UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Fiscal Year Ended September 30, 2004
Commission File Number 001-08137

AMERICAN PACIFIC CORPORATION

(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. þ Yes o 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. o Yes þ No

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2004, was approximately $57 million. 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 31, 2004, was 7,300,000.

Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Part III Hereof

     Definitive Proxy Statement for 2005 Annual Meeting of Stockholders to be filed not later than January 28, 2005.

Part IV Hereof

     S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the years ended September 30, 2003, 2002, 2000 and 1999; S-2 Registration Statement (33-36664); Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998; Form 8-A dated August 6, 1999; S-3 Registration Statement (33-52196); S-8 Registration Statement (333-104732); S-8 Registration Statement (333-53449); S-8 Registration Statement (333-62566) and Current Report on Forms 8-K dated November 9, 1999.

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PART I

Item 1. Business

Overview

     The terms “Company”, “we”, “us”, and “our” are used herein to refer to American Pacific Corporation and, where the context requires, one or more of the direct and indirect subsidiaries or divisions of American Pacific Corporation.

     American Pacific Corporation is principally engaged in the production of a specialty chemical, ammonium perchlorate (“AP”), which is used as an oxidizing agent in composite solid propellants for rockets, booster motors and missiles. We also produce a variety of other specialty chemicals, performance products and environmental protection equipment for niche applications, including: (i) sodium azide, used primarily in the inflation of automotive airbags, in the production of certain tetrazoles and in certain pharmaceutical applications; (ii) Halotron products, used to extinguish fires; (iii) water treatment equipment, used to disinfect effluents from sewage treatment and industrial facilities and for the treatment of seawater; and (iv) packaged explosive products. In addition, as of September 30, 2004, we own approximately 14 acres of improved undeveloped land in an industrial park in the Las Vegas, Nevada area and approximately 4,700 acres of land and certain water rights at our production site in Iron County, Utah.

     Our highest propellant grade AP (“Grade I AP”) is employed in the Space Shuttle, the Minuteman missile, the Delta and Atlas families of commercial space launch vehicles, a number of defense related missiles and rockets, and most other solid fuel rocket motors. Grade I AP customers include contractors of the National Aeronautics and Space Administration (“NASA”), the Department of Defense (“DOD”) and certain commercial space launch vehicle programs used to launch satellites for communication, navigation, intelligence gathering, space exploration, weather forecasting and environmental monitoring.

     Our strategic plan with respect to the market we serve with our existing products is described below. In addition, our strategic plan will attempt to accelerate our growth by pursuing attractive new product and market opportunities. In pursuing these growth initiatives, we seek to leverage our existing customer, market or manufacturing position. These growth initiatives may include the evaluation of new product development and acquisition opportunities.

     On October 1, 2004 we acquired the former Atlantic Research Corporation in-space propulsion business from Aerojet-General Corporation. This acquisition provides us with a leading supplier of commercial and military propulsion products and the world’s largest producer of bipropellant thrusters.

     We currently have two operating segments: (i) Specialty Chemicals and (ii) Other Businesses. See Note 11 to our Consolidated Financial Statements for financial information concerning our operating segments. Our perchlorate chemicals, a part of the Specialty Chemical segment, accounted for approximately 73%, 79% and 73% of revenues during fiscal 2004, 2003 and 2002, respectively.

Specialty Chemicals

Perchlorate Chemicals

Strategy

     In March 1998, we acquired certain assets and rights of Kerr-McGee Chemical Corporation (“Kerr-McGee”) related to its production of AP (the “Acquisition”). By virtue of the Acquisition, we became the sole

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commercial producer of perchlorate chemicals in North America. Our strategy is to maintain and enhance our position as the leading world-wide producer of perchlorate chemicals.

Market

     AP is the sole oxidizing agent for solid fuel rockets, booster motors and missiles used in space exploration, commercial satellite transportation and national defense programs. A significant number of existing and planned launch vehicles providing access to space use solid fuel and thus depend, in part, upon AP. Many of the rockets and missiles used in national defense programs are also powered by solid fuel.

     We have supplied AP for use in space and defense programs for over 40 years. Today, our principal space customers are Alliant Techsystems, Inc. (“Alliant”) for the Space Shuttle Program and the Delta family of commercial rockets, and Aerojet General Corporation for the Atlas family of commercial rockets. We also supply AP for use in a number of defense programs, including the Minuteman, Navy Standard Missile, Patriot, and Multiple Launch Rocket System programs. We have supplied AP to various foreign defense programs and commercial space programs, although AP is subject to strict export license controls.

     Demand for perchlorate chemicals declined throughout the 1990’s. In 1998, supply capacity was substantially in excess of demand levels. In 1998, we consummated the Acquisition with Kerr-McGee in an effort to rationalize market production capacity and increase our sales volume of Grade I AP (see “Perchlorate Chemicals – Kerr-McGee Acquisition”).

     Since the Acquisition in 1998, our annual sales volumes of Grade I AP have been approximately 20.2 million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000, 2001, 2002 and 2003 fiscal years (ended September 30), respectively. Prior to the Space Shuttle Columbia disaster on February 1, 2003, and based principally upon information we had received from our major customers, we had estimated that annual demand for Grade I AP would range between 16.0 million and 20.0 million pounds over the next several years.

     The suspension of Space Shuttle missions after the Columbia disaster reduced sales volume of our Grade I AP products in fiscal 2004 to 11.3 million pounds. This reduced sales volume exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers’ inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently expected to resume flights beginning in the spring of 2005 with four to five flights per year thereafter, although there is no assurance in this regard. Based principally upon market information we received from our customers, we currently estimate that our annual sales volumes of Grade I AP will range between 10.0 and 13.0 million pounds over the next three years.

     In January 2004, President Bush announced a new initiative for the Nation’s space exploration program. The President proposed a long-term human and robotic program to explore the solar system, starting with a return to the Moon. This program includes the following:

	•	The United States will complete its work on the International Space Station (“ISS”) by 2010. To accomplish this goal, NASA will return the Space Shuttle to flight and the Shuttle’s chief purpose over the next several years will be to help finish assembly of the ISS. The Space Shuttle will be retired at the end of this decade.
	•	The United States will begin developing a new crew exploration vehicle (“CEV”). The CEV will be developed and tested by 2008 and conduct its first manned mission no later than 2014.
	•	The United States will return to the Moon as early as 2015 and no later than 2020 and use it as a stepping stone for more ambitious missions.

     The President’s plan for NASA will likely have a significant impact on the demand for Grade I AP. The ultimate impact on the demand for Grade I AP is uncertain at this time, and will depend upon, among other things, the following factors:

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	•	The timing of the Space Shuttle’s return to flight.
	•	The number of Shuttle flights between now and the retirement of the Shuttle fleet.
	•	The timing of the retirement of the Space Shuttle fleet.
	•	The amount of inventory of Grade I AP owned by our customers.
	•	The amount of NASA’s annual budget over the next several years.
	•	The type of propulsion technology used to launch the CEV.
	•	The timing of the development and testing of the CEV and the number of CEV launches.
	•	The type of heavy lift vehicle used to transport material and supplies to the ISS and the Moon after retirement of the Shuttle fleet.

     Our revenues, operating income and cash flows from operating activities are negatively impacted by these lower sales volume levels. In addition, demand for Grade I AP is program specific and dependent upon, among other things, governmental appropriations. We have no ability to influence the demand for Grade I AP. Any decision to further delay, reduce or cancel Space Shuttle flights over an extended period of time would have a further significant adverse effect on our results of operations and financial condition.

     We also produce and sell a number of other grades of AP and different types and grades of sodium and potassium perchlorates (collectively “other perchlorates”). Other perchlorates have a wide range of prices per pound, depending upon the type and grade of the product. We have recently experienced a change in the sales mix of other perchlorates, from lower price per pound products to higher price and margin per pound products. Other perchlorates are used in a variety of applications, including munitions, explosives, propellants, and initiators. Some of these applications are in a development phase, and there can be no assurance that sales of the higher price and higher margin products will continue. A significant reduction in these sales would have a material adverse effect on our results of operations and financial condition.

Customers

     Prospective purchasers of Grade I AP consist principally of contractors in programs of NASA and the DOD. The specialized nature of the activities of these contractors restricts competitive entry by others. Therefore, there are relatively few potential customers for Grade I AP, and individual Grade I AP customers account for a significant portion of our revenues. Prospective customers also include companies providing commercial satellite launch services and agencies of foreign governments and their contractors.

     During 2001, Alliant acquired the Thiokol Propulsion Division (“Thiokol”) of Alcoa. Alliant (including Thiokol) accounted for 44%, 66%, and 51% of our revenues during the fiscal years 2004, 2003 and 2002, respectively.

     Thiokol Agreement

     In connection with the Acquisition, we entered into an agreement with Thiokol with respect to the supply of Grade I AP through September 30, 2008. This agreement contains no volume commitments, however, the agreement, as amended, provides that during its term Thiokol will make all of its Grade I AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under which Grade I AP unit prices vary inversely with the quantity of a specific grade of Grade I AP sold by us to all of our customers. Under the agreement, Grade I AP unit prices in the matrix at all quantity levels escalated each year through fiscal 2003 and were adjusted downward by approximately 20% in fiscal 2004. This downward adjustment reduced revenues and operating cash flows on Grade I AP sold to Thiokol in fiscal 2004. After the adjustment, Grade I AP unit prices again escalate each year through fiscal 2008. See below for a discussion of the impact of the Alliant acquisition of Thiokol in 2001 on this agreement.

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     Alliant Agreement

     In connection with the Acquisition, we entered into an agreement with Alliant to extend an existing agreement through the year 2008. The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended. Under this agreement, Alliant agreed to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliant’s Bacchus Works. We have agreed with Alliant that the individual agreements in place prior to Alliant’s acquisition of Thiokol will remain in place. All Thiokol programs existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.

Manufacturing Capacity and Process

     Production of AP at our manufacturing facility in Iron County, Utah commenced in July 1989. This facility, as currently configured, is capable of producing 30.0 million pounds of perchlorate chemicals annually and is readily expandable to 40.0 million pounds annually. Grade I AP produced at the facility and propellants incorporating such AP have qualified for use in all programs for which testing has been conducted, including the Space Shuttle, Titan, Minuteman, Multiple Launch Rocket System, and the Delta, Pegasus and Atlas programs.

     Our perchlorate chemicals facility is designed to site particular components of the manufacturing process in discrete areas of the facility. It incorporates modern equipment and materials-handling systems designed, constructed and operated in accordance with the operating and safety requirements of our customers, insurance carriers and governmental authorities.

     Perchlorate chemicals are manufactured by electrochemical processes using our proprietary technology. The principal raw materials used in the manufacture of AP (other than electricity) are salt, sodium chlorate, graphite, ammonia and hydrochloric acid. All of the raw materials used in the manufacturing process are available in commercial quantities. Although we recently had some difficulty in obtaining graphite, significant progress has been made in establishing an assured source of supply. We continue to explore other technologies that would reduce our dependence on graphite.

