UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

     (Mark One)

or

Commission File Number 1-1520

GenCorp Inc.

Registrant’s telephone number, including area code (916) 355-4000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

     As of June 30, 2004, there were 44,822,476 outstanding shares of our Common Stock, $0.10 par value.

GenCorp Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended May 31, 2004

Table of Contents

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

GenCorp Inc.
Condensed Consolidated Statements of Income
(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GENCORP INC.
Consolidated Balance Sheets
(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GenCorp Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See Notes to Unaudited Condensed Consolidated Financial Statements.

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GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation and Nature of Operations

     We have prepared the accompanying Unaudited Condensed Consolidated Financial Statements, including our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, in accordance with the instructions to Form 10-Q and therefore do not include all of the information and notes required by accounting principles generally accepted in the United States (GAAP). These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 30, 2003, as filed with the Securities and Exchange Commission (SEC). Unless otherwise indicated or required by the context, as used in this Quarterly Report on Form 10-Q, the terms “we,” “our,” and “us” refer to GenCorp Inc. and all of our subsidiaries that are consolidated under GAAP.

     We believe the accompanying Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In addition, our operating results for interim periods may not be indicative of the results of operations for a full year.

     We are a multinational technology-based company operating primarily in North America. Our continuing operations are organized into three segments: Aerospace and Defense, Fine Chemicals and Real Estate. The Aerospace and Defense segment includes the operations of Aerojet-General Corporation (Aerojet), which develops and manufactures propulsion systems for space and defense applications, armament systems for precision tactical weapon systems and munitions applications, and advanced airframe structures. Primary customers served include major prime contractors to the U.S. government, the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA). The Fine Chemicals segment consists of the operations of Aerojet Fine Chemicals LLC (AFC), sales of which are primarily from custom manufactured active pharmaceutical ingredients and advanced/registered intermediates to pharmaceutical and biotechnology companies. The Real Estate segment includes activities related to the development, sale and leasing of our real estate assets. Information on our operations by segment is provided in Note 16.

     During the second quarter of 2004, we classified the GDX Automotive (GDX) operating segment as discontinued operations as a result of our announced plans to sell the business. See additional discussion in Note 15. For all periods presented, we have classified the results of GDX as discontinued operations in the Condensed Consolidated Statements of Income. The assets and liabilities of GDX have been classified as Assets of Discontinued Operations and Liabilities of Discontinued Operations in the Consolidated Balance Sheets as of May 31, 2004 and November 30, 2003.

     On October 17, 2003, Aerojet completed the acquisition of substantially all of the assets of the propulsion business of Atlantic Research Corporation (ARC), a subsidiary of Sequa Corporation, for a purchase price of $144 million, comprised of $133 million in cash and estimated direct

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acquisition costs and purchase price adjustments of $11 million. In March 2004, Sequa proposed purchase price adjustments which would require that Aerojet make an additional payment. The two parties have been negotiating the proposed adjustments and have reached a mutual understanding on several matters. On other matters, the parties are in disagreement and are preparing for binding arbitration. Management does not believe the resolution of these matters will have a material effect on our financial condition.

2. Earnings (Loss) Per Share of Common Stock

     A reconciliation of the numerator and denominator used to calculate basic and diluted earnings (loss) per share of common stock (EPS) is presented in the following table (dollars in millions, except per share amounts, shares in thousands):

     The effect of a conversion of our $150 million aggregate principal amount of 5.75% Convertible Subordinated Notes issued in April 2002 (5.75% Notes) into common stock was not included in the computation of diluted earnings (loss) per share for the three and six months ended May 31, 2004 and May 31, 2003 because the effect would be antidilutive for these periods. Our $125 million aggregate principal amount of 4% Contingent Convertible Subordinated Notes due 2024, issued in January 2004 (4% Notes) were not convertible into common stock as of May 31, 2004, accordingly, the 4% Notes were not included in the computation of diluted earnings (loss) per share for the three and six months ended May 31, 2004. The 5.75% Notes are convertible at an initial conversion rate of 54.29 shares per $1,000 outstanding. The 4% Notes are convertible at an initial conversion rate of 64.8088 shares per $1,000 outstanding. Potentially dilutive securities that were not included in the diluted EPS calculation because they would have been antidilutive also include 3,278,005 and 3,249,000 employee stock options for the three months ended May 31, 2004 and 2003, respectively and 3,278,005 and 3,209,000 employee stock options for the six months ended May 31, 2004 and 2003, respectively.

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3. Stock Based Compensation

     As permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, we apply the existing accounting rules under APB Opinion No. 25, Accounting for Stock Issued to Employees, which provides that no compensation expense is charged for options granted at an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation expense for our stock option plans been determined based upon the fair value at the grant date for awards under these plans using market-based option valuation models, net income (loss) and the effect on net income (loss) per share would have been as follows (dollars in millions, except per share amounts):

     Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the input assumptions can materially affect the fair value estimate, it is our opinion that the existing models do not necessarily provide a reliable single measure of the fair value of the employee stock options. The discontinued operations earnings (loss) per share would not have changed as a result of stock based compensation expense.

4. Inventories, Net

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5. Property, Plant and Equipment, Net

6. Goodwill

     The changes in the carrying amount of goodwill for the six months ended May 31, 2004 were as follows (dollars in millions):

     Our goodwill balance at May 31, 2004 and November 30, 2003 relates to our Aerospace and Defense segment. During the first six months of 2004, goodwill of $3 million was recorded as a result of corrections to the valuation of assets and liabilities associated with the ARC acquisition completed in October 2003 and the acquisition of the General Dynamics Ordnance and Tactical Systems Space Propulsion and Fire Suppression business (Redmond, Washington operations) completed in October 2002. The adjustments reflect the use of more accurate data in valuing certain operations acquired as part of the transaction with Sequa Corporation which were required to be disposed of by the Federal Trade Commission as a condition to approving the ARC acquisition and in recording our post-retirement obligation associated with our Redmond, Washington operations employees.

7. Other Noncurrent Assets, Net

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8. Other Current Liabilities

9. Long-term Debt

     As of May 31, 2004, the borrowing limit under our Revolving Credit Facility was $137 million. We had no borrowings and letters of credit of $56 million outstanding under that facility as of May 31, 2004. The average interest rate on the outstanding balance of long term debt was 6.26% as of May 31, 2004, compared to 5.33% as of May 31, 2003. As of May 31, 2004, we also had borrowing limits totaling $20 million on additional credit facilities in Europe and Canada related to our discontinued operations, under which $12 million was outstanding. The outstanding borrowings are included in Foreign Credit Facilities and Other Debt in the table above. Availability under our various credit facilities totaled $89 million as of May 31, 2004.

     The charge recorded as a result of adjusting GDX Automotive to management’s estimate of proceeds to be received on disposition less costs to sell (see Note 15) has caused us to be out of compliance with our consolidated net worth covenant related to our Senior Credit Facility as of May 31, 2004, for which the senior lenders have granted us a waiver through May 31, 2005. We were in compliance with our other debt covenants as of May 31, 2004.

     In connection with the anticipated sale of GDX Automotive, we will be seeking the consent of the lenders under our senior credit facilities to permit the sale of GDX Automotive and to amend and waive certain covenants therewith.

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4% Contingent Convertible Subordinated Notes

     In January 2004, we issued $125 million aggregate principal amount of our 4% Contingent Convertible Subordinated Notes due 2024 (4% Notes) in a private placement pursuant to Section 4(2) and Rule 144A under the Securities Act of 1933. The 4% Notes will mature in January 2024. Interest on the notes accrues at a rate of 4% per annum and is payable on January 16 and July 16, beginning July 16, 2004. In addition, contingent interest will be paid during any six-month period, commencing with the six-month period, beginning January 16, 2008, if the average market price of a 4% Note for the five trading days ending on the third trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the notes.

