Company and Thiokol  executed an amendment to the
         Advance  Agreement  (the  "Amendment")  and the AP  Facility  Loan  was
         repaid.  Upon early  repayment  in full of the AP  Facility  Loan,  the
         Amendment  provided for the  termination  as fulfilled of the Surcharge
         Agreement and termination of certain other  agreements  relating to the
         repayment of advances (the Working Capital  Agreement and the Repayment
         Plan).

         The Amendment  provided for the Company to receive revenues,  excluding
         surcharge revenues,  from sales of AP of approximately $33 million, $28
         million and $20 million  during the fiscal years ending  September  30,
         1994, 1995 and 1996,  respectively.  Prior to the effective date of the
         Amendment,  the  Company  was  indebted  to Thiokol  for  approximately
         $10,208,000 under the Working Capital Agreement and Repayment Plan. The
         Amendment  required the Company to pay $750,000 of this amount  ratably
         as  deliveries  of AP were made over the  remainder  of the fiscal year
         ended  September 30, 1994. The remaining  obligation  under the Working
         Capital  Agreement and Repayment  Plan has been and will continue to be
         repaid by the Company through delivery of AP.


10.     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 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.  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.

        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

                                       52
<PAGE>
        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 agreed to and has paid attorneys
        fees and other  defense costs  related to the  plaintiffs'  unsuccessful
        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 alleged that the Company was 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 by the  Superior  Court of the State of Delaware in and for
        New Castle County. The plaintiffs filed an appeal with the Supreme Court
        of the State of Delaware in January 1997. In October 1997,  the Delaware
        Supreme Court affirmed the Superior Court's judgment.

        Trace amounts of perchlorate chemicals were recently found in Lake Mead.
        Clark County,  Nevada,  where Lake Mead is situated,  is the location of
        Kerr-McGee Chemical Corporation's  ("Kerr-McGee") 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  appropriate  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  impacts,  if  any,  of  such
        contributions  or  assistance.  Accordingly,  no accrual  for  potential
        losses  has  been  made  in  the  accompanying   Consolidated  Financial
        Statements of the Company.

        The Company is a party to an agreement with Utah Power and Light Company
        for its electrical  requirements.  The agreement provides for the supply
        of power for a minimum of a ten-year  period,  which began in 1988,  and
        obligates  the  Company to  purchase  minimum  amounts  of power,  while
        assuring the Company  competitive  pricing for its electricity needs for
        the duration of the  agreement.  Under the terms of the  agreement,  the
        Company's  minimum monthly charge for firm and  interruptible  demand is
        approximately $22,000.

        See Note 14 for a discussion of certain litigation involving Halotron.

        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.

        As  discussed  in Note 5, the Company  entered  into an  agreement  with
        Hughes Parkway  pursuant to which the Company  leases office space.  The
        lease is for an initial  term of 10 years and is  subject to  escalation
        every three  years based on changes in the  consumer  price  index,  and
        provides for the Company to occupy 22,262 square feet of office space.


                                       53
<PAGE>
        Rent expense was  approximately  $550,000  during the fiscal years ended
        September 30, 1997, 1996 and 1995.  Future minimum rental payments under
        this lease for the years ending September 30, are as follows:

1998                                    550,000
1999                                    550,000
2000                                    275,000
                                     ----------
Total                                $1,375,000
                                     ==========











                                      53-A
<PAGE>
11.     SHAREHOLDERS' EQUITY

        The Company has authorized the issuance of 3,000,000 shares of preferred
        stock, of which 125,000 shares have been designated as Series A, 125,000
        shares  have been  designated  as Series B and 15,340  shares  have been
        designated  as Series C  redeemable  convertible  preferred  stock.  The
        Series C  redeemable  convertible  preferred  stock was  outstanding  at
        September  30,  1989,  was redeemed in December  1989,  and is no longer
        authorized for issuance. No preferred stock is issued or outstanding.

        The Company has granted  options and warrants to purchase  shares of the
        Company's  common stock at prices at or in excess of market value at the
        date of grant. The options and warrants were granted under various plans
        or by specific grants  approved by the Company's Board of Directors.  In
        1994,  the former  Executive  Vice  President  of the Company  exercised
        options for 45,000  shares of the  Company's  common  stock by executing
        demand  notes  bearing  interest  at a bank's  prime  rate for the total
        option price of $174,000.  Approximately  $97,000 of this amount remains
        outstanding at September 30, 1997. Interest income of $8,000, $7,000 and
        $8,000 was recorded on these notes in fiscal 1997, 1996 and 1995.