Competition

     Upon consummation of the Acquisition, we became the sole North American commercial producer of perchlorate chemicals. We are aware of production capacity for perchlorate chemicals (including AP) in France, Japan and possibly China and Taiwan. Although we have limited information with respect to these facilities, we believe that these foreign producers operate lower volume, higher cost production facilities and are not approved as AP suppliers for NASA or DOD programs, which represent the majority of domestic AP demand. In addition, we believe that the rigorous and sometimes costly NASA and DOD program qualification process, the strategic nature of such programs, the high cost of constructing a perchlorate chemicals facility, and our established relationships with key customers, constitute significant hurdles to entry for prospective competitors.

Kerr-McGee Acquisition

     On March 12, 1998 we acquired, pursuant to a purchase agreement with Kerr-McGee, certain intangible assets related to Kerr-McGee’s production of AP (the “Rights”) for a purchase price of $39.0 million. The Acquisition did not include Kerr-McGee’s production facilities (the “Production Facilities”) and certain water and power supply agreements used by Kerr-McGee in the production of AP. Under the purchase agreement, Kerr-McGee ceased the production and sale of AP, although the Production Facilities may continue to be used by Kerr-McGee for production of AP under certain limited circumstances not competitive with our operations. Kerr-McGee also reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities.

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Financing

     On March 12, 1998, we sold $75.0 million in principal amount of 91/4% unsecured senior notes (the “Notes”). A portion of the net proceeds from the sale of the Notes ($39.0 million) was used to effect the Acquisition. Prior to March 1, 2003, we had repurchased and retired approximately $34.4 million in principal amount of Notes. On March 1, 2003, we redeemed all of our remaining outstanding Notes. The redemption was at a price of 102.313% of the principal amount of the Notes, plus accrued interest to the date of redemption, aggregating approximately $43.4 million. We recognized a loss on the redemption of $1.5 million, including a non-cash charge of $0.6 million to write off remaining debt issue costs.

Sodium Azide

Sodium Azide Facility

     In July 1990, the Company entered into agreements with Dynamit Nobel A.G. (“Dynamit Nobel”) under which it licensed to us its technology and know-how for the production of sodium azide, the principal component of a gas generator used in certain automotive airbag safety systems. In addition, Dynamit Nobel provided technical support for the design, construction and startup of the production facility located in Iron County, Utah for its owner and operator, American Azide Corporation (“AAC”), our indirect wholly-owned subsidiary. Our obligation to make royalty payments to Dynamit Nobel under the license was suspended in 1995.

Financing

     On February 21, 1992, we concluded a $40.0 million financing for the design, construction and startup of the sodium azide facility through the sale of 11% noncallable subordinated secured term notes (the “Azide Notes”). On March 12, 1998, we repurchased the then remaining $25.0 million principal amount outstanding of the Azide Notes with funds obtained through the issuance of the Notes. In connection with the issuance of the Azide Notes, we issued Warrants (“the Warrants”) to purchase shares of our Common Stock to the purchasers of the Azide Notes, which went unexercised and expired on December 31, 2003.

Market

     Over the last 30 years, a number of firms have made extensive efforts to develop automotive airbag safety systems. The initial airbag system adopted by the automobile industry used sodium azide in combination with other materials in tablet or granule form. The airbag market became the largest consumer of sodium azide. Subsequently, a number of other non-azide based bag inflator technologies have been commercialized. These new inflator systems have gained substantial market share and, as a consequence, there has been a substantial decline in the demand for sodium azide. Based upon market information received from inflator manufacturers, we expect that sodium azide use will continue to decline and that bag inflators using sodium azide will be phased out over some period of time. Currently, demand for sodium azide is substantially less than supply on a worldwide basis.

     The Company has an on-going program to evaluate and potentially commercialize the use of sodium azide in other non-airbag applications. Currently, sodium azide is used as an intermediary in the manufacture of certain tetrazoles and pharmaceuticals, and we sell small quantities into these markets.

     The emerging methyl-bromide pesticide replacement market maybe a promising area for sodium azide new product development. Methyl bromide is a widely used pesticide that is being phased out globally (due to its harmful effect on the atmospheric ozone layer) as required under by The Montreal Protocol on Substances that Deplete the Ozone Layer (the “Montreal Protocols”) that was signed by the United States in 1987. Historically, methyl bromide was manufactured by a number of companies, including Great Lakes Chemical, Albemarle, and Dead Sea Bromine.

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     We have developed a proprietary sodium azide based pesticide as a potential replacement for methyl bromide. We have tentatively named this new pesticide line Soil Enhancement Products (“SEP”). SEP 100, our first product in this line, has undergone extensive field trials on a variety of applications, including turf, cut flowers, and food crops. The results of these evaluations have been promising. As of this date, SEP 100 is under review by the United States Environmental Protection Agency, (“US EPA”) for approval as a pesticide in certain applications.

     The potential demand for a methyl bromide replacement is substantial. Although the Company currently plans to pursue this market, there is no assurance that there will be wide market acceptance of this new product. While we are optimistic that the EPA will approve SEP 100, there is no assurance that such EPA approval will be granted. Furthermore, a variety of larger companies, with financial resources exceeding our own, are also developing potential methyl bromide substitute products.

Customers

     Historically, Autoliv ASP, Inc. (“Autoliv”) has been the Company’s primary customer for sodium azide.

Competition

     We believe that current competing sodium azide production capacity includes at least one producer in Japan and at least three producers in India.

Energetic Systems

Acquisition

     In December 2002, we established Energetic Systems Inc., LLC (“ES”), a joint venture formed to acquire and manage a commercial explosives business. Our ownership interest in ES is held by our wholly-owned subsidiary, Energetic Additives Inc., LLC (“EA”). EA holds a 50% equity interest in ES. The remaining 50% equity interest is held by a private entity with extensive experience in the explosives industry.

     On December 11, 2002, we made a $10.7 million investment in ES so that it could complete the purchase of certain assets (including the assumption of certain liabilities) of Slurry Explosives Corporation and Universal Tech Corporation (collectively “SEC/UTC”), subsidiaries of LSB industries, Inc. SEC/UTC is involved in the manufacture and distribution of commercial explosives, and is also a research, development and testing organization specializing in the development and testing of products and processes for commercial explosives and energetic compounds.

Customers and Markets

     ES manufactures and markets a niche line of packaged explosives to other explosives manufacturers and major distributors within North America, and directly to end users in Oklahoma, Kansas and Missouri. ES markets a unique line of commercial explosives incorporating “demilled” military energetic materials using proprietary technology. ES also conducts testing and classification of energetic materials and markets product/process technology, sensitizers and other related materials.

Competition

     Our packaged explosives products compete with similar products manufactured by major explosives companies. The market for packaged explosives is very competitive over the broad range and types of packaged explosives products available. ES believes that its relative small size, its flexible manufacturing capabilities, its commitment to customer service and its superior product performance provides a competitive advantage over other suppliers.

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Facilities

     The corporate office for ES is in Oklahoma City, Oklahoma. The company operates four packaged explosives manufacturing plants from a single site at Columbus, Kansas, a research and development laboratory at Riverton, Kansas, an underwater testing laboratory at Hallowell, Kansas, and a blasting services and product distribution operation at Pryor, Oklahoma.

Halotron

     Halotron is a “clean agent based” fire extinguishing system composed of proprietary chemicals and hardware. Traditional fire extinguishing agents, such as those based on sodium bicarbonate (“regular dry chemical”) or mono-ammonium phosphate (“ABC dry chemical”), consist of finely divided solid powders. These traditional fire extinguishing agents leave a coating upon discharge that is costly and difficult to clean. In contrast to traditional fire extinguishing agents, Halotron is discharged as a rapidly evaporating liquid that leaves no residue. As a result, Halotron is much less likely to damage valuable assets (such as electronic equipment, machinery and various engines) than traditional extinguishing agents.

     Halotron was designed to replace halons, which are brominated CFC chemicals that have been widely used as fire extinguishing agents since the early 1970’s. The impetus for the invention and improvement of Halotron was the discovery during the 1980’s that halons are highly destructive to the atmospheric ozone layer, which acts as a shield against harmful solar ultraviolet radiation. In 1987 the Montreal Protocols stipulated restrictions on the production (which ended in developed countries at the end of 1993) and use of halons by 1994.

Use of Halons

     Halons have been used throughout the world in modalities that range from hand-held fire extinguishers to extensively engineered fixed systems. They are generally of two types, streaming and total flooding systems. Streaming systems rely upon the focused projection of a slowly gasifying liquid over distances of up to 50 feet from the point of projection. Total flooding systems release a quickly gasifying liquid or gas into a confined space, extinguishing any ongoing combustion and, in limited instances, inerting a space to prevent combustion.

Customers and Market

     The end-user market for clean fire extinguishing agents is divided into five application segments: (i) industrial, (ii) commercial, (iii) military, (iv) civil aviation and (v) maritime. The industrial segment consists of manufacturing plants, clean rooms, and telecommunications facilities. The commercial segment consists of workplace environments such as office buildings, wholesale and retail sales facilities, art galleries, warehouses, and computer rooms. The military segment includes the armed services including the Navy and Air Force. The civil aviation segment includes airport flightlines, airport gates, on-board aircraft and aircraft manufacturing. The maritime segment includes commercial vessels, yachts, and pleasure boats.

     Our first and primary Halotron clean agent is Halotron I. In 1993, Halotron I was approved by the United States Environmental Protection Agency (“EPA”) as a substitute for Halon 1211. In June, 1995 the Federal Aviation Administration (“FAA”) approved Halotron I as an acceptable airport ramp firefighting agent alternative to Halon 1211 based on a rigorous test program conducted prior to that date. In 2002, approval was issued by the FAA for a Halotron I portable fire extinguisher that met all FAA requirements for use on civilian commercial transport aircraft. Through September 30, 2004, more than 50 domestic US airports have installed 460-500 lb Halotron I systems on their aircraft rescue and fire fighting (ARFF) vehicles.

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     Together with distributors Amerex Corporation (“Amerex”), Badger Fire Protection (“Badger”), Kidde Fyrnetics (“Kidde”) and Buckeye Fire Equipment Company (“Buckeye”), we have successfully completed Underwriters Laboratories (“UL”) fire tests for a number of sizes of portable and wheeled fire extinguishers using Halotron I in streaming agent applications. Four of the five major domestic fire extinguisher companies are now manufacturing and distributing UL listed portable fire extinguishers using Halotron I. We are also marketing Halotron I to other domestic and international fire extinguisher manufacturers.

     We have also developed a new clean fire extinguishing agent (Halotron II) designed for total flooding applications in certain niche clean agent markets. Halotron II has a zero Ozone Depletion Potential (“ODP”) and a relatively low Global Warming Potential (“GWP”). Sales of Halotron II to date have been limited.

     Although Halotron I has a good environmental profile, with an ozone depletion potential (“ODP”) that is near zero, potential users of clean agents may eventually require a product with an absolute zero ODP. Accordingly, the product life of Halotron I may be limited. The Company continues to explore, through research and development efforts, other clean agent candidates for possible commercialization. There can be no assurance that we will be able to identify and produce such new agents, if necessary, or that a competitor will not develop fire extinguishing agents with comparable or superior qualities to Halotron products.