     Each $1,000 principal amount of the 4% Notes is convertible at each holder’s option into 64.8088 shares of our common stock (subject to adjustment as provided in the indenture governing the 4% Notes) only if: (i) during any calendar quarter if the closing price of the common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price on that 30th trading day; (ii) we have called the notes for redemption and redemption has not yet occurred; (iii) during the five trading day period after any five consecutive trading day period in which the average trading price of the notes for each day of such five-day period is less than 95% of the product of the common stock price on that day multiplied by the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes; or (iv) certain corporate events have occurred. The conversion rate of 64.8088 shares for each $1,000 principal amount of the 4% Notes is equivalent to an initial conversion price of $15.43 per share of our common stock. None of these events have occurred subsequent to the issuance of the notes.

     We may redeem some or all of our 4% Notes for cash on or after January 19, 2010. In addition, we may redeem some or all of our notes for cash on or after January 19, 2008 if the closing price of our common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the preceding calendar month is more than 125% of the conversion price of $15.43. Each holder may require us to repurchase for cash all or a portion of its notes on January 16, 2010, 2014, and 2019, or, subject to certain exceptions, upon a change of control. In all cases for either redemption of the notes or repurchase of the notes at the option of the holder, the price is equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, including contingent interest and liquidated damages, if any.

     The 4% Notes are general, unsecured obligations and rank equal in right of payment to all of our other existing and future subordinated indebtedness, including the 5.75% Notes, and junior in right of payment to all of our existing and future senior indebtedness, including all of our obligations under our Senior Credit Facilities and all of our existing and future senior subordinated indebtedness, including our outstanding 9.50% Senior Subordinated Notes due 2013 (9.50% Notes). In addition, the 4% Notes are effectively subordinated to any of our secured debt and to any and all debt and liabilities, including trade debt of our subsidiaries.

     The indenture governing the 4% Notes limits our ability to, among other things, consolidate with or merge into any other person, or convey, transfer or lease our properties and assets substantially as an entirety to any other person unless certain conditions are satisfied. The indenture also contains customary events of default, including failure to pay principal or interest when due, cross-acceleration to other specified indebtedness, failure to deliver shares of common stock as required, failure to comply with covenants and certain events of bankruptcy, insolvency and reorganization, subject in some cases to notice and applicable grace periods.

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     Issuance of the 4% Notes generated net proceeds of approximately $120 million, which were first used to repay $40 million of outstanding borrowings under the Revolving Credit Facility, and, second, to prepay the next 12 months of scheduled principal amortization under the Term Loan A in the amount of $19 million. The remaining net proceeds are available to be used for general corporate purposes. Amounts repaid under the Revolving Credit Facilty may be reborrowed at any time and the borrowings may be used for any purpose, subject only to the limitations contained in the agreements governing that facility.

Interest Rate Swaps

     Effective January 2003, we entered into interest rate swap agreements on $100 million of our variable rate term loan debt for a two-year period. Under the swap agreements, we make payments based on a fixed rate of 6.02% and receive a London InterBank Offered Rate (LIBOR) based variable rate (4.89% as of May 31, 2004). We account for the interest rate swaps pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and there was no material ineffectiveness recognized in earnings. As of May 31, 2004, the fair value of these swaps resulted in a liability of $1 million, which has been included in other current liabilities with an offsetting amount recorded as an unrealized loss in other comprehensive income.

10. Commitments and Contingencies

     a. Legal proceedings

     From time to time, as discussed in our Annual Report to the SEC on Form 10-K, we and our subsidiaries are subject to legal proceedings, including litigation in federal and state courts, which arise out of, and are incidental to, the ordinary course of business. We are also subject to governmental investigations by state and federal agencies. While we cannot predict the outcome of such proceedings with any degree of certainty, the potential liabilities that may result could have a material adverse effect on our financial position or the results of operations.

Groundwater Cases

     Along with other industrial Potentially Responsible Parties (PRPs) and area water purveyors, Aerojet was sued in three cases by approximately 500 individual plaintiffs residing in the vicinity of Aerojet’s facilities near Sacramento, California (the Sacramento cases). The Sacramento Superior Court through the initial pleading stage had reduced the number of plaintiffs in the Sacramento cases to approximately 300. On or about May 28, 2004, the Sacramento Superior Court dismissed, without leave to amend, 204 plaintiffs, leaving the number of plaintiffs at 88. The remaining individual plaintiffs in the Sacramento cases generally seek damages for illness (in some cases death) and economic injury allegedly caused by their ingestion of groundwater contaminated or served by defendants, without specifying actual damages. Discovery in the Sacramento cases has commenced and trial has been set for July 2005. Aerojet has retained outside counsel and is vigorously defending these actions.

     Aerojet was also sued in 14 cases by approximately 1,100 individual plaintiffs residing in the vicinity of Aerojet’s former facility in Azusa, California (the San Gabriel Valley cases). In the San Gabriel Valley cases, the number of plaintiffs has been reduced to approximately 500. The San Gabriel Valley cases, coordinated for trial in Los Angeles, California, are proceeding under two

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master complaints and pretrial discovery is in process. The remaining individual plaintiffs in the San Gabriel Valley cases generally seek damages for illness (in some cases death) and economic injury allegedly caused by their ingestion of groundwater contaminated or served by defendants, without specifying actual damages. Aerojet and other industrial defendants involved in the cases are required to carry on certain investigations by order of the U.S. Environmental Protection Agency (EPA) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA).

     The trial court in the San Gabriel Valley cases has ruled that regulated water entity defendants will only be held accountable based on quantitative or numerical standards such as “maximum contaminant levels” (MCL) or “action levels.” The trial court also ruled that a single exceedance of a numerical standard does not constitute a violation. Rather, a violation requires a “failure to comply with the regulatory scheme, and not merely by exceedances of the MCL.” Thus, an exceedance of an action level, by itself, does not give rise to a cause of action. Plaintiffs have sought to overturn these rulings, but a final determination has not yet been made. The next step in these cases will be proceedings regarding whether any of the Public Utility Commission regulated water entity defendants served water in violation of the state and federal standards. If it is determined that the regulated water purveyors served water not in violation of drinking water standards, the regulated water purveyor defendants will be dismissed from the litigation, potentially leaving us and other industrial defendants that are not regulated water purveyors as the remaining party-defendants. Several defendants, including San Gabriel Water Company, have settled with the plaintiffs. Currently, 162 of the remaining approximately 500 San Gabriel Valley plaintiffs are subject to early trial — most likely in 2005. Aerojet has notified its insurers, retained outside counsel and is vigorously defending the actions.

McDonnell Douglas Environmental Remediation Cost Recovery Dispute

     Aerojet and McDonnell Douglas Corporation (MDC), an operating unit of The Boeing Company, are engaged in a dispute in the U.S. District Court for the Eastern District of California regarding the final allocation of liability for the environmental contamination of the Inactive Rancho Cordova Test Site (IRCTS). In 1961, IRCTS was transferred by Aerojet to a predecessor of MDC and was subsequently reacquired by Aerojet in 1984. An initial federal lawsuit filed by Aerojet against MDC in 1994 was settled in 1999 (1999 Settlement Agreement). Pursuant to the 1999 Settlement Agreement, Aerojet agreed to participate with MDC in the interim funding of certain remediation efforts at IRCTS, subject to a final cost allocation.