        Option and warrant transactions are summarized as follows:

                                    --------------------------------------------
                                    Shares Under
                                    Options and
                                      Warrants                 Option Price
                                    --------------------------------------------


October 1, 1994                         3,153,450           3.88  -    30.50
Granted                                   281,000           4.88  -     7.50
Exercised, expired or canceled           (104,400)          3.88  -    30.50
                                    --------------------------------------------
September 30, 1995                      3,330,050           3.88  -    21.50
Exercised, expired or canceled            (35,000)          3.88  -    12.50
                                    --------------------------------------------
September 30, 1996                      3,295,050          $3.88  -   $21.50
Granted                                   587,000           6.38  -     7.13
Exercised, expired or canceled             75,050           3.88  -    12.63
                                    --------------------------------------------
September 30, 1997                      3,807,000          $4.88  -   $21.50
                                    --------------------------------------------

        In February  1992,  the Company  issued  $40,000,000 in Azide Notes with
        Warrants.  See Note 6 for a description  of the  Warrants.  Shares under
        options  and  warrants  at  September  30,  1997  include  approximately
        2,857,000 Warrants at a price of $14 per Warrant.

        The  following  table  summarizes  information  about stock  options and
        warrants outstanding at September 30, 1997:
<TABLE>
<CAPTION>

                                        Options and Warrants Outstanding                                 Options Exercisable
                           -----------------------------------------------------------    -----------------------------------------
                                             Weighted Average                                                           Weighted
                                                Remaining                Weighted                                        Average
            Range of            Number         Contractual                Average                Number                  Exercise
         Exercise Price       Outstanding      Life (Years)            Exercise Price         Exercisable                 Price
        -----------------  --------------    --------------------   ----------------------   -----------------    ---------------
        <S>                  <C>                      <C>                <C>                    <C>                  <C>     
        $       4.88            40,000                2.5               $    4.88                  40,000            $   4.88
         5.63 - 7.50           860,000                4.1                    6.97                 569,000                7.07
               21.50            50,000                1.0                   21.50                  50,000               21.50
               14.00         2,857,000                6.0                   14.00               2,857,000               14.00
                             ---------       ---------------------   ----------------------   -----------------    ---------------
                             3,807,000                5.49               $  13.23               3,516,000            $  13.60
                             =========       =====================   ======================   =================    ===============
</TABLE>


                                       54
<PAGE>
12.     SEGMENT INFORMATION

        The  Company's  principal  business  segments are  specialty  chemicals,
        environmental     protection     equipment    and    technology,     and
        industrial/commercial and residential real estate development.  Products
        of the specialty  chemicals  segment include AP used in the solid rocket
        propellant for the space shuttle and defense programs, other perchlorate
        chemicals, sodium azide, and Halotron.

        Information about the Company's industry segments is as follows:
<TABLE>
<CAPTION>

                                             ---------------------------------------------
                                                        Years ended September 30,
                                             ---------------------------------------------
                                                 1997            1996            1995
                                                 ----            ----            ----
Revenues:
<S>                                          <C>             <C>             <C>         
Specialty chemicals                          $ 37,976,000    $ 34,061,000    $ 34,219,000
Environmental protection                        2,429,000       3,099,000       1,656,000
Real estate                                     3,645,000       5,221,000       3,375,000
                                             ------------    ------------    ------------

Total                                        $ 44,050,000    $ 42,381,000    $ 39,250,000
                                             ============    ============    ============

Operating income (loss) before
    unallocated income and expenses:
Specialty chemicals                          $(55,227,000)   $   (879,000)   $ (2,150,000)
Environmental protection                         (659,000)       (249,000)       (640,000)
Real estate                                     1,624,000       2,069,000       1,356,000
                                             ------------    ------------    ------------

Total                                         (54,262,000)        941,000      (1,434,000)
                                             ------------    ------------    ------------

Deduct (add) unallocated expense (income):
General corporate(1)                            3,838,000         506,000         613,000
Equity in earnings of real estate venture        (200,000)       (700,000)
Interest and other income                      (1,115,000)     (1,381,000)     (1,429,000)
Interest and other expense                      2,001,000       2,836,000       1,709,000
Income tax credit                             (10,101,000)       (109,000)       (791,000)
                                             ------------    ------------    ------------

Net loss                                     $(48,685,000)   $   (211,000)   $ (1,538,000)
                                             ============    ============    ============

Specialty chemicals                          $ 32,166,000    $ 91,869,000    $ 95,845,000
Environmental protection                        1,667,000       1,476,000       1,087,000
Real estate                                    29,215,000      28,996,000      29,827,000
Corporate                                      27,033,000      27,678,000      28,460,000
                                             ------------    ------------    ------------

Total                                        $ 90,081,000    $150,019,000    $155,219,000
                                             ------------    ------------    ------------
Financial information relating to domestic
   and export sales (domestic operations):
Domestic revenues                            $ 42,723,000    $ 40,029,000    $ 38,857,000
Export revenues                                 1,327,000       2,784,000         393,000
                                             ------------    ------------    ------------

Total                                        $ 44,050,000    $ 42,381,000    $ 39,250,000
                                             ============    ============    ============
</TABLE>

(1)     The  increase in general  corporate  expenses in fiscal 1997  relates to
        employee  separation and management  reorganization  costs recognized in
        the fourth quarter. (See Note 16.)