Competition

     As of September 30, 2004, there are non-essential use restrictions on halons in the US. There are more stringent restrictions in other countries, notably EU wide. Despite this, recycled Halon 1211 is the primary competitor to Halotron I.

     Halon alternatives compete primarily on the basis of performance characteristics, environmental effects, and cost. Performance measurements include fire rating (UL or FAA), ease of training non-experts, throw range, collateral damage, equipment size and weight, performance at low and high temperatures, corrosion probability, and shelf life. The environmental and human health effects include ODP, GWP and toxicity. It is likely that competitors producing alternatives and substitutes will be larger than and have at least as much experience in the production of fire extinguishing chemicals and systems as us and will have greater financial resources.

     One primary competitor to Halotron I is FE36Ô from Dupont Fluoroproducts. Another competing product is Novec 1230Ô from 3M. FE36Ô and Novec 1230Ô are marketed as both streaming and total flooding clean agents. Great Lakes Chemical, historically a significant producer of halon, produces FM200Ô which established a large market share in the halon 1301 replacement market over the last seven years.

Halotron Facility

     Within the Company’s primary manufacturing facility at Cedar City, Utah, the Company maintains a production facility for its Halotron products. The capacity of this facility is sufficient to meet future anticipated demands for both Halotron products.

Other Businesses

Environmental Protection Equipment

     We engineer and manufacture equipment for a wide range of environmental protection applications. These systems utilize an electrochemical process, which is an extension of one of our core competencies, to produce chemicals such as sodium hypochlorite on site at the point of use. The industries and specific applications in which our equipment is used include the following: (i) our ChlorMaster systems used by

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municipalities and sewage plants for the disinfection of drinking water, effluent and waste water; (ii) our ChlorMaster systems used by power plants, desalination plants, chemical plants and on-shore/off-shore crude oil facilities for the control of marine growth in seawater used in cooling water circuits; and (iii) our OdorMaster scrubber used by composting plants for the deodorizing of malodorous compounds in contaminated air.

     At the heart of these systems is a proprietary bi-polar electrochemical cell which uses brine or seawater to produce the necessary chemicals. For drinking water applications, these cells are supplied with an NSF^® certification.

     Our systems are marketed domestically by independent sales representatives and overseas by sales representatives and licensees. We also receive a significant amount of direct sales leads as a result of advertising and through attendance at key trade shows.

     We compete with companies that utilize other technologies and those that utilize technologies similar to ours. Most of these companies are substantially larger than we are. Our success depends principally upon our ability to be cost competitive and, at the same time, to provide a quality product.

Real Estate Assets

     At September 30, 2004, we owned approximately 14 acres of improved undeveloped land at the Gibson Business Park in Henderson, Nevada. Approximately 13 of the 14 acres are under option to be purchased by Western Realco, an industrial warehouse developer in Newport Beach, California. The transaction is expected to close early in the second quarter of FY 2005 for approximately $3 million. We expect the remaining acreage to be developed as a commercial site in the near future. We believe that this site has an approximate value of $1 million and would likely be developed as part of a joint venture.

     We also own approximately 4,700 acres of land and certain water rights at our site in Iron County, Utah. We are exploring development options for this property.

Intellectual Property

     The following are registered trademarks and service marks pursuant to applicable intellectual property laws and are the property of American Pacific Corporation or our subsidiaries: Halotron^®, SEP™, OdorMaster^®, and ChlorMaster^®.

Product Development and Enhancement

     Our existing laboratory facilities are located on the premises of our perchlorate chemicals production site and are used to support those activities and our sodium azide and Halotron production activities. We also conduct development programs directed toward enhancement of product quality and performance and the development of complementary or related products at these facilities.

Insurance

     The Company’s policy is to obtain liability and property insurance coverage that is currently available at what management determines to be a fair and reasonable price. The Company maintains public liability and property insurance coverage at amounts that management believes are sufficient to meet the Company’s anticipated needs in light of historical experience to cover future litigation and claims. There is no assurance, however, that the Company will not incur losses beyond the limits of, or outside the coverage of, its insurance.

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Government Regulation

     As a supplier to United States government projects, we have been and may be subject to audit and/or review by the government of the negotiation and performance of, and of the accounting and general practice relating to, government contracts. Most of our contracts for the sale of AP are in whole or in part subject to the commercial sections of the Federal Acquisition Regulations. Our AP pricing practices have been and may be reviewed by our customers and by certain government agencies.

Environmental Regulation

     Our operations are subject to extensive Federal, State and local regulations governing, among other things, emissions to air, discharges to water and waste management. We believe that we are currently in compliance in all material respects with all applicable environmental, safety and health requirements and, subject to the matters discussed below, we do not anticipate any material adverse effects from existing or known future requirements. To meet changing licensing and regulatory standards, we may be required to make additional significant site or operational modifications, potentially involving substantial expenditures or the reduction or suspension of certain operations. In addition, the operation of our manufacturing plants entails risk of adverse environmental and health effects (not covered by insurance) and there can be no assurance that material costs or liabilities will not be incurred to rectify any future occurrences related to environmental or health matters.

     In 1997, the Southern Nevada Water Authority detected trace amounts of perchlorate chemicals in Lake Mead and the Las Vegas Wash, bodies of water near our real estate development property in Henderson, Nevada (in the Las Vegas area). Lake Mead is a source of drinking water for the City of Las Vegas, neighboring areas and certain areas of Southern California. Perchlorate chemicals (including AP) are a potential health concern because they can interfere with the production of a growth hormone by the thyroid gland, although they are not currently included in the list of hazardous substances compiled by the EPA. However, perchlorates have been added to the EPA’s Contaminant Candidate List and will likely be regulated. We manufactured perchlorate chemicals at a facility on the Henderson site until the facility was destroyed in May 1988, after which we relocated our perchlorate production to our current facilities in Iron County, Utah. For many years, Kerr-McGee operated a perchlorate production facility at a site near our former Henderson site.

     The Water Authority’s testing has shown perchlorate concentrations of 4 to 18 parts per billion (“ppb”) in Clark County drinking water. In response to this discovery, we have engaged environmental consultants to drill monitoring wells in order to characterize ground water at and in the vicinity of the Henderson site. The results of our tests have shown perchlorate concentrations in the ground water at the Henderson property ranging from 0 to approximately 750,000 ppb at certain monitoring wells. We have completed a pilot remediation testing process to treat groundwater containing perchlorate using a biological in situ process at and near the Henderson site. The pilot remediation process has shown promising results, but there can be no assurance as to its efficacy.

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     The EPA is conducting a risk assessment for the purpose of recommending a proposed reference dose for perchlorates. The EPA has recommended a preliminary reference dose that would equate to 1 ppb in drinking water. Certain states are also conducting risk assessments and some have set advisory levels as low as 1 ppb. It is our understanding that virtually all independent and qualified experts believe that EPA used flawed animal studies and overly conservative uncertainty factors while completely or mostly ignoring substantial human data that indicate the reference dose could safely and reasonably be orders of magnitude higher with no increased risk to a human population. Several different experts and organizations have opined that the number could safely be as high as 200 ppb while others have opined in the range between 70 and 200 ppb. It is impossible to determine the future outcome of this debate; however, the National Academy of Sciences (“NAS”) was requested to review the work done by EPA to date along with other science that was disregarded or developed after EPA had drawn their conclusions. The NAS report was released January 11, 2005. The recommendations contained in this NAS report indicate that human health is protected at a level in drinking water at a level of approximately 24 ppb. The report will have to be assessed and evaluated by the EPA before any final reference dose is published.

     Public statements indicate that the EPA intends to complete its risk assessment and make a final reference dose recommendation, although we do not know when that will occur. We are cooperating with Federal, State and local agencies (including the Nevada Department of Environmental Protection), 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, potential remediation methods, and the establishment of a safe drinking water standard for perchlorates. Until one or more of these matters have reached definitive conclusions, it will not be possible for us to determine the extent to which, if at all, we may be called upon to contribute to or assist with future remediation efforts, or the financial impact, if any, of such cooperation, contribution or assistance. Accordingly, no accrual for potential costs has been made in our Consolidated Financial Statements. (See Note 9 to our Consolidated Financial Statements.) However, the lower the level at which the final reference dose is established, the more severe the negative impact will likely be on our financial condition, results of operations and ability to manufacture and handle perchlorate chemicals.

     Our perchlorate operations have an evaporation pond which was the subject of a notice of consent decree received in 1995 from the Utah Division of Water Quality after sampling and testing that occurred in 1994. This decree requires that we remediate the evaporation pond which was determined to have lead in excess of 5 ppm. A site remediation plan was submitted to the Utah Division of Water Quality and approved. Remediation has been performed and the pond is below the regulatory 5 ppm limit. However, evaporation of pond water could concentrate the remaining lead in the pond above the 5 ppm limit. As a result, we have continued to remediate this pond to ensure that we remain in compliance even at lower water volumes. This remediation is expected to be completed in the summer of 2005.

     In December 2002, we made an investment in Energetic Systems Inc., LLC (“ES”), a joint venture formed to acquire and manage a commercial explosives business. On December 11, 2002, ES completed the purchase of certain assets and the assumption of certain liabilities of Slurry Explosives Corporation and Universal Tech Corporation (collectively “SEC/UTC”), subsidiaries within LSB Industries, Inc. (“LSB”). ES is party to two consent orders with the Kansas Department of Health and Environment (KDHE). The first consent order involves approximately 10 acres of land at the Hallowell, Kansas site, and the second involves a smaller parcel of land which is located in Riverton, Kansas. The latter is part of a larger issue the KDHE is addressing at the unrelated adjacent Jayhawk chemical complex. Contaminants at the Hallowell location are predominantly perchlorate and nitrates, while the Riverton site may contain perchlorates, some chlorinated compounds and other materials.

     Under the asset purchase agreement LSB is responsible for all environmental issues that arose prior to December 11, 2002. A number of environmental issues arose prior to purchase, and the seller is actively working with state regulators and consultants to remediate the problems. ES has committed to provide access to the sites so any remediation can take place, provided there is no interruption in its operations.

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     The Company’s policy is to conduct its businesses with high regard for the safety of its personnel and for the preservation and protection of the environment. The Company devotes significant resources and management attention to complying with environmental and safety laws and regulations. In view of our production and handling of specialty chemicals, such operations are regulated and monitored by governmental agencies (i.e. OSHA, EPA and other regulatory agencies). Accordingly, the Company from time to time has been subject to compliance orders, including civil penalties, imposed by such regulatory agencies.

Safety Considerations

     Our largest operating facility is located in Iron County, Utah, where the perchlorate oxidizers, sodium azide, and Halotron products are produced. The largest of these is the perchlorate manufacturing facility, and the loss or shutdown of operations of this facility over an extended period of time would have a material adverse effect on us. Our operations are subject to the usual hazards associated with chemical manufacturing and the related storage and transportation of products and wastes, including explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, chemical spills, discharges or releases of toxic or hazardous substances or gases and other environmental risks, such as required remediation of contamination. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and could result in suspension of operations and the imposition of civil or criminal penalties. We maintain property, business interruption and liability insurance at levels which we believe are in accordance with customary industry practice, but there can be no assurance that we will not incur losses beyond the limits or outside the coverage of our insurance.