     In 2001, a disagreement between Aerojet and MDC arose regarding the interpretation of the 1999 Settlement Agreement. In December 2001, MDC filed a second lawsuit in federal court alleging that Aerojet breached the 1999 Settlement Agreement. McDonnell Douglas Corporation v. Aerojet-General Corporation, Case No. CIV-01-2245, U.S. District Court, E.D. CA. Under that lawsuit, MDC sought to have Aerojet bear a 50 percent interim share (rather than the 10 percent interim share accepted by Aerojet) of the costs of investigating and remediating offsite perchlorate groundwater contamination, allegedly associated with activities on IRCTS.

     In November 2002, Aerojet and MDC entered into discussions to settle the second lawsuit by renegotiating the temporary allocation of certain costs associated with the environmental contamination at IRCTS. The parties reached an agreement in principle to settle the allocation dispute relating to costs associated with the environmental contamination at IRCTS and expect to formalize the agreement this summer.

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Air Pollution Toxic Tort Cases

     Aerojet and several other defendants have been sued by private homeowners residing in the vicinity of Chino and Chino Hills, California. The cases have been consolidated and are pending in the U.S. District Court for the Central District of California. Baier, et al. v. Aerojet-General Corporation, et al., Case No. EDCV 00 618VAP (RNBx) CA; Kerr, et al. v. Aerojet-General Corporation, Case No. EDCV 01-19VAP (SGLx); and Taylor, et al. v. Aerojet-General Corporation, et al., Case No. EDCV 01-106 VAP (RNBx). Plaintiffs generally allege that defendants released hazardous chemicals into the air at their manufacturing facilities, which allegedly caused illness, death, and economic injury. Various motions have reduced the number of plaintiffs from 80 to 49. Discovery is proceeding in the cases. Trial is likely to be scheduled for 2005. Aerojet has notified its insurers and is vigorously defending the actions.

Water Entity Cases

     In October 1999, Aerojet was sued by American States Water Company (ASWC), a local water purveyor, for damages, including unspecified past costs, future damages and replacement water for contaminated drinking water wells near Aerojet’s Sacramento, California manufacturing facility. American States Water Company, et al. v. Aerojet-General Corporation, et al., Case No. 99AS05949, Sacramento County Superior Court. Weeks before the scheduled trial, Aerojet and ASWC initiated mediation to resolve the dispute. As a result, Aerojet and ASWC have entered into a Memorandum of Understanding (MOU) to settle this matter. Although the settlement agreement has not yet been finalized, the trial court has ruled that the MOU is binding and the trial date has been vacated. Any disputes arising in subsequent negotiations with respect to the settlement agreement are to be resolved by arbitration subject to the continuing jurisdiction of the trial court for enforcement or ancillary purposes.

     Aerojet’s 2003 agreement with the Sacramento County Water Agency (the County) in which Aerojet agreed to transfer all of its remediated groundwater to the County is anticipated to satisfy Aerojet’s water replacement obligations in eastern Sacramento County. Subject to various provisions of the County agreement, including approval under California Environmental Quality Act, the County will assume Aerojet’s responsibility for providing replacement water to ASWC and other impacted water purveyors up to the amount of remediated water Aerojet transfers to the County. Aerojet has also agreed to pay the County approximately $13 million over several years toward the cost of constructing a replacement water supply project. If the amount of Aerojet’s transferred water is in excess of the replacement water provided to the impacted water purveyors, the County has committed to make such water available for the development of Aerojet’s land in an amount equal to the excess.

     In October 2002, Aerojet, along with approximately 65 other individual and corporate defendants, was served with four civil suits filed in the U.S. District Court for the Central District of California that seek recovery of costs allegedly incurred in response to the contamination present at the South El Monte Operable Unit (SEMOU) of the San Gabriel Valley Superfund site. The cases are denominated as follows: The City of Monterey Park v. Aerojet-General Corporation, et al., (CV-02-5909 ABC (RCx)); San Gabriel Basin Water Quality Authority v. Aerojet-General Corporation, et al., (CV-02-4565 ABC (RCx)); San Gabriel Valley Water Company v. Aerojet-

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General Corporation, et al., (CV-02-6346 ABC (RCx)) and Southern California Water Company v. Aerojet-General Corporation, et al., (CV-02-6340 ABC (RCx)). The cases have been coordinated for ease of administration by the court. The plaintiffs’ claims are based upon allegations of discharges from a former site in the El Monte area, as more fully discussed below under the headings “San Gabriel Valley Basin, California — South El Monte Operable Unit.” Aerojet is vigorously defending the actions as its investigations do not identify a credible connection between the contaminants identified by the water entities in the SEMOU and those detected at Aerojet’s former facility located in El Monte, California, near the SEMOU (East Flair Drive site). Aerojet has notified its insurers of these claims. Discovery is ongoing and a trial is likely to be scheduled for early 2005. The EPA has retained the services of a professional mediator to assist the recipients of its Unilateral Administrative Order (UAO) for groundwater investigation and remediation to form a group and negotiate with the EPA and the water entities. The cost estimates to implement projects under the UAO prepared by EPA and the water entities range from $77 million to $127 million.

Wotus, et al. v. GenCorp Inc. and OMNOVA Solutions Inc.

     In October 2000, a group of hourly retirees filed a federal lawsuit against GenCorp Inc. (GenCorp) and OMNOVA Solutions Inc. (OMNOVA) disputing certain retiree medical benefits. Wotus, et al. v. GenCorp Inc., et al., U.S.D.C., N.D. OH (Cleveland, OH), Case No. 5:00-CV-2604. The retirees seek rescission of the then current Hourly Retiree Medical Plan established in the spring of 1994, and the reinstatement of the prior plan terms. The crux of the dispute relates to union and GenCorp negotiated modifications to retiree benefits that, in exchange for other consideration, now require retirees to make benefit contributions as a result of caps on company-paid retiree medical costs implemented in late 1993. A retiree’s failure to pay contributions results in a termination of benefits. We prevailed in similar litigation filed in 1995 involving salaried employees arising at our Wabash, Indiana location. Divine, et al. v. GenCorp Inc., U.S.D.C., N.D. IN (South Bend, IN), Case No. 96-CV-0394-AS.

     The plaintiffs consist of four hourly retirees from the Jeannette, Pennsylvania facility of OMNOVA, the company spun-off from GenCorp on October 1, 1999, two hourly retirees from OMNOVA’s former Newcomerstown, Ohio facility, and three hourly retirees from our former tire plants in Akron, Ohio; Mayfield, Kentucky; and Waco, Texas. The plaintiffs sought class certification seeking to represent all eligible hourly retirees formerly represented by the unions URW or USWA. The unions are not party to the suit and have agreed not to support such litigation pursuant to an agreement negotiated with us. In December 2003, the trial court denied plaintiffs’ motion for class action certification. The plaintiffs filed a motion seeking reconsideration, and that motion was denied. Plaintiffs petitioned the Sixth Circuit Court of Appeals (Court of Appeals) for the right to seek an interlocutory appeal of the trial court’s denial of class certification. We filed our opposition with the Court of Appeals on March 16, 2004.

     In addition, OMNOVA has filed a motion to be dismissed alleging that it is “not a party” to the agreements giving rise to the dispute. Plaintiffs have filed a brief in opposition to OMNOVA’s motion, and a decision by the trial court is pending. Extensive discovery has occurred in this case. We have given notice to our insurance carriers and are vigorously defending these claims. A trial in the Ohio federal court is not expected until sometime after the summer of 2005.