                                       55
<PAGE>
        The Company's  operations  are located in the United  States.  It is not
        practicable  to  compute a measure of  profitability  for  domestic  and
        export  sales or for sales by  geographic  location.  Substantially  all
        export revenues relate to  environmental  protection  equipment sales in
        the Far and Middle East.









                                      55-A
<PAGE>

        The  majority  of  depreciation  and  amortization  expense  and capital
        expenditures  relate  to  the  Company's  specialty  chemicals  segment.
        Depreciation and amortization  expenses for the years ended September 30
        are as follows:

                          ----------------------------------------------
                                1997            1996           1995
                          ----------------------------------------------
Specialty chemicals        $ 6,749,000      $6,899,000       $4,824,000
All other segments             936,000         911,000        1,059,000
                          ----------------------------------------------


Total                      $ 7,685,000      $7,810,000       $5,883,000
                          ==============================================

        Capital expenditures for the years ended September 30 are as follows:

                          ---------------------------------------------
                                  1997                   1996
                          ---------------------------------------------
Specialty chemicals       $     1,524,000        $     3,157,000
All other segments                 33,000                 91,000
                          ----------------------------------------------
Total                     $     1,557,000        $     3,248,000
                          =============================================

        The Company had three  customers  that  accounted for 10% or more of the
        Company's  revenues in one or more of fiscal 1997, 1996 and 1995.  These
        three customers accounted respectively for the following revenues during
        the fiscal years ended September 30:
<TABLE>
<CAPTION>

                                                            -----------------------------------------------------
  Customer              Chemical               Industry              1997        1996                1995
-----------------------------------------------------------------------------------------------------------------
<S>            <C>                          <C>              <C>               <C>                 <C>
      A        Ammonium Perchlorate         Space            $15,661,000       $20,000,000         $27,963,000
      B        Ammonium Perchlorate         Space              4,614,000
      C        Sodium Azide                 Airbag            11,715,000         9,378,000
                                                            -----------------------------------------------------
</TABLE>

13.     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.

        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  begins  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  agreement  with
        Autoliv ASP, Inc. ("Autoliv") (formerly Morton International  Automotive
        Safety  Products).  The  agreement  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 agreement is approximately $45 - $55 million over the
        three-

                                       56
<PAGE>
        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 agreement.

       The Company  previously  believed  that demand for sodium  azide in North
       America and the world would substantially  exceed existing  manufacturing
       capacity  and  announced  expansions  or new  facilities  (including  the
       Company's  plant) by the 1994 model year  (which for sodium  azide  sales
       purposes is the period June 1993 through May 1994). Currently, demand for
       sodium azide is substantially  less than supply on a worldwide basis. The
       Company  believes  this is the result of capacity  expansions by existing
       producers,   although   the   Company's   information   with  respect  to
       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 has been due, in part, 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 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,  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.


                                       57
<PAGE>
        The  Company has  incurred  significant  operating  losses in its sodium
        azide  operation  during the last three  fiscal  years.  Such  operating
        history  was  partially  expected  by the  Company  as a  result  of the
        generally  lengthy process of  qualification  for use of new material in
        automotive  safety equipment.  Sodium azide performance  improved in the
        fourth  quarter of fiscal 1997,  principally  as a result of  additional
        sodium azide deliveries under the Autoliv  agreement  referred to above,
        and the  operations  were  cash  flow  positive  during  the year  ended
        September  30,  1997.   Capacity   utilization   rates   increased  from
        approximately  45% in the third quarter of fiscal 1997 to  approximately
        55% in the fourth  quarter of 1997.  However,  even  though  performance
        improved,  Management's view of the economics of the sodium azide market
        changed  significantly  during the fourth quarter of fiscal 1997. During
        the late August,  September,  October and November of 1997 the following
        events or  developments  occurred that changed the Company's view of the
        economics of the sodium azide market.

        o  The Company was  unsuccessful in its attempts to sell sodium azide to
           major users other than Autoliv.  With the  procurement  cycle for the
           automotive  model  year  beginning  in July or  August,  the  Company
           previously  believed it would be successful in achieving  significant
           sales to other major users.

        o  One  major  inflator   manufacturer   announced  the  acquisition  of
           non-azide  based inflator  technology and that they intended to be in
           the  market  with  this new  technology  by  model  year  1999.  This
           announcement, coupled with the fact that other inflator manufacturers
           appear  to be  pursuing  non-azide  based  inflator  technology  more
           aggressively  than  before,  caused  a  reduction  in  the  Company's
           estimates of annual sodium azide demand  requirements  and,  possibly
           more importantly, the duration that such requirements will exist.

        o  The  effects of the  antidumping  petition  appear to have been fully
           incorporated  into the sodium azide market by the end of fiscal 1997.
           At  September  30, 1997,  Management  believes  that the  antidumping
           related  environment  will  remain  unchanged  as  a  result  of  the
           continued  strength  and outlook of the U.S.  dollar  relative to the
           Japanese  yen (the  home  country  currency  of the  Company's  major
           competitor).