     AP, in the particle sizes and chemical purities produced by us, is categorized for transportation purposes by the United States Department of Transportation (“DOT”) as a Class V oxidizer. Such classification indicates that the DOT considers AP to be non-explosive and non-flammable. Our perchlorate manufacturing plant was constructed in a manner intended to minimize, to the extent of known technologies and safety measures, the combination of AP with other materials in a manner that could result in explosions or combustion. However, no assurance can be given that our safety precautions will be effective in preventing explosions, fires and other such events from occurring. On July 30, 1997, an explosion and fire occurred at our perchlorate production facility in Iron County, Utah. Although damage to our property was confined to a relatively small area, the incident left one employee dead and three others injured, one seriously. As a result of this incident, the Utah Occupational Safety and Health Division of the Utah Labor Commission cited us for violation of certain applicable Utah safety regulations in connection with the handling of AP and assessed fines totaling $5,250. Although we have taken steps to improve safety measures and training in response to this incident, there can be no assurance that such measures will be effective in preventing other such events in the future.

     On May 4, 1988, our former manufacturing and office facilities in Henderson, Nevada were destroyed by a series of massive explosions and associated fires. Extensive property damage occurred both at our facilities and in immediately adjacent areas, the principal damage occurring within a three-mile radius. Production of AP ceased for a 15-month period. Significant interruptions were also experienced in our other businesses, which occupied the same or adjacent sites. Although our current facility is designed to site particular components of the manufacturing process in discrete areas of the facility and incorporates modern equipment and materials handling systems designed, constructed and operated in accordance with the operating and safety requirements of our customers, insurance carriers and governmental authorities, there can be no assurance that another incident would not interrupt some or all of the activities carried on at our current manufacturing site.

     Sodium azide is a strong reducing agent and is classified by the DOT as a poison. Its manufacture entails certain hazards with which we have become familiar over the course of time. Our method of production is intended to limit the quantity of sodium azide in process at any one time and to utilize known safety measures in an effort to lessen attendant risks.

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     In late 1992, a fire occurred in a sodium azide reactor vessel at our facility during start-up and testing of the reactor vessel. In addition, fires are reported to have affected production at a competitor’s facility in the past. There can be no assurance that a fire or other incident will not occur at our sodium azide production facility in the future. On April 11, 2002, an accident occurred at our sodium azide plant that resulted in the death of an employee. No other employees were involved and there was no significant damage to the facility. We have received fines from Utah OSHA relating to this accident, but believe that the ultimate payment by us for these fines will be less than $75,000. See Item 3. Legal Proceedings.

     We believe that exposure to sodium azide after an airbag is installed in an automobile is highly unlikely due to the way in which sodium azide is used and to the housing in which it is encased. However, in January 2002, AAC was named as a defendant in a complaint relating to airbag deployment. In the third quarter of fiscal 2003, we paid less than $50,000 to settle our part of this complaint See Item 3. Legal Proceedings.

     The ES joint venture produces commercial explosives for the mining, quarry, and construction industries, and has developed appropriate safety, environmental, and hazard assessment programs. All products manufactured by ES are approved under the DOT designations of 1.1, 1.5, or 5.1. Safety performance has significantly improved since the business was acquired, with no recordable injuries reported during the Company’s 2004 fiscal year.

Employees

     At September 30, 2004, we employed approximately 200 persons in executive, administrative, sales and manufacturing capacities. Although efforts have been made by union representatives to seek certification to represent certain of our employees, no such certification has been granted and we do not have collective bargaining agreements with any of our employees. We consider our relationships with our employees to be satisfactory.

Acquisition of the In-Space Propulsion Business

     On October 1, 2004 we acquired the former Atlantic Research Corporation in-space propulsion business from Aerojet-General Corporation. This acquisition provides us with a leading supplier of commercial and military propulsion products and the world’s largest producer of bipropellant thrusters.

     The purchase price for this acquisition was approximately $3.5 million in cash plus the assumption of certain liabilities. The purchase agreement is based on the transfer of approximately $4.0 million of certain net working capital assets at the close of the transaction. The purchase agreement includes a post-closing adjustment, to the extent that a different amount of certain net working capital assets are transferred at the close of this transaction. The purchase price adjustment analysis for this transaction has not been completed.

     We renamed the acquired business as “Ampac-ISP”. We believe that Ampac-ISP will be able to develop new high value-added products by leveraging our strength in the development of energetic materials. This report does not reflect the financial impact of this transaction since it was completed after the close of our 2004 fiscal year. Our first quarter 2005 fiscal report will reflect the Ampac-ISP transaction and its financial performance in that period.

Customers and Market

     Ampac-ISP is a leading supplier of propulsion products to the commercial and government satellite market, and is the world’s largest producer of bipropellant thrusters. In-space propulsion thrusters are either monopropellant or bipropellant based products. Monopropellant thrusters utilize a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters use a combination of a liquid fuel (typically monomethylhydrazine) and an oxidizer.

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     Both defense and commercial satellite contracts make up the business mix, which are typically awarded based on product performance, pricing, and reliability. The selection of propulsion thruster is based on the satellite’s or spacecraft’s mission and encompasses a variety of factors. The factors generally include type of mission, mission length, type of orbit, mass, type of launch vehicle and price.

Competition

     The U.S. market for monopropellant and bipropellant thrusters is highly concentrated. Ampac-ISP and Gencorp are the principal suppliers of these thrusters to commercial, civil and defense customers in the United States. Foreign suppliers of in-space propulsion thrusters are not significant competitors in the U.S. in-space propulsion market due to burdensome and time consuming regulatory requirements for U.S. commercial, civil and defense customers to procure thrusters from foreign suppliers. In addition, many U.S. governmental agencies are restricted from purchasing thrusters from foreign suppliers due to national security concerns.

     A new supplier in the in-space propulsion market will have significant market barriers to overcome. A new entrant into this market would need to undertake the difficult, expensive and time-consuming process of developing a viable in-space propulsion thruster, acquiring the necessary production and testing assets, obtaining the appropriate environmental permits and developing the expertise needed to successfully design, manufacture, and market these products. In addition, a new supplier would also have the onerous “heritage” or “track record” requirements that customers demand.

Facilities

     Ampac-ISP has operations in Niagara Falls, New York and Westcott, England. With tungsten inert gas and electron beam welding capabilities, final thruster assembly, clean rooms assembly, water flushing, vibration, shock and hot fire test at simulated sea level and simulated altitude, the combined facilities can serve all in-space propulsion, maneuvering, and de-orbiting needs.

     Ampac-ISP’s Niagara Falls, New York facility is leased and consists of thirteen buildings with a total of 96,000 square feet of floor space, distributed across a parcel of approximately 13 acres of land. This facility can provide complete liquid propulsion assembly and complete testing capabilities.

     Ampac-ISP’s Westcott facility is located midway between Aylesbury and Bicester in England. The facility is leased and consists of 65 acres of land with 34 buildings occupying 61,463 square feet of floor space. The site is used to manufacture and test liquid propulsion engines and associated subsystems and components.

Available Information

     The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports, are available free of charge on the Company’s Internet website at http://www.apfc.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission.

Item 2. Properties

     The following table sets forth certain information regarding our properties at September 30, 2004.

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	(a)	This facility is used for the production of perchlorate products and environmental protection equipment. It consists of approximately 112,000 sq. ft. of enclosed manufacturing space, a 12,000 sq. ft. administration building and a 3,200 sq. ft. laboratory building. Perchlorate capacity utilization rates for this production facility were approximately 39%, 62% and 66% during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
	(b)	This facility is used for the production of sodium azide and consists of approximately 34,600 sq. ft. of enclosed manufacturing and laboratory space. Capacity utilization rates for this production facility were approximately 12%, 14% and 30% during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
	(c)	Capacity utilization rates for the Halotron production facility were approximately 5%, 6% and 8% during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
	(d)	These facilities are leased from 3770 Howard Hughes Parkway Associates-Limited Partnership for an initial term of 10 years, which began on March 1, 1991, and was extended for an additional five years in March 2001. Approximately 25% of this space is currently sublet at an annual rent of approximately $130,000. (See Note 4 to our Consolidated Financial Statements.)
	(e)	This facility is used for the production of packaged water gel explosives and binary products. It consists of three manufacturing facilities of approximately of 48,000 sq. ft. of enclosed space, administration facilities of 5,200 sq. ft. and several raw material and finished goods storage buildings and trailers.
	(f)	This approximately 3,200 sq. ft. facility is used for the administration of explosive retail, drill and blasting operations and the maintenance of drilling and blasting equipment and vehicles.
	(g)	This facility is used for underwater testing of explosives. It has an office and lab building of approximately 2,400 sq. ft.
	(h)	This facility houses the technical group for the ESI business and research and development laboratories; it consists of an 8,000 sq. ft building plus maintenance and storage space.

     We consider our facilities to be adequate for our present needs and suitable for their current use. See Item 1. Business – ”Other Businesses” for a description of our development properties in Iron County, Utah and Clark County, Nevada.

Item 3. Legal Proceedings

     In January 2002, AAC was named as a defendant in a complaint filed in the Superior Court of the State of California for the County of Los Angeles – Southwest District. The complaint named a number of defendants, including AAC’s principal sodium azide customer, Autoliv. The complaint alleged, among

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other things “toxic injuries” as a result of the deployment of an airbag. In the third quarter of fiscal 2003, we paid less than $50,000 to settle our part of this complaint.

     In January 2002, the Company received a claim for approximately $1.7 million from Frontier Insurance Company (“Frontier”), alleging liability arising under indemnity agreements. The Company rejected the claim and filed a complaint with the District Court, Clark County, Nevada on February 28, 2002, seeking a declaratory judgment declaring that the indemnity agreements have been terminated and that we have no liability to Frontier. Frontier has been declared insolvent and was ordered into rehabilitation status by the Supreme Court of New York on October 15, 2001, which Order also stayed all lawsuits involving Frontier. On March 31, 2004, the Nevada District Court dismissed our declaratory judgment suit without prejudice because the case had been pending for more than two years. Recent information indicates that Frontier’s rehabilitation status has not changed.