     OMNOVA had requested defense and indemnification from us regarding this matter. We denied this request and the party-defendants engaged in arbitration as required pursuant to the 1999

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GenCorp-OMNOVA spin-off agreements. On May 26, 2004, the arbitrator issued his decision holding that we are required to defend and indemnify OMNOVA in the Wotus matter. As currently written, the arbitrator’s ruling could be read to also cover the Baumgardner case discussed below. However, because we believe that the arbitrator’s ruling was overbroad and exceeded the scope of the arbitration, we intend to seek clarification, and possible modification, of the ruling in Ohio state court.

     As a result of the denial of class certification in the Wotus case and pending the decision on the interlocutory appeal with the Court of Appeals, an additional 238 individuals filed a motion to intervene in the Wotus case. The trial court stayed all proceedings in the Wotus case, including ruling on the motion to intervene, pending the decision of the Court of Appeals regarding whether to accept the plaintiffs’ interlocutory appeal.

     Baumgardner et al. v. GenCorp Inc. and OMNOVA Solutions Inc.

     On or about July 8, 2004, the 238 individuals who are seeking to intervene in the Wotus matter filed a separate lawsuit against GenCorp and OMNOVA, also in the U.S. District Court for the Northern District of Ohio, seeking the same claims and relief (other than class certification) as in the Wotus matter. Baumgardner, et al. v. GenCorp Inc. et al., U.S.D.C., N.D. OH (Cleveland, OH), Case No. 1:04 CV 1278. If (i) the Wotus plaintiffs are successful in obtaining an interlocutory appeal and if the Court of Appeals overturns the trial court and orders that a class be certified, or (ii) the Wotus trial court allows the 238 Baumgardner plaintiffs to intervene in the Wotus case, the Baumgardner plaintiffs have indicated that they would likely voluntarily dismiss the lawsuit without prejudice. We have not yet responded to the Baumgardner claims but we intend to vigorously defend against such claims.

GenCorp Inc. v. Olin Corporation

     In August 1991, Olin Corporation (Olin) advised us that under a 1962 manufacturing agreement with Olin (the 1962 Agreement), it believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million. The costs are associated with a former Olin manufacturing facility and its waste disposal sites in Ashtabula County, Ohio. In 1993, we sought a declaratory judgment in federal court (the Ohio Court) that we are not responsible for such environmental remediation costs. GenCorp Inc. v. Olin Corporation, Case No. 5:93CV2269, U.S. District Court, N.D. Ohio. Olin counterclaimed seeking a judgment that we are liable for a share of remediation costs. We argued that we are not derivatively or directly liable as an arranger for disposal of waste at the “Big D Campground” landfill (Big D site), both as a matter of fact and law. As a defense to Olin’s counterclaim, we asserted that under the terms of the 1962 Agreement, Olin had a contractual obligation to insure against environmental and other risks and that its failure to protect such insurance payments under these policies precluded Olin from recovery against us for these remediation costs. Further, we claim that any failure on Olin’s part to comply with the terms of such insurance policies would result in our being entitled to breach of contract remedies resulting in a reduction in any CERCLA liability amounts determined to be owed to Olin that would have otherwise been recovered from Olin’s insurance carriers (the Reduction Claims).

     In 1999, the Ohio Court rendered an interim decision on CERCLA liability. The Ohio Court found GenCorp 30 percent liable and Olin 70 percent liable for remediation costs at the Big D site. The Ohio Court also found GenCorp 40 percent liable and Olin 60 percent liable for remediation

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costs, including costs for off-site disposal (other than the Big D site) and costs attributable to contamination at the Olin TDI facility, a plant built and operated by Olin on GenCorp property near the Big D site. However, the trial court did not rule on our Reduction Claims and determined it would hold these claims in abeyance.

     In a related case, on August 27, 2002, the U.S. District Court for the Southern District of New York (the NY Court) ruled that Olin failed to protect its right to payments under its insurance policies for the Big D site. The NY Court based its ruling on the fact that Olin had failed to timely notify its insurance carriers of its claims. Given Olin’s contractual obligations and the NY Court’s finding that Olin failed to give proper notice of a claim under these insurance policies, management could not then, or at this time, estimate the possible amount of liability arising from this case, if any.

     Olin appealed the NY Court’s ruling to the Second Circuit Court of Appeals. In November 2003, the Second Circuit Court of Appeals vacated the NY Court’s decision with respect to Olin’s excess insurance carriers. While the appeals court upheld the dismissal as to the primary carriers, it held the trial court failed to make a record sufficient to dismiss the excess carriers. Thus, the court returned the case to the NY Court for further proceedings holding that the decision could not be upheld on the basis of the facts as outlined in the NY Court’s decision. On further review, the NY Court may still decide that Olin’s notice to the excess insurance carriers remains untimely or could decide it was timely. If the NY Court decides Olin’s notice was untimely, the Ohio Court could rule in GenCorp Inc. v. Olin Corporation that Olin’s late notice constituted a breach of its obligation under the 1962 Agreement to protect the insurance; or it could conclude that Olin’s conduct does not support our Reduction Claims and thus does not reduce our liability. If the Ohio Court rules that Olin’s late notice is a breach of the 1962 Agreement, then it must determine the damages suffered by us as a result of the breach. We have argued that the proper measure of damages is the coverage limits of the policies that Olin forfeited — an amount in this case that is more than sufficient to cover our entire liability.

     Nonetheless, on November 21, 2002, the Ohio Court issued a memorandum opinion and judgment entering “final” judgment in favor of Olin in the amount of approximately $19 million plus prejudgment interest in the amount of approximately $10 million. At that time, the Ohio Court did not decide our Reduction Claims against Olin. The Ohio Court held that our Reduction Claims “are held in abeyance pending the resolution of [Olin’s] appeal in the New York insurance litigation.”

     On January 22, 2003, the Ohio Court issued a judgment order stating the case was “terminated” on the Ohio Court’s docket. However, in its memorandum opinion and order of the same date, the Ohio Court stated “[w]hether there was an insurable event upon which Olin would have been entitled to recovery had it provided its insurers with timely notice... and... whether GenCorp is entitled to credit based upon Olin’s omission which foreclosed insurance recovery for Big D, remain unresolved.” Management believes that a recovery on our Reduction Claims could range from a nominal amount to an amount sufficient to reduce the judgment against us in its entirety.

     We have appealed our CERCLA contribution liability to the Sixth Circuit Court of Appeals (the Court of Appeals). GenCorp Inc. v. Olin Corporation, Docket Nos. 03-3019; 03-3211, United States Court of Appeals for the Sixth Circuit. We believe that we are not directly or indirectly liable as an arranger for Olin’s waste disposal at the Big D site and that we did not either actively control Olin’s waste disposal choices or operate the plant on a day-to-day basis. The Court of Appeals

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heard oral arguments on June 11, 2004. A decision is not expected until late 2004 or 2005. Management believes it will prevail on appeal.

     Our Reduction Claims portion of the case is on hold pending final resolution of the NY Court’s determination as to whether Olin’s notice to its insurance carriers was or was not timely. Irrespective of the outcome of its appeal, we believe we have contractual protection against Olin’s claims by virtue of Olin’s obligations to procure and protect insurance. The Ohio Court had previously stated that pursuant to the terms of the 1962 Agreement, it was Olin’s contractual obligation to obtain insurance coverage and the evidence adduced during the litigation showed that Olin had in place insurance coverage during the period in question in the amount of $40 million to $50 million.