         As a result of these events and developments, the Company's view of the
         economics  of  the  sodium  azide  market  and  the  Company's   future
         participation in such market degraded substantially by October 30, 1997
         and  Management  concluded that the cash flows  associated  with sodium
         azide  operations  would not be  sufficient  to recover  the  Company's
         investment  in  sodium  azide  operations  would not be  sufficient  to
         recover the Company's  investment in sodium azide related fixed assets.
         As quoted  market  prices  were not  available,  the  present  value of
         estimate  future  cash flows was used to  estimate  the value of sodium
         azide fixed assets.  Under the  requirements  of SFAS No. 121, and as a
         result of this valuation technique, an impairment charge of $52,605,000
         was recognized in the fourth quarter of fiscal 1997.

                                       58
<PAGE>
         This impairment  charge was recorded as a reduction of the sodium azide
         building and  equipment  and related  accumulated  depreciation  in the
         amounts of approximately $69,537,000 and $16,932,000,  respectively, to
         reduce  the  carrying  value  of these  assets  to  $13,500,000  or the
         estimate of their fair value.

         The  Company  will  continue  to use the  sodium  azide  assets  in its
         operations  as long as the cash  flows  generated  from the use of such
         assets are  positive.  The  Company  estimates  that cash flows will be
         negligible around calendar 2005 and as such the sodium azide assets are
         being depreciated over the lesser of their useful lives or seven years.

14.     HALOTRON

        On August 30, 1991, the Company entered into an agreement (the "Halotron
        Agreement")  granting  the Company  the option to acquire the  exclusive
        worldwide  rights to manufacture  and sell Halotron I (a replacement for
        halon 1211). Halotron products are fire suppression systems, including a
        series of chemical compounds and application  technologies,  designed to
        replace halons,  chemicals  presently in wide use as a fire  suppression
        agent in military, industrial, commercial and residential applications.

        The Halotron  Agreement  provides for  disclosure  to the Company of all
        confidential and proprietary  information  concerning  Halotron I, which
        together   with  testing   undergone   by  Halotron  I  at   independent
        laboratories  in Sweden and the United  States and  consulting  services
        that were  provided,  was  intended  to enable the  Company to  evaluate
        Halotron I's commercial  utility and feasibility.  In February 1992, the
        Company announced that a series of technical evaluations and field tests
        conducted  at the  University  of  New  Mexico  had  been  positive  and
        equivalent  to the  performance  previously  reported  in testing at the
        Swedish  National  Institute of Testing and Standards and the University
        of Lund in Sweden.

        In February 1992, the Company  determined to acquire the rights provided
        for in the  Halotron  Agreement,  gave  notice  to  that  effect  to the
        inventors,  and  exercised  its option.  In  addition  to the  exclusive
        license to manufacture  and sell Halotron I, the rights  acquired by the
        Company include rights under all present and future patents  relating to
        Halotron  I  throughout  the  world,  rights to  related  and  follow-on
        products  and  technologies  and  product and  technology  improvements,
        rights to reclaim,  store and distribute halon and rights to utilize the
        productive  capacity of the inventors' Swedish  manufacturing  facility.
        Upon  exercise of the option,  the Company paid the sum of $700,000 (the
        exercise price of $1,000,000, less advance payments previously made) and
        became  obligated to pay the further sum of  $1,500,000 in equal monthly
        installments of $82,000, commencing in

                                      58-A
<PAGE>
        March 1992. The license  agreement  entered into between the Company and
        the  inventors of Halotron I provides for a royalty to the  inventors of
        5% of the Company's net sales of Halotron I over a period of 15 years.

        The Company has designed and constructed a Halotron facility that has an
        annual capacity of approximately 6,000,000 pounds, located on land owned
        by the Company in Iron County, Utah.

        As discussed above, in 1992, the Company purchased the rights to certain
        fire  suppression  chemicals and delivery  systems called  Halotron from
        their Swedish  inventor,  Jan Andersson and his  corporation,  AB Bejaro
        Product.  The Company  claimed that  Andersson  and Bejaro  breached the
        contract  in which they had sold the rights to  Halotron.  This  alleged
        breach  resulted in  litigation  initiated by the Company.  This initial
        litigation  was settled when  Andersson  and Bejaro  promised to perform
        faithfully  their duties and to honor the terms of the  contracts  that,
        among other things,  gave the Company  exclusive  rights to the Halotron
        chemicals and delivery systems.