     On June 4, 2004, Alan Andrew Curtis and Linda Ann Curtis, residents of Bullhead City, Arizona, filed an action in the United States District Court for the District of Arizona entitled Alan Andrew Curtis, an individual (“Husband”); Linda Ann Curtis, an individual (“Wife”), Plaintiffs, vs. City of Bullhead City, Arizona a municipality; The County of Mohave, Arizona; The State of Arizona; Arizona Department of Environmental Quality; Arizona-American Water Company; The State of Nevada; Clark County Nevada; The Southern Nevada Water Authority; Kerr-McGee Corporation LLC; American Pacific Corporation; State Title Corporation of Arizona; Mister and Miss Edward Koontz; The United States Department of the Interior; The United States Environmental Protection Agency Region IX; and Does 1 through 100, Inclusive, Defendants, alleging that various combinations of defendants are liable under federal and state law for damages and injuries suffered by the Curtis’ and the environment as a result of perchlorate and other contaminants found in the Colorado River, and requesting compensation and injunctive relief. We waived service of the summons and complaint on August 12, 2004, and filed a motion to dismiss based on perceived jurisdictional, procedural, and substantive defects in the Curtis’ complaint on September 20, 2004. Several other defendants also filed motions to dismiss. Thereafter, there have been numerous motions to strike documents filed by the Curtis’. The court has not yet ruled on any motion to dismiss, and we are therefore not in a position to know with any degree of certainty how the Court views the merits of the Curtis’ claims. We expect decisions from the court on our and other defendants’ motions to dismiss in the near term. In the event one or more of the Curtis’ claims survive the initial motions, our plan is to conduct thorough discovery of all remaining claims.

     The Company is pursuing a legal claim against Bejaro Brandskysföretaget AB (“Bejaro”), a company headquartered in Sweden. This claim involves historical infringement of the Company’s Halotron trademark rights in Sweden. The Company has received an interim judgment in its favor concerning the ownership of these rights. The case is currently under appeal by Bejaro and the ultimate resolution of the case, including any damages, could take several years or more.

     The information set forth in Note 9 to our Consolidated Financial Statements regarding litigation and contingencies is incorporated herein by reference. Reference is also made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     There are also various other lawsuits and claims, other than those mentioned above, pending against the Company and certain of its consolidated subsidiaries. Although it is not possible to predict or determine the outcome of legal actions brought against the Company or the ultimate cost of these actions, the Company believes the costs associated with all such actions in the aggregate will not have a material adverse effect on its consolidated financial position, liquidity or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

     Not Applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Our Common Stock trades on The Nasdaq Stock Market^® under the symbol “APFC.” The table below sets forth the high and low sales prices of the Common Stock for the periods indicated.

     At December 31, 2004, there were approximately 1,021 shareholders of record of our Common Stock. In January 2003, we adopted our Dividend and Stock Repurchase Program. (See Note 12 to our Consolidated Financial Statements for a description of this program). Under the provisions of this Program, on December 18, 2003, our Board of Directors declared a cash dividend of $0.42 per share, payable on January 9, 2004, to shareholders of record on December 29, 2003. The program specifies a formula based on a percentage of available cash flow and the dollar amount of our repurchases of Common Stock for the fiscal year as a basis for determining any dividend and is also subject to the Board’s determination that a dividend is appropriate in light of our overall financial condition, prospects and anticipated cash needs. By reason of the application of the program formula, no dividend will be paid based on the Company’s performance in fiscal 2004.

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Item 6. Selected Financial Data

FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED SEPTEMBER 30,

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We are principally engaged in the production of Grade I AP for the aerospace and national defense industries. In addition, we produce and sell sodium azide, the primary component of a gas generator used in certain automotive airbag safety systems, and Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting vehicles. The perchlorate, sodium azide and Halotron facilities are located on our property in Southern Utah. We also hold a 50% ownership stake in Energetic Systems, an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. These businesses collectively represent our specialty chemicals operating segment. Our other businesses segment includes our real estate operation which is winding down, and

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the production of environmental protection equipment, including waste water and seawater treatment systems.

     Critical Accounting Policies. A summary of our significant accounting policies is included in Note 1 to our Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide the users of our financial statements with useful and reliable information about our operating results and financial condition.

     The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

     Application of the critical accounting policies discussed below requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. However, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different results.

Sales and Revenue Recognition

     Sales of the specialty chemicals and environmental protection products are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. We offer some of our perchlorate product customers the option, at their election, of storing purchased materials in our Cedar City facility (“Bill and Hold” transactions). We recognize the revenue and profit from these Bill and Hold transactions at the point at which the risks of ownership and transfer of title is transferred to the customers. Sales of the environmental protection equipment segment are recognized when the product is shipped. We receive cash for the full amount of real estate sales at the time of closing.

Depreciable Lives of Plant and Equipment

     Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of cost of each asset from earnings every year over its estimated economic useful life. Economic useful life is the duration of time the asset is expected to be productively employed by the company, which may be less than its physical life. Management’s assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, changes in market demand and raw material availability.

     The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, changes in technological advances, changes in the estimated future demand for products, or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In these cases, the Company would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.

Impairment of Long-Lived Assets — Plant and Equipment

     Plant and equipment held for use is grouped for impairment testing at the lowest level for which there are identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses recoverability by comparing the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets. If an asset group is considered impaired, the impairment loss to be recognized would be measured as the amount by which the asset group’s carrying amount exceeds its fair value. Assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.

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     The estimate of plant and equipment fair value is based on estimated discounted future cash flows expected to be generated by the asset group. The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include: industry and market conditions, sales volume and prices, costs to produce, inflation, etc. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

Impairment of Long-Lived Assets – Goodwill and Intangible Assets

     The purchase method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of net assets of an acquired entity. The Company currently has no goodwill in its financial statements. Disclosures related to intangible assets are included in Note 1 – Intangible Assets to the consolidated financial statements.

     The Company performs an impairment test annually in the fourth quarter of the fiscal year. In addition, additional tests will be conducted if changes in circumstances indicate a potential impairment exists. The impairment test requires the Company to compare the fair value of business reporting units to carrying value. The results of the impairment tests have indicated fair value amounts exceeded carrying amounts.

     The Company primarily uses the present value of future cash flows to determine fair value. The company’s valuation model assumes a five-year growth period for the business and an estimated exit trading multiple. Management judgment is required in the estimation of future operating results and to determine the appropriate exit multiple. The exit multiple is determined from comparable industry transactions. Future operating results and exit multiples could reasonably differ from the estimates.

Income Taxes

     We account for income taxes using the asset and liability approach required by SFAS No. 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 our 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.

     Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.

     Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when there are not sufficient sources of future taxable income to realize the benefit of the operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.

Pension Benefits

     The Company sponsors defined benefit pension plans in various forms for employees who meet eligibility requirements. Several assumptions and statistical variables are used in actuarial models to calculate the pension expense and liability related to the various plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are

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determined by the Company. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. Depending on the assumptions selected, pension expense could vary significantly and could have a material effect on reported earnings. The assumptions used can also materially affect the measurement of benefit obligations. For more information regarding the Company’s pension benefits, see Note 8 – Employee Benefit Plans to the consolidated financial statements.

     Recently Issued Accounting Standards. In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.” SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). We have determined that SFAS No. 150 will not have a material impact on our financial position or results of operations.

     In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. In December 2003, FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R”)), was issued to clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94, “Consolidation of All Majority-Owned Subsidiaries”.

     We historically treated our 50% equity interest in the ES joint venture as an unconsolidated operation whose financial performance was disclosed, but not consolidated in our financial results. However under FIN 46(R), we are required to consolidate the ES joint venture due to a number of factors including our majority ownership of the joint venture’s debt securities.

     As of March 31, 2004, we consolidated the ES joint venture. We reported a cumulative effect of an accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter income statement to reflect the loss that we would have incurred had the ES joint venture been consolidated since its inception. The consolidation of the ES joint venture significantly changes various line items of our balance sheet, statement of operations and cash flow presentations as compared to financial presentations in earlier reports.

     In November 2004, the FASB issued SFAS 151, Inventory Costs—an amendment of ARB No. 43, Chapter 4. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Statement is effective for us beginning in fiscal 2006 and could have a material effect on our financial statements upon adoption.

     In December 2004, the FASB issued a revision to SFAS 123 (revised 2004), Share-Based Payment. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statements eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. The Statement is effective for us beginning in our fourth quarter of fiscal 2005.

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Results of Operations

Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003

     Sales of our perchlorate chemical products accounted for approximately 73%, 79% and 73% of revenues during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. In general, demand for Grade I AP is driven by a relatively small number of DOD and NASA contractors. As a result, any one individual Grade I AP customer usually accounts for a significant portion of our revenues. For example, Alliant accounted for approximately 44%, 66% and 51% of our revenues during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.

     In connection with the Acquisition, we entered into an agreement with Thiokol with respect to the supply of Grade I AP through the year 2008. The agreement contains no volume commitments, however, the agreement, as amended, provides that during its term Thiokol will make all of its Grade I AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under which Grade I AP unit prices vary inversely with the quantity of Grade I AP sold by us to all of our customers. Under the agreement, Grade I AP unit prices in the matrix at all quantity levels escalated each year through fiscal 2003 and, in fiscal 2004, were adjusted downward by approximately 20%. Such downward adjustment had the effect of reducing revenues and operating cash flows on Grade I AP sold to Thiokol by 20% in fiscal 2004. After the adjustment, Grade I AP unit prices again escalate each year through fiscal 2008.

     In connection with the Acquisition, we entered into an agreement with Alliant to extend an existing agreement through the year 2008. The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliant’s Bacchus Works.

     During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual agreements in place prior to Alliant’s acquisition of Thiokol remain in place. All Thiokol programs existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.

     Since the Acquisition, our annual sales volumes of Grade I AP have been approximately 20.2 million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000, 2001, 2002 and 2003 fiscal years (ended September 30) respectively. Prior to the Space Shuttle Columbia disaster on February 1, 2003, and based principally upon information we had received from our major customers, we previously estimated that annual demand for Grade I AP would range between 16.0 million and 20.0 million pounds over the next several years.

     The suspension of Space Shuttle missions since the Columbia disaster reduced the sales volume of our Grade I AP products in fiscal 2004 to 11.2 million pounds. This reduced sales volume exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers’ inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently expected to resume flights beginning in the spring of 2005 with four to five flights per year thereafter although there is no assurance in this regard. Based principally upon market information we received from our customers, we currently estimate that our annual sales volumes of Grade I AP will range between 10.0 and 13.0 million pounds over the next three years. In addition, the new space exploration initiative for NASA announced by President Bush in January 2004 could have a significant impact on the demand for Grade I AP, however, the ultimate impact from this initiative remains uncertain at this time.

     We also produce and sell other perchlorates. Other perchlorates have a wide range of prices per pound, depending upon the type and grade of the product. We have recently experienced a change in the

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sales mix of other perchlorates, from lower price per pound products to higher price and margin per pound products. Other perchlorates are used in a variety of applications, including munitions, explosives, propellants, and initiators. Some of these applications are in a development phase, and there can be no assurance that sales of the higher price and higher margin products will continue. A significant reduction in these sales would have a material adverse effect on our results of operations and financial condition.

     Sodium azide sales accounted for approximately 5%, 6% and 12% of sales during fiscal years ended September 30, 2004, 2003 and 2002, respectively. Autoliv, our principal sodium azide customer, accounted for approximately 2%, 3% and 8% of our revenues during fiscal 2004, 2003 and 2002, respectively.

     Worldwide demand for sodium azide has declined considerably over the last several years. Currently, worldwide demand for sodium azide is substantially less than worldwide supply. Based principally upon market information received from airbag inflator manufacturers, we expect sodium azide use to continue to decline and that inflators using sodium azide will be phased out over some period of time.