     In summary, while the Ohio Court has found us liable to Olin for a CERCLA contribution payment, we have concluded it is not appropriate to accrue any additional amount related to that finding because: (a) we previously accrued the entire amount of our estimated potential liability for contamination at the Olin TDI facility and related offsite contamination, except for disposal at the Big D site; (b) we believe we will prevail on appeal on the basis that we are not derivatively or directly liable as an arranger for disposal at the Big D site, both as a matter of fact and law; and (c) irrespective of whether, upon exhausting all avenues of appeal, there is a finding of CERCLA liability, we believe that: (i) if Olin prevails in its appeal of the NY Court ruling, we will ultimately benefit from available insurance proceeds and may make no payment to Olin; or (ii) if Olin fails in its appeal, that Olin’s breach of its contractual obligations to provide insurance will result in a reduction in, or elimination of, some or all of such liability. In any event, the possible amount of additional liability arising from this case or any reduction in our liability, if any, cannot be established at this time.

Vinyl Chloride Toxic Tort Cases

     Between the early 1950s and 1985, we produced polyvinyl chloride (PVC) resin at our former Ashtabula, Ohio facility. PVC is the most common form of plastic currently on the market. A building block compound of PVC is vinyl chloride (VC), now listed as a known carcinogen by several governmental agencies. The Occupational Safety and Health Administration (OSHA) has strictly regulated workplace exposure to VC since 1974.

     Since the mid-1990s, we have been named in 38 toxic tort cases involving alleged exposure to VC. With the exception of one case brought by the family of a former Ashtabula employee, we are alleged to be a “supplier/manufacturer” of PVC and/or a civil co-conspirator with other VC and PVC manufacturers. Plaintiffs generally allege that we suppressed information about the carcinogenic risk of VC to industry workers, and placed VC or PVC into commerce without sufficient warnings. Of these 38 cases, 18 have been settled or dismissed on terms favorable to us, including the case where we were the employer and the cases that allege VC exposure through various aerosol consumer products. In these “aerosol” cases, it was alleged that VC had been used as an aerosol propellant during the 1960s. Defendants in these cases include numerous consumer product manufacturers and more than 30 chemical manufacturers. We used VC internally, but never supplied VC for aerosol or any other use.

     The 20 pending cases involve employees at VC or PVC facilities that had no connection to us. One of the pending cases is a class action seeking a medical monitoring program for former

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employees at a PVC facility in New Jersey. The complaints in each of these cases assert that our involvement in the alleged conspiracy stems from our membership in trade associations.

     Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against us, we are unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no estimate of future liability has been accrued for such contingencies. We are vigorously defending against all claims in these cases.

Asbestos Litigation

     Over the years, we and our subsidiary Aerojet have from time to time been named as defendants in lawsuits alleging personal injury or death due to exposure to asbestos in building materials or in manufacturing operations. The majority have been filed in Madison County, Illinois and San Francisco, California. Since 1998, more than 80 of these asbestos lawsuits have been resolved, with the majority being dismissed and many being settled for less than $0.1 million each. As of May 31, 2004, there were 38 asbestos cases pending, including the Goede case described below.

     In November 2002, a jury verdict against Aerojet in the amount of approximately $5 million in the Circuit Court of the City of St. Louis, Missouri, led to a judgment of approximately $2 million after setoff based on plaintiffs’ settlements with other defendants, which we have accrued. Goede et al. v. A. W. Chesterton Inc. et al., Case No. 012-9428, Circuit Court, City of St. Louis, MO. The $3 million setoff was based on plaintiffs’ settlements with other defendants. Post-trial motions filed by Aerojet and the plaintiffs were denied by the trial court. Aerojet appealed the decision to the Missouri Court of Appeals, Eastern District (the Appellate Court) and asked the Appellate Court to vacate the judgment and order a new trial based on, among other things, the trial court’s actions during trial that denied Aerojet the opportunity to introduce testimony from certain witnesses and to introduce certain evidence at trial, and based on the trial court’s application of Missouri law rather than California law. The appellate court heard oral arguments on December 9, 2003. In an opinion dated May 11, 2004, the Appellate Court denied Aerojet’s appeal and affirmed the trial court’s opinion. Aerojet has filed with the Appellate Court a motion for a rehearing and a petition to transfer to the Supreme Court of Missouri. A ruling on that motion is expected later this year.

     Given the lack of any significant consistency to claims (i.e., as to product, operational site, or other relevant assertions) filed against us and our subsidiaries, we are unable to make a reasonable estimate of the future costs of pending claims or unasserted claims. Accordingly, no estimate of future liability has been accrued for such contingencies.

Other Legal Matters

     We are subject to other legal actions, governmental investigations and proceedings relating to a wide range of matters in addition to those discussed above. While there can be no certainty regarding the outcome of any litigation, investigation or proceeding, in the opinion of our management, after reviewing the information that is currently available with respect to such matters, any liability that may ultimately be incurred with respect to these matters is not expected to materially affect our consolidated financial condition. The effect of the resolution of these matters on our financial condition and results of operations, our liquidity and available financial resources cannot be predicted because any such effect depends on both future results of operations, liquidity position and available financial resources, and the amount and timing of the resolution of such

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matters. In addition, it is possible that amounts could be significant in any particular reporting period.

b. Environmental Matters

Sacramento, California

     In 1989, a federal district court in California approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study (RI/FS) of a portion of Aerojet’s Sacramento site. The Decree required Aerojet to prepare a RI/FS report on specific environmental conditions present at the site and alternatives available to remediate such conditions. Aerojet also is required to pay for certain governmental oversight costs associated with Decree compliance. Beginning in the mid-1990s, the State of California expanded its surveillance of perchlorate and nitrosodimethylamine (NDMA). Under the RI/FS, traces of these chemicals were detected using new testing protocols in public water supply wells near Aerojet’s Sacramento site.

     Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the Sacramento site. Aerojet has preliminarily identified the technologies that will likely be used to remediate the site and has estimated costs using generic remedial costs from Superfund remediation databases. Aerojet will continue to conduct feasibility studies to refine technical approaches and costs to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. Aerojet is also addressing groundwater contamination both on and off its facilities through the development of operable unit feasibility studies. On August 19, 2002, the EPA issued an administrative order requiring Aerojet to implement the EPA approved remedial action for the Western Groundwater Operable Unit. A nearly identical order was issued by the California Regional Water Quality Control Board, Central Valley (Central Valley RWQCB). Aerojet has discovered a zone of previously unidentified NDMA contaminated groundwater located to the north and west of the Western Groundwater Operable Unit boundaries. The source and extent of the contamination is under investigation. This groundwater zone will most likely be incorporated into the Western Groundwater Operable Unit remediation plan. Aerojet believes that no municipal drinking water wells are threatened by this finding. A discussion of Aerojet’s efforts to estimate these costs is contained below under the heading “Environmental Reserves and Estimated Recoveries.”

     On April 15, 2002, the United States District Court approved and entered a Stipulation and Order Modifying the Partial Consent Decree (Stipulation and Order). Among other things, the Stipulation and Order removed approximately 2,600 acres of Aerojet’s property from the requirements of the Decree and from the Superfund site designation, enabling us to put the 2,600 acres to more productive use. The Stipulation and Order (i) requires us to provide a guarantee of up to $75 million (in addition to a prior $20 million guarantee) to assure that remediation activities at the Sacramento site are fully funded; (ii) requires Aerojet to provide a short-term and long-term plan to replace lost water supplies; and (iii) divides the Superfund site into “Operable Units” to allow Aerojet and the regulatory agencies to more efficiently address and restore priority areas. For the first three years of the Stipulation and Order, the new guarantee is partially offset by financial assurances provided in conjunction with the Baldwin Park Operable Unit (BPOU) agreement (discussed below). Obligations under the $75 million aggregate guarantee are limited to $10 million

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in any year. Both the $75 million aggregate guarantee and the $10 million annual limitation are subject to adjustment annually for inflation.