        Following the settlement of the initial litigation,  however,  Andersson
        and Bejaro  failed to  perform  the acts they had  promised  in order to
        secure  dismissal  of  that  litigation.  As a  result,  litigation  was
        initiated  in the Utah state  courts in March  1994,  for the purpose of
        establishing the Company's  exclusive  rights to the Halotron  chemicals
        and delivery  systems.  On August 15, 1994,  the court entered a default
        judgment   ("Judgment")   against  Andersson  and  Bejaro  granting  the
        injunctive  relief  requested by the Company and awarding damages in the
        amount of $42,233,000.

        The  trial  court  further  ordered  Andersson  and  Bejaro  to  execute
        documents  required  for  patent  registration  of  Halotron  in various
        countries.  When  Andersson  and Bejaro  ignored  this order,  the Court
        directed the Clerk of the Court to execute these  documents on behalf of
        Andersson and Bejaro.  Finally,  the Court ordered that  Andersson's and
        Bejaro's  rights to any future  royalties  from sales of  Halotron  were
        terminated.  The Company is exploring  ways to collect the Judgment from
        Andersson  and Bejaro.  It appears  that  Andersson  and Bejaro have few
        assets and those  assets they do have appear to have been placed  beyond
        reach of the Judgment.

        The Company has initiated arbitration  proceedings against Jan Andersson
        and Bejaro to  enforce  Halotron's  patent  rights to  Halotron  against
        Andersson.  The parties have each submitted  statements of claims,  with
        supporting  documents,  affidavits and briefs to the arbitration  panel.
        Jan Andersson and Bejaro have also asserted a  counterclaim  against the
        Company,  alleging that the Company  wrongfully  deprived  Andersson and
        Bejaro of royalties due under the agreements with the Company. Andersson
        and Bejaro seek  $6,200,000,  including  damages  for  alleged  physical
        suffering  and  punitive  damages.  The Company has sought to strike the
        counterclaim as having been filed untimely.  If the  counterclaim is not
        stricken,  the Company will  vigorously  contest claims  asserted in the
        counterclaim. The Company believes the counterclaim to be without merit.
        No hearing has been set in the arbitration.

15.     ASSET PURCHASE AGREEMENT

        On  October  10,  1997,  the  Company  entered  into an  Asset  Purchase
        Agreement (the "Agreement") with Kerr-McGee.  The Agreement contemplates
        that the Company  will  acquire  certain  intangible  assets  related to
        Kerr-McGee's production of AP.

                                       59
<PAGE>
        The Agreement calls for a purchase price of $39 million,  and grants the
        Company the option to purchase  limited AP inventory of  Kerr-McGee  for
        additional consideration.

        Closing  of the  transaction  is  subject  to a  number  of  conditions,
        including  the  Company's  securing of financing  for 100 percent of the
        purchase  price and Board of  Director  approvals  by both  parties.  In
        December 1997, the Company received  notification that the Federal Trade
        Commission  ("FTC") had  determined  to grant early  termination  of the
        waiting  period  relating to the  Company's and  Kerr-McGee's  premerger
        notifications  filings with the FTC and the  Department of Justice under
        the Hart-Scott-  Rodino Antitrust  Improvements Act of 1976. The Company
        has entered  into  long-term  pricing  agreements  for AP with its major
        customers that are contingent upon the closing of the  transaction  and,
        on a continuing  basis,  that will be contingent  upon  agreement on the
        terms of specific purchase orders.

        There  can  be no  assurance  that  the  conditions  to  closing  of the
        transaction  will be satisfied,  or that the transaction will close. The
        management of the Company will, however,  make all reasonable efforts to
        meet all conditions, and to conclude successfully this transaction.

16.     EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS

        During the fourth  quarter of fiscal  1997,  the Company  implemented  a
        management  reorganization plan. As a result, the former Chief Executive
        Officer,  Executive  Vice  President  and two  other  senior  executives
        separated  their  employment  with the Company  and the Company  vacated
        approximately  one-half of its leased corporate office facilities space.
        In addition,  activities  associated  with the  Company's  environmental
        protection  equipment  division  were  relocated to the  Company's  Utah
        facilities.

        The Company  recognized a charge of  $3,616,000 to account for the costs
        associated with the employee  separations and vacating leased space. The
        charge consists principally of four years of salary and benefits payable
        to the former  Executive Vice President under the terms of an employment
        agreement,  the present  value of the  estimated  amount  payable to the
        former  Chief  Executive  Officer  under  the  terms  of  the  Company's
        Supplemental  Executive  Retirement  Plan ("SERP") and  severance  costs
        payable to the two other  former  senior  executives.  The former  Chief
        Executive Officer is the only person currently covered under the SERP.

        Relocation costs amounted to  approximately  $387,000 and are classified
        in  operating  expenses in the  accompanying  consolidated  statement of
        operations.

        In the third  quarter  of 1995,  the  Company  reduced  total  full-time
        employee  equivalents by approximately  ten percent through  involuntary
        terminations  and an  offering  of  enhanced  retirement  benefits  to a
        certain  class  of  employees.   The  Company  recognized  a  charge  of
        approximately  $226,000  as a  result  of  these  terminations  and  the
        acceptance  of the offer of  enhanced  retirement  benefits  by  certain
        employees.




                                       60
<PAGE>





                                  GIBSON RANCH
                           LIMITED LIABILITY COMPANY

                              FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND
                          INDEPENDENT AUDITORS' REPORT





                                       61

<PAGE>
INDEPENDENT AUDITORS' REPORT


To the Members
Gibson Ranch Limited Liability Company
Las Vegas, Nevada

We have  audited  the  accompanying  balance  sheets  of  Gibson  Ranch  Limited
Liability  Company (the  "Company")  as of December  31, 1997 and 1996,  and the
related  statements of operations and members'  equity and of cash flows for the
years ended  December  31, 1997 and 1996.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Gibson Ranch Limited Liability
Company as of December 31, 1997 and 1996,  and the results of its operations and
its cash flows for the years then ended in conformity  with  generally  accepted
accounting principles.


/s/ DELOITTE & TOUCHE LLP


Las Vegas, Nevada
July 10, 1998

                                       62
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY

BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS                                                             1997                       1996

<S>                                                           <C>                        <C>         
Cash and cash equivalents                                     $    498,465               $    391,085
Receivables, net                                                   377,597                     53,586
Inventories                                                     25,751,033                 23,457,325
Deposits and other assets                                        1,032,269                    992,887
                                                              ------------               ------------
          TOTAL                                               $ 27,659,364               $ 24,894,883
                                                              ============               ============
LIABILITIES AND MEMBERS' EQUITY

LIABILITIES:
  Notes payable                                               $  5,852,947               $  3,603,904
  Accounts payable and accrued liabilities                       4,978,642                  3,215,998
  Due to members                                                 2,379,393                  2,786,621
  Customer deposits                                                123,075                    151,870
                                                              ------------               ------------
          Total liabilities                                     13,334,057                  9,758,393

MEMBERS' EQUITY                                                 14,325,307                 15,136,490
                                                              ------------               ------------

          TOTAL                                               $ 27,659,364               $ 24,894,883
                                                              ============               ============
</TABLE>


See notes to financial statements.

                                       63

<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY

STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                1997           1996

REVENUES:
<S>                                                       <C>             <C>         
  Home sales                                              $ 19,407,397    $ 16,122,148
  Land sale                                                  2,240,000       2,480,000
                                                          ------------    ------------
          Total revenues                                    21,647,397      18,602,148
                                                          ------------    ------------

COST OF SALES:
  Home sales                                                17,291,000      14,420,944
  Land sale                                                    934,078         999,090
                                                          ------------    ------------
          Total cost of sales                               18,225,078      15,420,034
                                                          ------------    ------------

GROSS PROFIT                                                 3,422,319       3,182,114

OPERATING EXPENSES                                           1,223,131         984,230
                                                          ------------    ------------
NET INCOME                                                $  2,199,188    $  2,197,884
                                                          ============    ============

MEMBERS' EQUITY, JANUARY 1, 1996 (As previously stated)                   $ 13,348,889

  ADJUSTMENT (See Note 1)                                                    1,687,651
                                                                          ------------

MEMBERS' EQUITY, JANUARY 1, 1996 (As adjusted)                              15,036,540

  NET INCOME                                                                 2,197,884

  DISTRIBUTIONS PAID                                                        (2,097,934)
                                                                          ------------

MEMBERS' EQUITY, DECEMBER 31, 1996                                          15,136,490

  NET INCOME                                                                 2,199,188

  DISTRIBUTIONS PAID                                                        (3,010,371)
                                                                          ------------

MEMBERS' EQUITY, DECEMBER 31, 1997                                        $ 14,325,307
                                                                          ============
</TABLE>


See notes to financial statements.


                                       64
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                            1997            1996

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                   <C>             <C>         
  Net income                                                          $  2,199,188    $  2,197,884
  Changes to reconcile net income to net cash provided by operating
    activities:
    Decrease (increase) in receivables                                    (324,011)        154,237
    Increase in deposits and other assets                                  (39,382)       (421,309)
    Increase in inventories                                             (2,293,708)        (31,253)
    Increase in accounts payable and accrued liabilities                 1,762,644         786,755
    Increase (decrease) in customer deposits                               (28,796)         90,325
                                                                      ------------    ------------
           Net cash provided by operating activities                     1,275,936       2,776,639
                                                                      ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of amounts due to members                                    (407,228)       (924,515)
  Distributions paid to members                                         (3,010,371)     (2,097,935)
  Proceeds from notes payable                                           18,466,503      15,099,943
  Principal payments on notes payable                                  (16,217,460)    (14,498,835)
                                                                      ------------    ------------
           Net cash used in financing activities                        (1,168,556)     (2,421,342)
                                                                      ------------    ------------

NET INCREASE IN CASH                                                       107,380         355,297

CASH, BEGINNING OF YEAR                                                    391,085          35,788
                                                                      ------------    ------------

CASH, END OF YEAR                                                     $    498,465    $    391,085
                                                                      ============    ============

SUPPLEMENTAL SCHEDULE OF CASH FLOW
  INFORMATION - Cash paid for interest                                $    856,757    $    835,396
                                                                      ============    ============
</TABLE>

See notes to financial statements.


                                       65
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------


1.      NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

        NATURE  OF   BUSINESS--Gibson   Ranch  Limited  Liability  Company  (the
        "Company")  was  formed  August  27,  1993,  under  the  Nevada  Limited
        Liability  Company  Act.  The  members  are  The  Developers  of  Nevada
        ("Developers"),  its  managing  member,  and AmPac  Development  Company
        ("AmPac").   Limited   liability   companies   ("LLC")  are  statutorily
        established  legal  entities  containing  features of  corporations  and
        partnerships.  Except as provided by law, the members are not personally
        liable  for any  debts of the  Company  or any  losses  in excess of the
        amount of their  capital  contribution.  The Company has  acquired  real
        property  in  Henderson,  Nevada,  for the purpose of  developing  lots,
        selling  undeveloped  commercial  land, and  constructing  single-family
        homes and four-plex  townhomes.  The Company will continue  until August
        2023 unless dissolved prior to that time.

        Prior  to  January  1,  1996,  the  Company  had  recorded  the  initial
        contribution of land by Developers and AmPac at its agreed upon value in
        accordance with the Company's  operating  agreement.  Generally accepted
        accounting  principles require that the land be recorded at the lower of
        the  members'  cost basis or market  value.  Therefore,  an  increase of
        $1,687,651 has been made to members' equity and land at January 1, 1996.

2.      SIGNIFICANT ACCOUNTING POLICIES

        BALANCE  SHEET  PREPARATION--The  operations  of the  Company  involve a
        variety of real estate  transactions and it is not possible to precisely
        measure the  operating  cycle of the Company.  The balance  sheet of the
        Company has been prepared on an  unclassified  basis in accordance  with
        real estate industry practice.

        REVENUE  RECOGNITION--Profits  on the sale of real estate are recognized
        upon  closing in  accordance  with  Statement  of  Financial  Accounting
        Standards  ("SFAS") No. 66,  Accounting  for Sales of Real Estate,  when
        title has passed, the buyer has made a substantial commitment, the usual
        risks and rewards of ownership have been  transferred to the buyer,  and
        the collectibilty of the sales price is reasonably assured. Construction
        costs are generally allocated to lots using the specific  identification
        method.  Payments  received from buyers prior to closing are recorded as
        deposits.

        MANAGEMENT  FEES--Over the life of the Company, a management fee is paid
        to the  Company's  managing  member in the amount of $50,000  per month.
        This management fee is charged to expense as incurred.

                                       66
<PAGE>
        INVENTORIES--Inventories  are  stated  at  the  lower  of  cost  or  net
        realizable value. Inventory costs include preacquisition costs, property
        taxes,   interest,   and  insurance   incurred  during  development  and
        construction, and direct and certain indirect project costs. General and
        administrative   costs  are  charged  to  expense  as  incurred.   Model
        construction,  model  furnishing  costs,  and  semi-permanent  signs are
        capitalized.  Costs of  amenities  such as swimming  pools,  parks,  and
        fitness centers are accounted for as common costs and allocated to units
        to be sold.

        The Company  follows  SFAS No. 121,  Accounting  for the  Impairment  of
        Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  Of. As of
        December  31,  1997,  no  adjustments  to reduce cost to fair value less
        estimated selling costs were required.

        ALLOCATION OF PROCEEDS AND DISTRIBUTIONS OF PROFIT AND LOSSES--Under the
        terms of the  operating  agreement,  the  capital  contributions  of all
        members  shall be returned on a pro rata basis as land in the project is
        developed and sold. The profits and losses of the Company shall be split
        equally between the members after the return of advances and agreed upon
        values for initial contributions.

        INCOME  TAXES--As  an LLC, the Company is taxed as a  partnership.  As a
        result,  the members separately account for their share of the Company's
        income, deductions,  losses, and credits.  Accordingly, no provision for
        income tax expense has been  recognized  in the  accompanying  financial
        statements.

        CASH AND CASH  EQUIVALENTS--For  purposes of reporting cash flows,  cash
        and cash  equivalents  includes  cash on hand,  cash in bank,  and money
        market accounts.

        USE OF ESTIMATES--The  preparation of financial statements in conformity
        with generally accepted  accounting  principles  requires  management to
        make  estimates  and  assumptions  that affect the  reported  amounts of
        assets  and  liabilities   and  disclosure  of  contingent   assets  and
        liabilities  at the date of the  financial  statements  and the reported
        amounts of revenues and expenses during the reported period. Significant
        estimates used include the allocation of lot development  costs.  Actual
        results could differ from those estimates.

3.      INVENTORIES

        Inventories consist of the following as of December 31:

                                                       1997            1996

        Land under development                      $10,869,926    $ 13,198,066
        Land held for investment                        726,817         726,817
        Development and construction costs           13,755,706       9,240,426
        Model home furnishings and signs                398,584         292,016
                                                    -----------    ------------
          Total                                     $25,751,033    $23,457,325
                                                    ===========    ============

        Interest and finance costs  capitalized  were  $1,248,846  and $544,922,
        including  $239,409  and  $240,072  to AmPac,  during  the  years  ended
        December 31, 1997 and 1996, respectively.

4.      DEPOSITS AND OTHER ASSETS

        Deposits and other assets consist of the following as of December 31:

                                               1997                  1996

        Refundable deposits                $  759,985            $ 757,783
        Other assets                          272,284              235,104
                                           ----------            ---------
          Total                            $1,032,269            $ 992,887
                                           ==========            =========

                                       67
<PAGE>
5.      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued  liabilities consist of the following as of
        December 31:

                                                        1997             1996

        Accounts payable - trade                     $4,121,209      $ 2,271,864
        Special improvement district assessment         684,705          821,646
        Warranty reserve                                114,756           88,487
        Accrued interest due to AmPac                    57,972           34,001
                                                     ----------      -----------

               Total                                 $4,978,642      $ 3,215,998
                                                     ==========      ===========
6.      NOTES PAYABLE

        Notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>

                                                                                               1997                    1996
<S>                                                                                        <C>                    <C>
Note payable  to a bank,  monthly  installments  of  interest  only based on the
  bank's  prime  lending  rate (8.50% at  December  31,  1997),  due April 1999,
  secured by deed of trust and guaranteed
  by the members of Developers.                                                            $  461,448

Notes payable to a corporation,  monthly  installments of interest only at 12.5%
  through February 1998, due March 1998, secured
  by deed of trust and guaranteed by the members of Developers.                             1,830,649             $ 1,065,967

Revolving line of credit for $10,000,000 secured by deed of trust
  and guaranteed by the members of Developers. Bears
  interest at the prime (8.5% at December 31, 1997)
  rate plus 1.25% and matures April 30, 1999.                                               3,560,850

Notes  payable to banks,  monthly  installments  of  interest  only based on the
  bank's prime  lending rate (8.25% at December  31,  1996)  various  maturities
  through  October 1997,  secured by deeds of trust and guaranteed by Developers
  and the members of
  Developers.                                                                                                       2,537,937
                                                                                           ----------             -----------

          Total                                                                            $5,852,947             $ 3,603,904
                                                                                           ==========             ===========
</TABLE>

        Scheduled  maturities of notes payable for the years ending December 31,
        1997, are as follows:

        1998                                                      $ 1,830,649
        1999                                                        4,022,298
                                                                  -----------

          Total                                                   $ 5,852,947
                                                                  ===========
                                       68
<PAGE>
        In accordance with the bank loan agreements,  the Company is required to
        maintain a minimum  tangible net worth of no less than $5,000,000 at all
        times.  The  Company is subject to certain  other debt  covenants  which
        includes providing reviewed or audited financial statements by a certain
        date.  Management  believes  the  Company  is  in  compliance  with  all
        covenants contained in its debt agreements at December 31, 1997.

7.      RELATED PARTY BALANCES AND TRANSACTIONS

        Developers  made advances to and received  payments from the Company for
        operating  and  development  expenditures.  Advances  included in due to
        members  were  $10,633  and  $268,768  at  December  31,  1997 and 1996,
        respectively.

        The Company also has a  $2,400,000  revolving  line of credit  agreement
        with AmPac and a  $2,400,000  revolving  line of credit  agreement  with
        Developers  that  may be  drawn  only  after  the  AmPac  line  has been
        exhausted.  The  agreements  have no stated  repayment  terms and accrue
        interest at 10 percent. The AmPac line is unsecured; the Developers line
        is secured by the land  contributed by Developers.  The balance included
        in due to  members  at  December  31,  1997 and 1996,  respectively,  is
        $2,368,760 and $2,517,853 and is due to AmPac.

        The Company  incurred  management  fees to its managing  member totaling
        $600,000 for each of the years ended December 31, 1997 and 1996.

        AmPac's  initial  contribution  of land was  subject  to its  ability to
        obtain a release of a mortgage  lien in favor of AmPac's  creditors.  In
        December 1994 an agreement  regarding  release of liens was consummated.
        Under the terms of this agreement,  release amounts are distributed to a
        trustee  upon sales of the  Company's  property  for  payment of AmPac's
        indebtedness.  The release  amounts  paid by the Company are recorded as
        distributions to the members.

                                       69