     As discussed in Note 1 to the Consolidated Financial Statements we began consolidating the financial performance of our packaged explosive joint venture as of March 31, 2004. As a result, our reported financial performance for fiscal 2004 includes only six months of our Energetic Systems operation. Prior to fiscal 2004, the financial performance of ES was not included in our Consolidated Financial Statements. As a consequence, the consolidation of our ES joint venture significantly changes various line items of our balance sheet, statement of operations and cash flow presentations as compared to financial presentations in earlier reports. Our fiscal 2005 annual report will include twelve months of financial performance of our ES operation.

     Sales of Halotron amounted to approximately 5%, 4% and 5% of revenues during the fiscal years 2004, 2003 and 2002, respectively. Halotron is designed to replace halon-based fire extinguishing systems. Accordingly, demand for Halotron depends upon a number of factors including the willingness of consumers to switch from halon-based systems, the effects of competing products, as well as existing and potential governmental regulations.

     Environmental protection equipment sales accounted for approximately 3%, 4% and 1% of revenues during the fiscal years 2004, 2003 and 2002, respectively. We currently do not expect significant change in the business performance in 2005, although there can be no assurance in that regard.

     There were no real estate sales in fiscal 2004. Real estate sales amounted to approximately 7% and 9% of revenues during the fiscal years 2003 and 2002, respectively. Our real estate operations are in a wind-down phase and real estate sales are currently estimated to be completed by the end of fiscal 2005.

     The principal elements comprising our cost of sales are raw materials, electric power, labor, manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The major raw materials used in our production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC 123. Significant increases in the cost of raw materials may have an adverse impact on margins if we are unable to pass along such increases to our customers.

     Prices paid by us for raw materials have historically been relatively stable, although we have experienced cost increases on certain raw materials. All the raw materials used in our manufacturing processes have been available in commercial quantities. Although we recently had some difficulty in obtaining graphite, significant progress has been made in establishing an assured source of supply. We continue to explore other technologies that would reduce our dependence on graphite. A substantial portion of the total cash costs of operating our specialty chemical plants, consisting mostly of labor and overhead, are largely fixed in nature.

     Although our net income (loss) and diluted net income (loss) per common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 9 to our Consolidated Financial Statements, we may incur material legal and other costs associated

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with certain litigation and contingencies; (ii) the magnitude, pricing and timing of perchlorate chemicals, sodium azide, Halotron, packaged explosives and environmental protection equipment sales in the future is uncertain; (iii) weighted average common and common equivalent shares for purposes of calculating diluted net income per common share are subject to significant fluctuations based upon changes in the market price of our Common Stock due to outstanding warrants and options; (iv) the results of periodic reviews of impairment issues; and (v) the ability to pass on increases in raw material costs to our customers. (See “Liquidity and Capital Resources” and “Forward Looking Statements/Risk Factors” below.)

     Sales and Operating Revenues. Sales decreased $9.4 million, or 14%, to $59.5 million in fiscal 2004, from $68.9 million in fiscal 2003. This decrease was principally attributable to a decrease in specialty chemicals segment sales of $3.8 million and a $5.6 million decrease in other businesses segment sales.

     The decrease in specialty chemicals sales resulted principally from a 20% sales volume decrease in perchlorate chemicals and a 13% decrease in sales volume of sodium azide in fiscal 2004 as compared to fiscal 2003.

     The decrease in other businesses segment sales resulted principally from a $4.4 million decline in real estate sales and a decline of $1.2 million in environmental equipment sales in fiscal 2004 as compared to fiscal 2003. Real estate sales were expected to decline substantially in 2004 since we have successfully sold almost all of the real estate assets in Nevada that we intended to monetize. Environmental protection equipment sales decreased due to fewer jobs generating lower amounts of revenue during fiscal 2004 as compared to fiscal 2003.

     Cost of Sales. Cost of sales increased $2.9 million, or 8%, to $40.2 million in fiscal 2004, from $37.3 million in fiscal 2003. As a percentage of sales, cost of sales was 68% in fiscal 2004, compared to 54% in fiscal 2003. The increases were primarily due to fixed costs that are allocated over a smaller base of perchlorates and other specialty chemical sales volumes for the year. In addition, higher costs were incurred due to the inclusion of the ES packaged explosives joint venture beginning in the third quarter of fiscal 2004. This increase in costs was partially offset by lower sales volumes in our other businesses segment.

     Operating Expenses. Operating (selling, general and administrative) expenses increased $7 million, or 48%, in fiscal 2004 to $21.5 million, from $14.5 million in fiscal 2003. The increase in operating expenses was due primarily to: (i) separation costs that occurred during the second quarter of fiscal 2004 (See Note 1 and 13 to our Consolidated Financial Statements), (ii) the addition of the ES packaged explosive joint venture during the third quarter of fiscal 2004, (iii) an increase in environmental remediation expenditures, and (iv) corporate development costs.

     Provision (Benefit) for Income Taxes. The effective income tax rate in fiscal 2004 is 116.5% which compares with 33.0% in fiscal 2003. In fiscal 2004, based on the analysis of deferred income taxes, the Company revised its estimate for deferred tax liability by $2.1 million. The increase in the effective tax rate in fiscal 2004 is largely the result of the change in estimate.

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     Segment Operating Income (Loss). Operating income (loss) of our operating segments during the fiscal years ended September 30, 2004 and 2003 was as follows:

The decrease in operating income in our specialty chemicals industry segment was primarily attributable to lower sales volume of our perchlorate chemicals. The decrease in operating income of our other businesses segment was principally due to decreased land sales.

     Net Interest and Other Expense (Income). Net interest and other expense (income) decreased to $(0.1) million in fiscal 2004 from $1.5 million in fiscal 2003. The decrease was principally due to the redemption of the Notes. (See Note 5 to our Consolidated Financial Statements.)

Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002

     Sales and Operating Revenues. Sales decreased $4.7 million, or 7%, to $68.9 million in fiscal 2003, from $73.6 million in fiscal 2002. This decrease was principally attributable to a decrease in specialty chemicals segment sales of $4.6 million and a decrease in other businesses segment sales of $0.2 million.

     The decrease in specialty chemicals sales resulted principally from a 6% sales volume decrease in perchlorate chemicals and a 54% decrease in sales volume of sodium azide in fiscal 2004 as compared to fiscal 2003.

     The decrease in other businesses segment sales resulted principally from a $2.2 million decline in real estate sales which was offset by a $2.1 million increase in environmental equipment sales in fiscal 2003 as compared to fiscal 2002. Real estate sales were expected to decline substantially in 2003 since we have successfully sold most of the real estate assets in Nevada that we intended to monetize. Environmental protection equipment sales increased due to increase in the number of jobs generating higher revenue in fiscal 2003 as compared to fiscal 2002.

     Cost of Sales. Cost of sales decreased $6.2 million, or 14%, to $37.3 million in fiscal 2003, from $43.5 million in fiscal 2002. As a percentage of sales, cost of sales was 54% in fiscal 2003, compared to 59% in fiscal 2002. The decrease in the percentage of cost of sales to sales was principally attributable to decreased depreciation expense associated with our specialty chemicals segment as a result of certain fully depreciated assets, and a change in the mix of products sold to higher margin products within the specialty chemicals segment.

     Operating Expenses. Operating (selling, general and administrative) expenses increased $0.7 million, or 5%, in fiscal 2003 to $14.5 million, from $13.8 million in fiscal 2002. The increase was primarily due to increased insurance costs and costs associated with the trace amounts of perchlorate chemicals found in Lake Mead. (See Note 9 to our Consolidated Financial Statements). These increases were partially offset by decreased spending on corporate development activities.

     Provision (Benefit) for Income Taxes. The effective income tax rate in fiscal 2003 is 33.0% which is unchanged from fiscal 2002.

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     Segment Operating Income. Operating income of our operating segments during the fiscal years ended September 30, 2003 and 2002 was as follows:

     The increase in operating income in our specialty chemicals industry segment was primarily attributable to a decrease in depreciation expense associated with our specialty chemicals segment, offset partially by decreased Halotron and sodium azide shipments. The increase in the operating performance of our environmental protection equipment business was primarily due to increased sales. The decrease in operating income of our real estate segment was principally due to decreased land sales resulting from the wind-down of our real estate operation.

     Net Interest and Other Expense. Net interest and other expense decreased to $1.5 million in fiscal 2003 from $3.2 million in fiscal 2002. The decrease was principally due to the redemption of the Notes. This decrease was partially offset by our equity in the loss from our investment in ES.

Inflation

     General inflation did not have a significant effect on our sales and operating revenues or costs during the three-year period ended September 30, 2004. General inflation may have an effect on gross profit in the future as certain of our agreements relating to Grade I AP and sodium azide customers require fixed prices, although certain of such agreements contain escalation features that should somewhat insulate us from increases in costs associated with inflation.

Liquidity and Capital Resources

     Cash flows provided by operating activities were $1.4 million, $17.7 million and $17.1 million during the fiscal years ended September 30, 2004, 2003 and 2002, respectively.

     Capital expenditures were $1.1 million, $3.1 million and $2.1 million during the fiscal years ended September 30, 2004, 2003 and 2002, respectively. Capital expenditures relate principally to specialty chemicals segment capital improvement projects and enterprise software.

     In December 2002 we made an investment of approximately $10.7 million in ES. The form of our investment in ES represents a combination of term and revolving debt and preferred stock and common equity.

     As discussed in Note 5 to our Consolidated Financial Statements, we redeemed the Notes on March 1, 2003. The total cost of the redemption, including interest on the Notes, was approximately $43.4 million. We recognized a loss on the redemption of the Notes of approximately $1.5 million.

     During the three-year period ended September 30, 2004, we received cash of approximately $1.4 million from our Ventana Canyon residential joint venture. The venture has wound down its operations and we do not expect to receive any cash returns from this venture in the future.

     We spent $2.8 million, $1.7 million and $0.3 million during the fiscal years ended September 30, 2004, 2003 and 2002, respectively, on the repurchase of our Common Stock. As discussed in Note 12 to our Consolidated Financial Statements, our Dividend and Stock Repurchase Program became effective in fiscal 2003. On December 18, 2003, our Board of Directors declared a cash dividend of $0.42 per share based upon application of the program formula for fiscal 2003, payable on January 9, 2004, to

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shareholders of record on December 29, 2003. By reason of the application of the program formula, no dividend will be paid for fiscal 2004.

2005 Outlook

     Capital expenditures for operations in 2005 are currently expected to be between $2.0 million and $3.0 million. This levels of spending is $0.9 million to $1.9 million more than in fiscal 2004. This increase in capital expenditures is driven primarily due to addition of ES business (for a full a year) and the Ampac-ISP business in our consolidated financial statements.

     In addition, the Company intends to continue to evaluate acquisition opportunities and investments in affiliated entities. Financing for these potential investment activities is likely to be obtained either through our existing cash balances and/or debt issuances.

     We believe that our cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of our operations. However, the resolution of litigation and contingencies, and the timing, pricing and magnitude of sales of perchlorates, sodium azide, Halotron and explosives, may have an effect on the use and availability of cash.