     On August 27, 2003, Aerojet entered into an agreement with the Sacramento County Water Agency (the County) whereby it agreed to transfer all of its remediated groundwater to the County. Subject to various provisions of the County agreement including approval under California Environmental Quality Act, the County will assume responsibility for providing replacement water to ASWC and other impacted water purveyors up to the amount of remediated water Aerojet transfers to the County. Aerojet has also agreed to pay to the County approximately $13 million over several years toward the cost of constructing a replacement water supply project. If the amount of Aerojet’s transferred water is in excess of the replacement water provided to the impacted water purveyors, the County has committed to make water available for the development of Aerojet’s land in an amount equal to the excess. In December 2003 and January 2004, Aerojet entered into certain agreements with ASWC which, when combined with Aerojet’s agreement with the County are anticipated to satisfy Aerojet’s obligations under EPA and RWQCB Orders to provide replacement water in eastern Sacramento County.

     Aerojet leased the southern portion of the Sacramento site to Douglas Aircraft for rocket assembly and testing from 1957 to 1961 and sold approximately 3,800 acres, including the formerly leased portion, to Douglas Aircraft in 1961. Aerojet reacquired the property known as IRCTS from MDC, the successor to Douglas Aircraft and now an operating unit of The Boeing Company, in 1984. Both MDC and Aerojet were ordered to investigate and remediate environmental contamination by certain orders issued in 1991 and 1994 by the California Department of Toxic Substance Control (DTSC) and a similar 1997 order of the Central Valley RWQCB.

     The California Department of Toxic Substances, through the Attorney General’s Office, recently proposed certain penalties against us relating to its findings in connection with audits for 2000, 2002 and 2003 at our Sacramento, California facility. After discussing such matters with the Attorney General’s Office, we entered into a Stipulation for Entry of Final Judgment with the DTSC and agreed to pay penalties of approximately $1 million.

     In March 2004, the California office of Environmental Health Hazard Assessment (OEHHA) established a perchlorate Public Health Goal at 6 parts per billion (ppb). The California Department of Health Services immediately established an Action Level for perchlorate at 6 ppb. The previous Action Level was 4 ppb. California may change the Public Health Goal and Action Level after the federal National academy of Sciences completes its reference dose assessment, which is anticipated to occur in the fall of 2004. Aerojet is evaluating the impact, if any, of the new standards on its remediation efforts.

San Gabriel Valley Basin, California

Baldwin Park Operable Unit

     Aerojet, through its former Azusa, California site, was named by the EPA as a PRP in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). A Record of Decision (ROD) regarding regional groundwater remediation was issued and Aerojet and 18 other PRPs received Special Notice Letters requiring groundwater remediation. All of the Special Notice Letter PRPs are alleged to have been a source of volatile organic compounds

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(VOCs). Aerojet’s investigation demonstrated that the groundwater contamination by VOCs is principally upgradient of Aerojet’s former property and that lower concentrations of VOC contaminants are present in the soils of Aerojet’s former property. The EPA contends that of the 19 PRPs identified by the EPA, Aerojet is one of the four largest sources of VOC groundwater contamination at the BPOU. Aerojet contests the EPA’s position regarding the source of contamination and the number of responsible PRPs.

     In May 1997, as a result of the development of more sensitive measuring methods, perchlorate was detected in wells in the BPOU. NDMA was also detected using newly developed measuring methods. Suspected sources of perchlorate include Aerojet’s solid rocket development and manufacturing activities in the 1940s and 1950s, military ordnance produced by another company at a facility adjacent to the Aerojet facilities in the 1940’s, the burning of confiscated fireworks by local fire departments, and fertilizer used in agriculture. NDMA is a suspected byproduct of Aerojet’s liquid rocket fuel activities in the same time period. NDMA is also a contaminant in cutting oils used by many businesses and is found in many foods. In addition, a chemical known as 1,4 dioxane is present and is being treated at the BPOU. Aerojet may be a minor contributor of this chemical.

     On November 23, 1999, the California Regional Water Quality Control Board, Los Angeles Region (Los Angeles RWQCB) issued orders to Aerojet and other PRPs to conduct groundwater investigations on their respective sites. As a result, the Los Angeles RWQCB ordered Aerojet to conduct limited soil gas extraction, which Aerojet is implementing, and to evaluate remedies for perchlorate contamination in soils.

     On June 30, 2000, the EPA issued a Unilateral Administrative Order (UAO) ordering the PRPs to implement a remedy consistent with the ROD, but still encouraging the PRPs to attempt to negotiate an agreement with the local purveyors. The PRPs agreed to comply.

     Following extended negotiations, Aerojet, along with seven other PRPs (the Cooperating Respondents) signed a Project Agreement in late March 2002 with the Water Quality Authority, Watermaster, Valley County Water District, La Puente Valley Water District, San Gabriel Valley Water Company, Suburban Water Systems and California Domestic Water Company (the Water Entities). The Project Agreement became effective on May 9, 2002.

     The basic structure of the Project Agreement is for the Cooperating Respondents to fund and financially assure (in the form of cash or letters of credit) the cost of certain treatment and water distribution facilities to be owned and operated by the Water Entities. Actual funding would be provided by funds placed in escrow at the start of each three-month period to cover anticipated costs for the succeeding quarter.

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     The Cooperating Respondents will also fund operation and maintenance of treatment facilities (not including ordinary operating expenses of the Water Entities, certain costs for replacement water that may be incurred by such Water Entities and related administrative costs, (O&M Costs)). The Cooperating Respondents are required to maintain sufficient financial assurance to cover the estimated O&M Costs for two years. Actual payments for O&M Costs would be made at the start of each three-month period to cover anticipated costs for the succeeding six-month period. When fully constructed, six treatment facilities will be treating in excess of 25,000 gallons per minute for the purposes of ROD implementation and providing a potable water supply. The Project Agreement has a term of 15 years. The Project Agreement also settles the past environmental claims of the Water Entities.

     Aerojet and the other Cooperating Respondents have entered into an interim allocation agreement that establishes the interim payment obligations of Aerojet and the remaining Cooperating Respondents for the costs of the Project Agreement. Under the interim allocation, Aerojet is responsible for approximately two-thirds of all project costs, pending completion of any allocation proceeding. All project costs are subject to reallocation among the Cooperating Respondents.

     A significant amount of public funding is available to offset project costs. To date, Congress has appropriated approximately $47 million (so called Title 16 or Dreier funds), which is potentially available for payment of project costs. All such funding will require Water Quality Authority (WQA) action to allocate funds to the project, which the WQA is currently considering. Approximately $28 million of the funding has been allocated to the project and additional funds may follow in later years.

     As part of Aerojet’s sale of its Electronics and Information Systems (EIS) business to Northrop Grumman Corporation (Northrop) in October 2001, the EPA approved a Prospective Purchaser Agreement with Northrop to absolve it of pre-closing liability for contamination caused by the Azusa facility, which liability will remain with Aerojet. As part of that agreement, Aerojet agreed to put $40 million into an irrevocable escrow for the BPOU project to fund Aerojet’s obligations under the Project Agreement. In addition, GenCorp agreed to provide a $25 million guarantee of Aerojet’s obligations under the Project Agreement. During the first three years of the Project Agreement, the GenCorp guarantee is partially offset by other financial assurances provided in conjunction with the Project Agreement.

     Also as part of the EIS sale to Northrop, Aerojet paid the EPA $9 million which was an amount to be offset against Aerojet’s share of the EPA’s total claimed past costs (the EPA now claims total past costs are approximately $28 million). A very substantial share of the EPA’s past costs relate to the period prior to 1997 when the sole contamination being considered involved VOCs. Aerojet believes that it is responsible for less than 10 percent of these costs. Unresolved at this time is the issue of California’s past costs which were last estimated at approximately $4 million.

     Aerojet intends to continue to defend itself vigorously to assure that it is appropriately treated with other PRPs and that costs of any remediation are properly allocated among all PRPs. Aerojet has notified its insurers and is pursuing claims under its insurance policies.

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South El Monte Operable Unit (SEMOU)

     On December 21, 2000, Aerojet received an order from the Los Angeles Regional Water Quarter Control Board (RWQCB) requiring a work plan for investigation of Aerojet’s former El Monte facility. On January 22, 2001, Aerojet filed an appeal of the order with the Los Angeles RWQCB asserting selective enforcement. The appeal had been held in abeyance pending negotiations with the Los Angeles RWQCB, but due to a two-year limitation on the abeyance period, the appeal was dismissed without prejudice. In March 2001, Aerojet submitted a limited work plan to the Los Angeles RWQCB. On February 21, 2001, Aerojet received a General Notice Letter from the EPA Region IX naming Aerojet as a PRP to the SEMOU of the San Gabriel Valley Superfund site.

     Aerojet continues to negotiate with the Los Angeles RWQCB for a limited investigation of this former facility. The RWQCB recently agreed to allow Aerojet to conduct less than the RWQCB’s demanded scope of work in order to take advantage of site access during building renovations at the site. In the event the RWQCB demands further site investigation, Aerojet may re-file its appeal.

     On April 1, 2002, Aerojet received a special notice letter from the EPA (dated March 28, 2002) that requested Aerojet to enter into negotiations with the EPA regarding the performance of a remedial design and remedial action for the SEMOU. In light of this letter, Aerojet performed a limited site investigation of the East Flair Drive Site. The data collected and summarized in the Field Investigation Report showed that chemicals including TCE and PCE were present in the soil and groundwater at and near the East Flair Drive Site. The Field Investigation Report also showed that the hydraulic gradient at the East Flair Drive Site is oriented toward the northeast. This finding indicates that the site is not a likely source of contamination at the SEMOU, as the groundwater flow at the site is away from the SEMOU and not toward it. Given the data indicating that the East Flair Drive Site is not a source of the contamination at the SEMOU, Aerojet requested that the EPA reconsider its issuance of the SEMOU special notice letter.

     On August 29, 2003, the EPA issued a Unilateral Administrative Order (UAO) against Aerojet and approximately 40 other parties requiring them to conduct the remedial design and remedial action in the SEMOU. The impact of the UAO on the recipients is not clear as much of the remedy is already being implemented by the water entities. The cost estimate to implement projects under the UAO prepared by the EPA and the water entities is approximately $90 million.

     The UAO requires the implementation of the Interim Record of Decision (IROD). The EPA extended the deadline for compliance with the UAO to allow the PRPs to resolve their liabilities with respect to SEMOU. In return, the EPA required the submission of a Good Faith Offer to implement the IROD. We have been working closely with the other PRPs to resolve this matter and submitted a Good Faith Offer to the EPA that was rejected on May 20, 2004. The EPA alleges that we, along with the other UAO recipients, have failed to transmit a Good Faith Offer in compliance with our obligations under the UAO. We are working diligently with the EPA and the other PRPs to resolve this matter and insure compliance with the UAO.

     Aerojet has been served with civil suits filed in the U.S. District Court for the Central District of California by four public and private water companies. The suits seek recovery of costs allegedly incurred in response to the contamination present in the SEMOU. Plaintiffs allege that groundwater in the SEMOU is contaminated with chlorinated solvents and ammonium perchlorate that were released into the environment by Aerojet and other parties causing plaintiffs to incur unspecified

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response costs and other damages. Aerojet’s investigations to date have not identified a credible connection between the contaminants identified by the water entities in the SEMOU and those detected at Aerojet’s former facility located at 9100 & 9200 East Flair Drive, El Monte, California, which lies in or near the SEMOU.

     Aerojet was successful in its efforts to eliminate several of the claims initially raised by the water entities. However, other claims remain. Discovery is ongoing.

     Aerojet recently filed third-party complaints against several water entities on the basis that they introduced perchlorate-containing Colorado River water to the basin. Responsive pleadings from the water entities have not yet been filed.

Other Sites

     We have studied remediation alternatives for our closed Lawrence, Massachusetts facility, which was primarily contaminated with PCBs, and have begun site remediation and off-site disposal of debris. As part of these remediation efforts, we are working with local, state and federal officials and regulatory agencies to return the property to a beneficial use. The time frame for the remediation and redevelopment project is currently estimated to range from two to three years.

     We are also currently involved, together with other companies, in approximately 27 other Superfund and non-Superfund remediation sites. In many instances, our liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and our involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in our experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. In our previous experience, our allocated share has frequently been minimal, and in many instances, has been less than one percent. Also, we are seeking recovery of our costs from our insurers.

Environmental Reserves and Estimated Recoveries

Reserves

     We continually review estimated future remediation costs that we could incur, which take into consideration the investigative work and analysis of our engineers and the advice of our legal staff regarding the status and anticipated results of various administrative and legal proceedings. In most cases only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimated amount is used when determinable and the minimum is used when no single amount is more probable. The timing of payment for estimated future environmental costs is subject to variability and depends on the timing of regulatory approvals for planned remedies and the construction and completion of the remedies.

     During 2002, we completed a review of estimated future environmental costs which incorporated, but was not limited to the following: (i) status of work completed since the last estimate; (ii) expected cost savings related to the substitution of new remediation technology and to information not available previously; (iii) obligations for reimbursement of regulatory agency service costs; (iv) updated BPOU cost estimates; (v) costs of complying with the Western Groundwater Administrative Order, including replacement water and remediation upgrades;

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(vi) estimated costs related to IRCTS and Aerojet’s Sacramento site; (vii) new information related to the extent and location of previously identified contamination; and (viii) additional construction contingencies. This re-examination of estimated future remediation costs resulted in a net increase in our environmental reserves of $107 million.

     The effect of the final resolution of environmental matters and our obligations for environmental remediation and compliance cannot be accurately predicted due to the uncertainty concerning both the amount and timing of future expenditures. We believe, on the basis of presently available information, that the resolution of environmental matters and our obligations for environmental remediation and compliance will not have a material adverse effect on our results of operations, liquidity or financial condition. We will continue our efforts to mitigate past and future costs through pursuit of claims for recoveries form insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.

     A summary of our environmental reserve activity is shown below (dollars in millions):

     As of May 31, 2004, the Aerojet reserves include $170 million for the Sacramento site and $100 million for BPOU. The reserves for the other sites include $8 million for the Lawrence Massachusetts site.

Estimated Recoveries

     On January 12, 1999, Aerojet and the U.S. government implemented the October 1997 Agreement in Principle (Global Settlement) resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. The Global Settlement covered all environmental contamination at the Sacramento and Azusa sites. Under the Global Settlement, Aerojet and the U.S. government resolved disagreements about an appropriate cost-sharing ratio. The Global Settlement provides that the cost-sharing ratio will continue for a number of years.

     Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, Aerojet can recover up to 88 percent of its environmental remediation costs for these sites through the establishment of prices for Aerojet’s products and services sold to the U.S. government. Allowable environmental costs are charged to these contracts as the costs are incurred. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward-pricing arrangements, the ability to continue recovering these costs depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business.

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     In conjunction with the sale of EIS, Aerojet entered into an agreement with Northrop whereby Aerojet will be reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement. Amounts reimbursed are subject to annual limitations, with excess amounts carrying over to subsequent periods, the total of which will not exceed $190 million over the term of the agreement, which ends in 2028. As of May 31, 2004, $163 million in potential future reimbursements was available over the remaining life of the agreement.

     In conjunction with the review of our environmental reserves discussed above, we revised our estimate of costs that will be recovered under the Global Settlement based on business expected to be conducted under contracts with the U.S. government and its agencies in the future. The adjustments to the environmental remediation reserves and estimated future cost recoveries did not affect operating results in fiscal 2002 as the impact of increases to the reserves of $107 million was offset by increased estimated future recoveries.

     As part of the acquisition of the ARC propulsion business, Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20 million of costs (Pre-Close Environmental Costs) associated with environmental issues that arose prior to Aerojet’s acquisition of the ARC propulsion business. Pursuant to a separate agreement with the U.S. government which was entered into prior to closing of the ARC acquisition, these Pre-Close Environmental Costs will be treated as allowable overhead costs combined with Aerojet’s environmental costs under the Global Settlement, and will be recovered through the establishment of prices for Aerojet’s products and services sold to the U.S. government. These costs will be allocated to all Aerojet operations (including the previously excluded Redmond, Washington operations) beginning in 2005.

     As a result of the ARC acquisition, Aerojet has signed a Memorandum of Understanding with the U.S. government agreeing to key assumptions and conditions that will preserve the original methodology to be used in recalculating the percentage split between Aerojet and Northrop. Aerojet presented a proposal to the U.S. government based on the Memorandum of Understanding and expects to complete an agreement in the near term.

11. Arrangements with Off-Balance Sheet Risk

     As of May 31, 2004, obligations required to be disclosed in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others consisted of:

	—		$56 million in outstanding commercial letters of credit expiring in 2004 and 2005 securing obligations for environmental remediation, insurance coverage and litigation.
	—		Up to $120 million aggregate in guarantees by us of Aerojet’s obligations to government agencies for environmental remediation activities, subject to partial offsets for other financial assurances provided in conjunction with these obligations.
	—		Up to $28 million in guarantees of bank loans, accounts receivable and lines of credit for our discontinued operations.
	—		Guarantees, jointly and severally, by our material domestic subsidiaries, including certain

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subsidiaries classified as discontinued operations, of our obligations under our bank credit agreements and our $150 million 9.5% Notes.

12. Shareholders’ Equity

     On May 12, 2004, our Board of Directors declared a quarterly dividend of three cents per share on our common stock. The dividends were paid on May 28, 2004.

13. Other Comprehensive Income (Loss), Net of Income Taxes

     Comprehensive income (loss) encompasses net income (loss) and other comprehensive income (loss) items, which includes all other non-owner transactions and events that change shareholders’ equity. Our other comprehensive income (loss) includes the effects of foreign currency translation adjustments and changes in the fair value of certain derivative financial instruments. The effects of foreign currency translation adjustments are primarily associated with our discontinued operations.

     The components of other comprehensive income and the related income tax effects are presented in the following table (dollars in millions):

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14. Employee Pension and Postretirement Plans

     We provide substantially all employees in North America with pension benefits and provide certain healthcare and life insurance benefits (postretirement benefits) to most U.S. retired employees with varied coverage by employee groups. Aerojet employees hired after January 1, 1997 are not eligible for postretirement healthcare and life insurance benefits. All other employees hired after January 1, 1995 are not eligible for postretirement healthcare benefits.

     Our U.S. pension plans remain overfunded and we do not expect to make any net cash contributions during the second half of 2004.

     The components of periodic cost for pension benefits and other postretirement benefits for the three and six months ended May 31, 2004 and 2003 were comprised of (dollars in millions):

     During the three and six months ended May 31, 2004, discontinued operations incurred $3 million and $7 million, respectively, relating to pension and postretirement benefit expense. Additionally, during the three and six months ended May 31, 2003, discontinued operations incurred $1 million and $3 million, respectively, relating to pension and postretirement benefit expense.

15. Discontinued Operations

     During the second quarter of 2004, we announced plans to sell the GDX Automotive business. This decision was a result of declining volumes and continued challenges in this market environment including increased material costs, high development and start-up costs, anticipated working capital requirements as well as adverse customer pricing pressures. In accordance with our plan to sell the GDX Automotive business, we have classified our GDX Automotive operating segment as discontinued operations. For operating segment reporting, GDX Automotive was previously reported as a separate operating segment.

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     The GDX Automotive operating segment net assets were adjusted to management’s estimate of proceeds to be received on disposition less costs to sell. The resulting loss recognized on this adjustment of $261 million has been recorded as a component of Income (Loss) From Discontinued Operations in the quarter ended May 31, 2004.

     In accordance with Emerging Issues Task Force (EITF) 87-24, Allocation of Interest to Discontinued Operations, we allocated interest to discontinued operations based upon interest on debt that would be required to be repaid using estimated proceeds to be received from the anticipated sale of GDX Automotive. This resulted in an interest allocation of approximately $1 million and $2 million, respectively, for the three and six months ended May 31, 2004 and 2003.

     Summarized financial information for the GDX Automotive operations (discontinued operations) is set forth below (dollars in millions):

     The components of assets and liabilities of discontinued operations in the consolidated balance sheets are as follows (dollars in millions):

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16. Operating Segments and Related Disclosures

     Our continuing operations are organized into three segments based on different products and customer bases: Aerospace and Defense, Fine Chemicals and Real Estate. See Note 1 for additional information related to our operating segments.

     During the second quarter of 2004, we classified our GDX Automotive operating segment as discontinued operations. See Note 15 for additional information about our discontinued operations.

     We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales less applicable costs, expenses and provisions for restructuring and unusual items relating to operations. Segment performance excludes corporate income and expenses, interest expense, income taxes, discontinued operations and minority interest.

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     Selected financial information for each reportable segment is as follows (dollars in millions):

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17. Condensed Consolidating Financial Information

     We are providing condensed consolidating financial information for our material domestic subsidiaries that have guaranteed the 9.50% Notes and for those subsidiaries that have not guaranteed the 9.50% Notes. These 100% owned subsidiary guarantors have, jointly and severally, fully and unconditionally guaranteed the 9.50% Notes. The subsidiary guarantees are senior subordinated obligations of each subsidiary guarantor and rank (i) prior in right of payment with all senior indebtedness, (ii) equal in right of payment with all senior subordinated indebtedness and (iii) senior in right of payment to all subordinated indebtedness, in each case, of that subsidiary guarantor. The subsidiary guarantees will also be effectively subordinated to any secured indebtedness of the subsidiary guarantor with respect to the assets securing that indebtedness. Absent both default and notice as specified in our Senior Credit Facilities and agreements governing our outstanding convertible notes and the 9.50% Notes, there are no restrictions on our ability to obtain funds from our subsidiary guarantors by dividend or loan. Certain subsidiary guarantors are included in discontinued operations and the guarantees will be released in accordance with the indenture upon completion of the sale of GDX Automotive (see Note 15).

     We have not presented separate financial and narrative information for each of the subsidiary guarantors because we believe that such financial and narrative information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees. Therefore, the following condensed consolidating financial information summarizes the financial position, and results of operations and cash flows for our guarantor and non-guarantor subsidiaries.

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Condensed Consolidating Statements of Income

Three Months Ended May 31, 2004 (dollars in millions):

Three Months Ended May 31, 2003 (dollars in millions):

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Six Months Ended May 31, 2004 (dollars in millions):

Six Months Ended May 31, 2003 (dollars in millions):