     As a result of the litigation and contingencies discussed in Note 9 to our Consolidated Financial Statements, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. Any such costs, to the extent borne by us and not recovered through insurance, would adversely affect our liquidity. We are currently unable to predict or quantify the amount or range of such costs or the period of time over which such costs may be incurred.

Contractual Obligations and Commitments. The following tables summarize our fiscal year contractual obligations and commitments as of September 30, 2004.

Forward-Looking Statements/Risk Factors

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

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

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1.	(a) Declining demand (including excess customer inventories) or downward pricing pressure for our products as a result of general or specific economic conditions, (b) governmental budget decreases affecting the DOD or NASA, including the status of the Space Shuttle Program (including President Bush’s current plan to ultimately terminate shuttle operations), that would cause further decreases in demand for Grade I AP, (c) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for Grade I AP and other perchlorates, sodium azide, Halotron, explosives or thrusters (d) the ability and desire of purchasers to change existing products or substitute other products for our products based upon perceived quality, environmental effects and pricing, and (e) the fact that perchlorate chemicals, sodium azide, Halotron and our environmental products have limited applications and highly concentrated customer bases.
2.	The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 9 to our Consolidated Financial Statements, as well as the costs resulting from regulatory and environmental matters that may have a negative impact on sales or costs.
3.	Our ability to profitably integrate, manage and operate new businesses and/or investments competitively and cost effectively (including recently acquired ES and Ampac-ISP).
4.	Competitive factors including, but not limited to, our limitations respecting financial resources and our ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and in the perchlorate market, potential patent coverage issues, and the development or penetration of competing new products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives businesses.
5.	Underutilization of our manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs, reductions in margins, and impairment issues.
6.	The near depletion of our Clark County, Nevada commercial real estate, with only 14 acres remaining for sale.
7.	The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies or similar organizations, including, but not limited to, environmental, safety and transportation issues.
8.	The dependence upon a single facility for the production of most of our products.
9.	Provisions of our Certificate of Incorporation and By-laws and Series D Preferred Stock, and the dividend of preference stock purchase rights and related Rights Agreement, could have the effect of making it more difficult for potential acquirors to obtain a control position in us.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Market risk represents the risk of loss arising from adverse changes in market rates and prices, commodity prices and foreign currency exchange rates. We had certain long-term fixed-rate debt that was redeemed on March 1, 2003. At September 30, 2004, we did not have any derivative-based financial instruments. However, the amount of outstanding debt may fluctuate and we may at some time be subject to financing risk.

Item 8. Financial Statements and Supplementary Data

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

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SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     Not Applicable.

Item 9A. Controls and Procedures

     Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. No change in our internal control over financial reporting occurred during our most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

     Not applicable.

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PART III

Item 10. Directors and Executive Officers of the Registrant

     The required information regarding directors and executive officers is incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2005. We have adopted a policy that applies to all of our directors and employees entitled “Standards of Business Conduct” that is filed as an exhibit to this annual report. This policy is also posted to our website at www.apfc.com.

     In March 2004 David N. Keys and Victor M. Rosenzweig resigned from the Company’s Board of Directors to pursue personal interests. The Board has elected to reduce its overall size from 10 to 8 members by not filling these board seats with new candidates.

Item 11. Executive Compensation

     The required information regarding executive compensation is incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2005.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     The required information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2005.

Item 13. Certain Relationships and Related Transactions

     The required information regarding certain relationships and related transactions is incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than January 28, 2005.

Item 14. Principal Accountant Fees and Services

     The required information regarding principal accountant fees and services is incorporated herein by reference from our definitive proxy statement for the 2005 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 28, 2005.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1)	Financial Statements
	See Part II, Item 8 for an index to the Registrant’s financial statements and supplementary data.

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(2)	Financial Statement Schedules
	None applicable.
(3)	Exhibits
	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 “S-14”).
	3.2	Registrant’s By-Laws, incorporated by reference to Exhibit 3B to the S-14.
	3.3	Amendments to Registrant’s By-Laws, incorporated by Reference to the Registrant’s Current Report on Form 8-K dated November 9, 1999.
	3.4	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 “S-3”).
	3.5	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 S-3.
	3.6	Form of Indemnification Agreement between the Registrant and all Directors of the Registrant, incorporated by reference to Exhibit 3.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (the “2000 10-K”).
	4.1	American Pacific Corporation 1997 Stock Option Plan (the “1997 Plan”), incorporated by reference to Exhibit 4.1 to Registrant’s Form S-8 (File No. 333-53449) (the “1998 S-8”).
	4.2	Form of Option Agreement under the 1997 Plan, incorporated by reference to Exhibit 4.2 to the 1998 S-8.
	4.3	American Pacific Corporation 2001 Amended and Restated Stock Option Plan (the “2001 Plan”), incorporated by reference to Exhibit 4.1 to Registrant’s Form S-8 (File No. 333-104732) (the “2003 S-8”).
	4.4	Form of Option Agreement under the 2001 Plan, incorporated by reference to Exhibit 4.3 to the 2003 S-8.
	4.5	American Pacific Corporation 2002 Directors Stock Option Plan (the “2002 Plan”), incorporated by reference to Exhibit 4.2 to the 2003 S-8.
	4.6	Form of Option Agreement under the 2002 Plan, incorporated by reference to Exhibit 4.4 to the 2003 S-8.
	4.7	Form of Rights Agreement, dated as of August 3, 1999, between Registrant and American Stock Transfer & Trust Company, incorporated by reference to the Registrant’s Registration Statement on Form 8-A dated August 6, 1999 (the “Form 8-A”).
	4.8	Form of Letter to Stockholders with copies of Summary of Rights to Purchase Preference Shares, incorporated by reference to the Form 8-A.

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	10.1	Employment agreement dated January 1, 2002, between the Registrant and David N. Keys, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002 (the “2002 10-K”).
	10.2	Employment agreement dated January 1, 2002, between the Registrant and John R. Gibson, incorporated by reference to Exhibit 10.2 to the Registrant’s 2002 10-K.
	10.3	Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, incorporated by reference to Exhibit 10.4 to the 1999 10-K.
	10.4	Amended and Restated American Pacific Corporation Supplemental Executive Retirement Plan effective January 1, 1999, incorporated by reference to Exhibit 10.5 to the 1999 10-K.
	10.5	Trust Agreement for the Amended and Restated American Pacific Corporation Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.6 to the 1999 10-K.
	10.6	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 Registrant’s Registration Statement on Form S-2 (File No. 33-36664) (the “1990 S-2”).
	10.7	Limited Partnership Agreement of 3770 Hughes Parkway Associates, Limited Partnership, incorporated by reference to Exhibit 10.23 to the 1990 S-2.
	10.8	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.
	10.9	Long-Term Pricing Agreement dated as of December 12, 1997, between Thiokol Corporation-Propulsion and the Registrant, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 (the “1998 March 10-Q”).
	10.10	Modification No. 1 dated September 13, 2000, to Long-Term Pricing Agreement between Thiokol Propulsion and the Registrant, incorporated by reference to Exhibit 10.14 to the 2000 10-K.
	10.11	Partnershipping Agreement between Alliant Techsystems Incorporated (“Alliant”) and Western Electrochemical Company and letter dated November 24, 1997, from the Registrant to Alliant and revised Exhibit B with respect thereto, incorporated by reference to Exhibit 10.2 to the 1998 March 10-Q.
	10.12	Articles of Organization of Energetic Systems Inc., LLC, incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003 (the “2003 10-K”).
	10.13	Operating Agreement of Energetic Systems Inc., LLC, incorporated by reference to Exhibit 10.13 to the 2003 10-K.
	*14	Standards of Business Conduct, incorporated by reference to Exhibit 14 to the 2003 10-K.
	*21	Subsidiaries of the Registrant.
	*23	Consent of Deloitte & Touche LLP.

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*24		Power of Attorney, included on Page 32.
*31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

Dated: January 11, 2005	AMERICAN PACIFIC CORPORATION (Registrant)
	By:	/s/ JOHN R. GIBSON
		John R. Gibson
		President & Chief Executive Officer
	By:	/s/ SETH L. VAN VOORHEES
		Seth L. Van Voorhees
		Vice President, Chief Financial Officer, Secretary and Treasurer, Principal Financial and Accounting Officer

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POWER OF ATTORNEY

     American Pacific Corporation and each of the undersigned do hereby appoint John R. Gibson and Seth L. Van Voorhees and each of them severally, its or his true and lawful attorneys, with full power of substitution and resubstitution, to execute on behalf of American Pacific Corporation and the undersigned any and all amendments to this Report and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each of such attorneys shall have the power to act hereunder with or without the others.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

American Pacific Corporation:

We have audited the accompanying consolidated balance sheets of American Pacific Corporation and Subsidiaries (the “Company”) as of September 30, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 American Pacific Corporation and subsidiaries as of September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
Las Vegas, Nevada
January 12, 2005

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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND 2003

See Notes to Consolidated Financial Statements.

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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002

See Notes to Consolidated Financial Statements.

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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002

See Notes to Consolidated Financial Statements.

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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002

See Notes to Consolidated Financial Statements.

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AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Principles of Consolidation – The Consolidated Financial Statements include the accounts of American Pacific Corporation and Subsidiaries (the “Company”, “we”, “us”, or “our”). All significant intercompany accounts and transactions have been eliminated.
	Estimates and Assumptions – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Judgments and assessments of uncertainties are required in applying our accounting policies in many areas. For example, key assumptions and estimates are particularly important when determining our projected liabilities for pension benefits, useful lives for depreciable and amortizable assets, deferred tax assets and long-lived assets, including intangible assets. Other areas in which significant uncertainties exist include, but are not limited to, costs that may be incurred in connection with environmental matters and the resolution of litigation and other contingencies. Actual results will inevitably differ to some extent from estimates on which our Consolidated Financial Statements were prepared.
	Sales and Revenue Recognition – Sales of the specialty chemicals and environmental protection products are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. We offer some of our perchlorate product customers the option, at their election, of storing purchased materials in our Cedar City facility (“Bill and Hold” transactions). We recognize the revenue and profit from these Bill and Hold transactions at the point at which the risks of ownership and transfer of title is transferred to the customers. Sales of the environmental protection equipment segment are recognized when the product is shipped. We receive cash for the full amount of real estate sales at the time of closing.
	Cash and Cash Equivalents – All highly liquid investment securities with a maturity of three months or less when acquired are considered to be cash equivalents.
	Related Party Transactions – Related party notes and accrued interest receivable represent demand notes bearing interest at a bank’s prime rate from our former Chairman and a current officer.
	Our other related party transactions generally fall into the following categories:

	•	Payments of professional fees to firms affiliated with certain members of our Board.
	•	Payments to certain directors for consulting services outside of the scope of their duties as directors.

	For the years ended September 30, 2004, 2003 and 2002, such transactions totaled $0.2 million, $0.5 million and $0.5 million.
	Inventories – Inventories are stated at the lower of cost or market. Cost of the specialty chemicals segment inventories is determined on a moving average basis and cost of the environmental protection equipment segment inventories is determined on the specific identification basis.
	Property, Plant and Equipment – Property, plant and equipment are carried at cost less accumulated depreciation. We periodically assess the recoverability of property, plant and equipment and evaluate such assets for impairment whenever events or changes in circumstances indicate that the net carrying amount of an asset may not be recoverable. Asset impairment (including intangible assets) is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the net carrying amount. Depreciation is computed on the straight-line method over the

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	estimated productive lives of the assets (3 to 12 years for machinery and equipment and 15 to 31 years for buildings and improvements).
	Intangible Assets – During the first quarter of fiscal 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. The adoption of SFAS No. 142 did not have a material effect on our results of operations or financial position. Under the provisions of SFAS No. 142, our intangible assets, related primarily to our perchlorate acquisition in fiscal 1998, will continue to be amortized under its originally assigned life of ten years. At September 30, 2004, our intangible assets had a gross carrying value of approximately $39.1 million and accumulated amortization of approximately $(25.4) million. Amortization expense was approximately $3.9 million in fiscal 2004 and $3.9 million and $4.4 million in fiscal 2003 and 2002, respectively. Amortization expense is estimated to amount to approximately $3.9 million in each of the years during the three-year period ending September 30, 2007.
	Fair Value Disclosure — Cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and other short-term liabilities – The carrying value of these items is a reasonable estimate of their fair value due to their short-term nature.
	Net Income Per Common Share – Basic per share amounts are calculated by dividing net income by average shares outstanding during the period. Diluted per share amounts are calculated by dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. The effect of outstanding stock options and warrants to purchase approximately 2.9 million and 2.9 million shares of common stock during the fiscal years 2003 and 2002, respectively, were not included in diluted per share calculations, since the average exercise price of such options and warrants was greater than the average market price of our common stock during these periods. The dilutive effect of the assumed exercise of stock options increased the weighted average of common shares by 47,000, 100,000 and 190,000 during the years ended September 30, 2004, 2003 and 2002, respectively.
	Accounting for Stock-Based Compensation – In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation” was issued. SFAS 148 is effective for fiscal years ending after December 15, 2002, and gives further guidance regarding methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation and regarding disclosure requirements as previously defined in SFAS 123. We have elected to follow Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our stock options. Under APB No. 25, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. (See Note 10.)

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	Income Taxes – We account for income taxes using the asset and liability approach required by SFAS No. 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 our 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.
	Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when there are not sufficient sources of future taxable income to realize the benefit of the operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.
	Loss on Debt Extinguishments – During the first quarter of fiscal 2003, we adopted SFAS No. 145. SFAS No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 distinguishes transactions that are part of an entity’s recurring operations from those that are unusual and infrequent and that meet the criteria for classification as an extraordinary item. We have reclassified previously reported extraordinary losses on debt extinguishments to a separate line item above the caption “Income Before Income Taxes” in our Consolidated Statements of Operations.
	Comprehensive Loss – Other comprehensive loss is reported in our Consolidated Statements of Shareholders’ Equity and Accumulated other comprehensive loss is reported in our Consolidated Balance Sheets. Our only component of other comprehensive loss represents a minimum pension liability adjustment. (See Note 8.)

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	Recently Issued Accounting Standards – In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity.” SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). We have determined that SFAS No. 150 will not have a material impact on our financial position or results of operations.
	In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. In December 2003, FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R)”, was issued to clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94, “Consolidation of All Majority-Owned Subsidiaries”.
	We historically treated our 50% equity interest in the ES joint venture as an unconsolidated operation whose financial performance was disclosed, but not consolidated in our financial results. However under FIN 46(R), we are required to consolidate the ES joint venture due to a number of factors including our majority ownership of the joint venture’s debt securities.
	As of March 31, 2004, we consolidated the ES joint venture. We reported a cumulative effect of an accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter income statement to reflect the loss that we would have incurred had the ES joint venture been consolidated since its inception.
	The consolidation of the ES joint venture significantly changes various line items of our balance sheet, statement of operations and cash flow presentations as compared to financial presentations in earlier reports. As of March 31, 2004, we consolidated the following balance sheet items: (i) $4.9 million of current assets, (ii) $7.6 million of noncurrent assets, and (iii) $3.4 million of noncurrent liabilities.
	In November 2004, the FASB issued SFAS 151, Inventory Costs—an amendment of ARB No. 43, Chapter 4. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Statement is effective for the Company beginning in fiscal 2006 and could have a material effect on our financial statements upon adoption.
	In December 2004, the FASB issued a revision to SFAS 123 (revised 2004), Share-Based Payment. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The statements eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. The Statement is effective for the Company beginning in our fourth quarter of fiscal 2005.
2.	INVENTORIES
	Inventories at September 30, 2004 and 2003 consist of the following:

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3.	PROPERTY, PLANT AND EQUIPMENT
	Property, plant and equipment at September 30, 2004 and 2003 are summarized as follows:

	Depreciation expense was approximately $1.8 million, $1.8 million and $2.2 million during the years ended September 30, 2004, 2003 and 2002, respectively. The increase in building, machinery and equipment in 2004 was principally attributed to the consolidation of ES.
4.	REAL ESTATE ASSETS
	At September 30, 2004, we owned approximately 14 acres of improved undeveloped land at the Gibson Business Park near Las Vegas, Nevada. We also own approximately 4,700 acres of land and certain water rights at our site in Iron County, Utah that are dedicated to our growth and diversification.
	We hold a 50% interest in the Ventana Canyon joint venture residential project located in the Las Vegas, Nevada area. All homes have been sold and the venture has wound down its operations. During the three-year period ended September 30, 2004, we received cash returns from this venture of approximately $1.4 million. We do not expect to receive any cash returns from the venture in the future.
	In July 1990, we contributed $0.7 million 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 $0.3 million in return for a 30% interest as limited partners. Such other limited partners include certain current and former members of our Board of Directors. The Partnership, in turn, contributed $1.0 million 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. We entered into an agreement with Hughes Parkway pursuant to which we lease office space in a building in Las Vegas, Nevada. (See Note 9.)
	Our real estate assets, grouped with Other Assets in our Consolidated Balance Sheet, had a total carrying value of approximately $1.7 million at each of September 30, 2004 and 2003.
5.	LONG-TERM DEBT
	On March 1, 2003, we redeemed all of our outstanding 9 1/4% Senior Unsecured Notes (the “Notes”). The redemption was at a price of 102.313% of the principal amount of the Notes, plus accrued interest to the date of redemption, aggregating approximately $43.4 million. We recognized a loss on the redemption of $1.5 million, including a non-cash charge of $0.6 million to write-off remaining debt issue costs.
	In 1992, we issued warrants (the “Warrants”) to the purchasers of certain subordinated secured notes (the “Azide Notes”). The remaining principal balance of the outstanding Azide Notes were repurchased in 1998. The Warrants, which granted the right to purchase shares of Common Stock at an exercise price of $14.00 per share, expired on December 31, 2003. The maximum number of shares purchasable upon exercise of the Warrants was 2,857,000 shares. The Warrants were exercisable, at the option of their holders, to purchase up to 20 percent of the common stock of American Azide Corporation (“AAC”), our wholly-owned subsidiary, rather than our Common Stock. In

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	the event of such an election, the exercise price of the Warrants was based upon a pro rata share of AAC’s capital, adjusted for earnings and losses, plus interest from the date of contribution.
	We accounted for the proceeds of the financing applicable to the Warrants as temporary capital. 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. The Warrants expired on December 31, 2003 and the amount of the Warrants was transferred to retained earnings on their expiration.
	As of September 30, 3004 the Company has $564,000 of availability in a letter of credit agreement that it has with US Bank.
6.	ACQUISITION
	On March 12, 1998 we acquired, pursuant to a purchase agreement with Kerr-McGee, certain intangible assets related to Kerr-McGee’s production of AP (the “Rights”) for a purchase price of $39.0 million. The Acquisition did not include Kerr-McGee’s production facilities (the “Production Facilities”) and certain water and power supply agreements used by Kerr-McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of AP, although the Production Facilities may continue to be used by Kerr-McGee for production of AP under certain limited circumstances not competitive with our operations. Kerr-McGee also reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities.
	In connection with the Acquisition, we entered into an agreement with the Thiokol Propulsion Division (“Thiokol”) of Alcoa with respect to the supply of Grade I AP through the year 2008. The agreement, as amended, provides that during its term Thiokol will make all of its Grade I AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under which Grade I AP unit prices vary inversely with the quantity of a specific grade of AP sold by us to all of our customers. Under the agreement, Grade I AP unit prices in the matrix at all quantity levels escalate each year through fiscal 2003 and, in fiscal 2004, were adjusted downward by approximately 20%. Such downward adjustment will have the effect of reducing revenues and operating cash flows on Grade I AP sold to Thiokol by at least 20% in fiscal 2004. After the adjustment, Grade I AP unit prices again escalate each year through fiscal 2008.
	In connection with the Acquisition, we also entered into an agreement with Alliant Techsystems, Inc. (“Alliant”) to extend an existing agreement through the year 2008. The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliant’s Bacchus Works.
	During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual agreements in place prior to Alliant’s acquisition of Thiokol will remain in place. All Thiokol programs existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.
	On October 1, 2004 we acquired the former Atlantic Research Corporation’s in-space propulsion business from Aerojet-General Corporation. The purchase price for this acquisition was approximately $3.5 million in cash plus the assumption of certain liabilities. The purchase agreement is based on the transfer of approximately $4.0 million of certain net working capital assets at the close of the transaction. The purchase agreement includes a post-closing adjustment, to the extent that a different amount of certain net working capital assets are transferred at the close of this transaction. This purchase price adjustment analysis for this transaction has not been completed. The accompanying consolidated financial statements do not reflect the financial impact of this transaction since it was

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	completed after the September 30 close of our 2004 fiscal year. Our first quarter 2005 fiscal report will reflect this transaction and its financial performance in that period.
7.	INCOME TAXES
	The following table provides an analysis of our income taxes for the years ended September 30:

Income taxes for the years ended September 30, 2003, 2002 and 2001 differ from the amount computed at the federal and state income tax statutory rates as a result of the following:

	The Company has net capital loss carryforwards available to offset future capital gains of $1,290,000. However, the Company does not expect to generate any capital gains in the future. As the Company does not expect to utilize the benefit of the capital loss deferred tax asset, a valuation allowance of $452,000 has been established. In addition, in fiscal 2004, based on the analysis of deferred income taxes, the Company has reversed its estimate for deferred tax liability by $2.1 million.
	The components of net deferred taxes at September 30, 2004, 2003 and 2002 consisted of the following:

8.	EMPLOYEE BENEFIT PLANS
	We maintain a group health and life benefit plan, an employee stock ownership plan (“ESOP”) that includes a Section 401(k) feature, a defined benefit pension plan (the “Plan”), and a supplemental executive retirement plan (“SERP”). The ESOP permits employees to make contributions. Plan benefits are paid based on an average of earnings, retirement age, and length of service, among other factors.

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The tables below provide relevant financial information about the Plan as of and for the fiscal years ended September 30: