e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2010


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

For the transition period from to

Commission File Number: 001-08137

AMERICAN PACIFIC CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		59-6490478 (I.R.S. Employer Identification No.)

3883 Howard Hughes Parkway, Suite 700
Las Vegas, Nevada 89169

(Address of principal executive offices) (Zip Code)

(702) 735-2200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x

The number of shares of the registrant’s common stock outstanding as of July 30, 2010 was 7,543,091.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN PACIFIC CORPORATION

Condensed Consolidated Statements of Operations
(Unaudited, Dollars in Thousands, Except per Share Amounts)



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009


Revenues	$	37,247		$	31,490		$	130,706		$	133,554
Cost of Revenues		28,920			24,227			93,054			94,260

Gross Profit		8,327			7,263			37,652			39,294
Operating Expenses		11,946			10,915			35,697			33,295

Operating Income		(3,619	)		(3,652	)		1,955			5,999
Interest and Other Income (Expense), Net		(291	)		28			(559	)		70
Interest Expense		2,671			2,683			8,102			8,061

Loss before Income Tax		(6,581	)		(6,307	)		(6,706	)		(1,992	)
Income Tax Benefit		(2,008	)		(2,752	)		(1,809	)		(627	)

Net Loss	$	(4,573	)	$	(3,555	)	$	(4,897	)	$	(1,365	)



Loss per Share:
Basic	$	(0.61	)	$	(0.48	)	$	(0.65	)	$	(0.18	)
Diluted	$	(0.61	)	$	(0.48	)	$	(0.65	)	$	(0.18	)

Weighted Average Shares Outstanding:
Basic		7,491,000			7,483,000			7,489,000			7,482,000
Diluted		7,491,000			7,483,000			7,489,000			7,482,000

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands, Except per Share Amounts)



	June 30,			September 30,
	2010			2009

ASSETS
Current Assets:
Cash and Cash Equivalents	$	32,161		$	21,681
Accounts Receivable, Net		30,833			44,028
Inventories		35,825			36,356
Prepaid Expenses and Other Assets		1,917			1,811
Income Taxes Receivable		3,149			2,148
Deferred Income Taxes		6,139			6,317

Total Current Assets		110,024			112,341
Property, Plant and Equipment, Net		112,664			114,645
Intangible Assets, Net		1,865			3,553
Goodwill		2,631			3,144
Deferred Income Taxes		21,049			21,121
Other Assets		9,753			10,037

TOTAL ASSETS	$	257,986		$	264,841


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	9,647		$	7,444
Accrued Liabilities		4,638			5,295
Accrued Interest		3,938			1,650
Employee Related Liabilities		6,838			6,930
Income Taxes Payable		48			189
Deferred Revenues and Customer Deposits		7,305			6,911
Current Portion of Environmental Remediation Reserves		2,091			2,522
Current Portion of Long-Term Debt		65			151

Total Current Liabilities		34,570			31,092
Long-Term Debt		105,113			110,097
Environmental Remediation Reserves		23,071			24,168
Pension Obligations		28,925			27,720
Other Long-Term Liabilities		233			667

Total Liabilities		191,912			193,744

Commitments and Contingencies
Shareholders’ Equity
Preferred Stock - $1.00 par value; 3,000,000 authorized; none outstanding		-			-
Common Stock - $0.10 par value; 20,000,000 shares authorized, 7,543,091 and 7,504,591 issued		754			750
Capital in Excess of Par Value		72,965			72,322
Retained Earnings		5,100			9,997
Accumulated Other Comprehensive Loss		(12,745	)		(11,972	)

Total Shareholders’ Equity		66,074			71,097

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	257,986		$	264,841

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Statements of Cash Flows
(Unaudited, Dollars in Thousands)



	Nine Months Ended
	June 30,
	2010			2009

Cash Flows from Operating Activities:
Net Loss	$	(4,897	)	$	(1,365	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:
Depreciation and amortization		11,980			11,971
Non-cash interest expense		472			473
Share-based compensation		635			474
Deferred income taxes		136			(14	)
Loss on sale of assets		12			52
Changes in operating assets and liabilities:
Accounts receivable, net		12,917			2,284
Inventories		711			(4,847	)
Prepaid expenses and other current assets		(127	)		1,792
Accounts payable		756			(2,780	)
Income taxes		(1,125	)		(262	)
Accrued liabilities		(624	)		(1,034	)
Accrued interest		2,288			2,475
Employee related liabilities		(305	)		(1,298	)
Deferred revenues and customer deposits		539			3,567
Environmental remediation reserves		(1,528	)		(987	)
Pension obligations, net		1,451			859
Other		(280	)		(8	)

Net Cash Provided by Operating Activities		23,011			11,352


Cash Flows from Investing Activities:
Capital expenditures		(7,392	)		(6,312	)
Acquisition of business, net of cash acquired		-			(6,725	)
Other investing activities		10			-

Net Cash Used by Investing Activities		(7,382	)		(13,037	)


Cash Flows from Financing Activities:
Payments of long-term debt		(5,048	)		(272	)
Issuances of common stock, net		11			32

Net Cash Used by Financing Activities		(5,037	)		(240	)


Effect of Changes in Currency Exchange Rates on Cash		(112	)		-


Net Change in Cash and Cash Equivalents		10,480			(1,925	)
Cash and Cash Equivalents, Beginning of Period		21,681			26,893

Cash and Cash Equivalents, End of Period	$	32,161		$	24,968


Cash Paid (Received) For:
Interest	$	5,342		$	5,113
Income taxes		(501	)		(380	)

Non-Cash Investing and Financing Transactions:
Additions to Property, Plant and Equipment not yet paid		1,525			408
Capital Leases Originated		98			-

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited, Dollars in Thousands, Except per Share Amounts)

1.		INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES

		*Interim Basis of Presentation.* The accompanying condensed consolidated financial statements of American Pacific Corporation and its subsidiaries (collectively, the “Company”, “we”, “us”, or “our”) are unaudited, but in the opinion of management, include all adjustments, which are of a normal recurring nature, necessary to a fair statement of the results for the interim periods presented. These statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2009. The operating results for the three-month and nine-month periods ended June 30, 2010 and cash flows for the nine-month period ended June 30, 2010 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

		*Accounting Policies.* A description of our significant accounting policies is included in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2009.

		*Principles of Consolidation.* Our consolidated financial statements include the accounts of American Pacific Corporation and our wholly-owned subsidiaries. All intercompany accounts have been eliminated.

		Effective October 1, 2008, we acquired Marotta Holdings Limited (subsequently renamed Ampac ISP Holdings Limited) and its wholly-owned subsidiaries (collectively “AMPAC ISP Holdings”) for a cash purchase price, including direct expenses and net of cash acquired, of $6,725. AMPAC ISP Holdings was included in our consolidated financial statements beginning on October 1, 2008 and is a component of our Aerospace Equipment segment.

		*Fair Value Disclosure of Financial Instruments.* We estimate the fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term nature. We estimate the fair value of our fixed-rate long-term debt to be approximately $103,425 based on the trade date closest to June 30, 2010, which was June 29, 2010.

		*Depreciation and Amortization Expense.* Depreciation and amortization expense is classified as follows in our statements of operations:



	Three Months Ended				Nine Months Ended
	June 30,				June 30,
	2010		2009		2010		2009

Classified as cost of revenues
Depreciation	$	3,101	$	3,446	$	9,934	$	10,048
Classified as operating expenses
Depreciation		194		125		487		383
Amortization		509		530		1,559		1,540

Total	$	3,804	$	4,101	$	11,980	$	11,971

Bill and Hold Transactions. Some of our perchlorate and fine chemicals products customers have requested that we store materials purchased from us in our facilities (“Bill and Hold” arrangements). The sales value of inventory, subject to Bill and Hold arrangements, at our facilities was $19,612 and $25,882 as of June 30, 2010 and September 30, 2009, respectively.

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1.		INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

		*Recently Issued or Adopted Accounting Standards.* In September 2006, the Financial Accounting Standards Board (the “FASB”) issued a new standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and expands disclosures about fair value measurements. In February 2008, the FASB deferred this standard for one year as it applied to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests, and long-lived assets measured at fair value for impairment assessments. The standard applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. This standard was effective for us on October 1, 2008; however, we did not adopt all the provisions of the standard as the FASB delayed the effective date of its application to non-financial assets and liabilities. The remaining provisions became effective for us beginning October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

		In December 2007, the FASB issued a new standard that significantly changed the accounting for business combinations. Under the standard, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The standard also includes a substantial number of new disclosure requirements. The standard applies to us for business combinations with acquisition dates on or after October 1, 2009. We expect that the new standard will have an impact on our accounting for future business combinations, but the effect is dependent upon acquisitions at that time.

		In December 2007, the FASB issued a new standard that establishes revised accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the standard requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. The standard requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The standard also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The standard was effective for us beginning on October 1, 2009. We currently have no entities or arrangements that were affected by the adoption of this standard.

		In April 2008, the FASB issued a new standard which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The standard for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements must be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The standard was effective for us beginning on October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

		In December 2008, the FASB issued a new standard that provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures include disclosure of investment allocation decisions, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets, the effect of certain fair value measurements, and significant concentrations of risk within plan assets. The

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1.		INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)

		expanded disclosure requirements are effective for our fiscal year ending September 30, 2010. The adoption of this standard is not expected to have a material impact on our results of operations, financial position or cash flows.

		In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17, which provides guidance on defining a milestone under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. We are currently evaluating the impact of adopting this ASU, which is effective for us beginning on October 1, 2010.

2.		SHARE-BASED COMPENSATION

		We account for our share-based compensation arrangements under an accounting standard which requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair values of awards are recognized as additional compensation expense, which is classified as operating expenses, proportionately over the vesting period of the awards.

		Our share-based compensation arrangements are designed to advance the long-term interests of the Company, including by attracting and retaining employees and directors and aligning their interests with those of our stockholders. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under our equity incentive plans. Depending on the form of the share-based award, new shares of our common stock may be issued upon grant, option exercise or vesting of the award. We maintain three share based plans, each as discussed below.

		The American Pacific Corporation Amended and Restated 2001 Stock Option Plan (the “2001 Plan”) permits the granting of stock options to employees, officers, directors and consultants. Options granted under the 2001 Plan generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. As of June 30, 2010, there were no shares available for grant under the 2001 Plan. This plan was approved by our stockholders.

		The American Pacific Corporation 2002 Directors Stock Option Plan, as amended and restated (the “2002 Directors Plan”) compensates non-employee directors with stock options granted annually or upon other discretionary events. Options granted under the 2002 Directors Plan prior to September 30, 2007 generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. Options granted under the 2002 Directors Plan in November 2007 vested 50% one year from the date of grant and 50% two years from the date of grant, and expire ten years from the date of grant. As of June 30, 2010, there were no shares available for grant under the 2002 Directors Plan. This plan was approved by our stockholders.

		The American Pacific Corporation 2008 Stock Incentive Plan (the “2008 Plan”) permits the granting of stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants. A total of 350,000 shares of common stock are authorized for issuance under the 2008 Plan, provided that no more than 200,000 shares of common stock may be granted pursuant to awards of restricted stock and restricted stock units. Generally, awards granted under the 2008 Plan vest in three equal annual installments beginning on the first anniversary of the grant date, and in the case of option awards, expire ten years from the date of grant. As of June 30, 2010, there were 12,000 shares available for grant under the 2008 Plan. This plan was approved by our stockholders.

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2. SHARE-BASED COMPENSATION (continued)

A summary of our stock option and restricted stock activity for the nine months ended June 30, 2010 is as follows:



	Stock Options										Restricted Stock
	Outstanding					Non-Vested					Outstanding and Non-Vested
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Fair					Fair
				Price					Value					Value
	Shares			Per Share		Shares			Per Share		Shares			Per Share
Balance, September 30, 2009		540,997		$	8.64		161,710		$	5.57		22,000		$	11.25
Granted		149,000			7.21		149,000			3.65		36,000			7.15
Vested		-			-		(61,065	)		5.62		(7,336	)		11.25
Exercised		(2,500	)		4.87		-			-		-			-
Expired / Cancelled		(28,571	)		8.90		-			-		-			-

Balance, June 30, 2010		658,926			8.32		249,645			4.41		50,664			8.34

A summary of our exercisable stock options as of June 30, 2010 is as follows:


Number of vested stock options		409,281
Weighted-average exercise price per share	$	8.07
Aggregate intrinsic value	$	15
Weighted-average remaining contractual term in years		4.8

We determine the fair value of stock option awards at their grant date, using a Black-Scholes Option-Pricing model applying the assumptions in the following table. We determine the fair value of restricted stock awards based on the fair market value of our common stock on the grant date. Actual compensation, if any, ultimately realized by optionees may differ significantly from the amount estimated using an option valuation model.



	Nine Months Ended
	June 30,
	2010		2009

Weighted-average grant date fair value per share of options granted	$	3.65	$	5.41
Significant fair value assumptions:
Expected term in years		6.00		6.00
Expected volatility		51.3%		48.7%
Expected dividends		0.0%		0.0%
Risk-free interest rates		2.3%		2.7%
Total intrinsic value of options exercised	$	4	$	21
Aggregate cash received for option exercises	$	12	$	32

Compensation cost (included in operating expenses)
Stock options	$	435	$	375
Restricted stock		200		99

Total		635		474
Tax benefit recognized		143		105

Net compensation cost	$	492	$	369


As of period end date:
Total compensation cost for non-vested awards not yet recognized:
Stock options	$	412	$	512
Restricted stock	$	122	$	148
Weighted-average years to be recognized
Stock options		1.4		1.6
Restricted stock		1.5		1.6

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3.		SELECTED BALANCE SHEET DATA

		*Inventories.* Inventories consist of the following:



	June 30,			September 30,
	2010			2009

Finished goods	$	5,323		$	1,951
Work-in-process		17,654			22,080
Raw materials and supplies		9,435			9,930
Deferred cost of revenues		3,417			2,395
Under(over) applied manufacturing overhead costs		(4	)		-

Total	$	35,825		$	36,356

For our Specialty Chemicals segment, purchase price variances or volume or capacity cost variances associated with indirect manufacturing costs and that are planned and expected to be absorbed by goods produced through the end of our fiscal year are deferred at interim reporting dates as under(over) applied manufacturing overhead costs. The effect of unplanned or unanticipated purchase price or volume variances are applied to goods produced in the period.

Intangible Assets. Intangible assets consist of the following:



	June 30,			September 30,
	2010			2009

Perchlorate customer list	$	38,697		$	38,697
Less accumulated amortization		(38,697	)		(38,697	)

	-			-

Customer relationships		8,897			9,018
Less accumulated amortization		(7,202	)		(6,182	)

		1,695			2,836

Backlog		1,479			1,579
Less accumulated amortization		(1,309	)		(862	)

		170			717

Total	$	1,865		$	3,553

		The perchlorate customer list is an asset of our Specialty Chemicals segment and was fully amortized as of February 2008.

		Customer relationships are assets of our Fine Chemicals and Aerospace Equipment segments and are subject to amortization. Amortization expense was $341 and $310 for the three months ended June 30, 2010 and 2009, respectively, and $1,032 and $929 for the nine months ended June 30, 2010 and 2009, respectively.

		Backlog is an asset of our Aerospace Equipment segment and is subject to amortization. Amortization expense was $168 and $220 for the three months ended June 30, 2010 and 2009, respectively, and $527 and $611 for the nine months ended June 30, 2010 and 2009, respectively.

		*Goodwill.* Goodwill is an asset of our Aerospace Equipment segment and is not expected to be deductible for tax purposes.

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4.		COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS

		Comprehensive loss consists of the following:



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Net Loss	$	(4,573	)	$	(3,555	)	$	(4,897	)	$	(1,365	)
Other Comprehensive Loss -
Foreign currency translation adjustment		(391	)		765			(773	)		(132	)

Comprehensive Loss	$	(4,964	)	$	(2,790	)	$	(5,670	)	$	(1,497	)

The components of accumulated other comprehensive loss are as follows:



	June 30,			September 30,
	2010			2009

Cumulative currency translation adjustment	$	(898	)	$	(126	)
Unamortized benefit plan costs, net of tax of $7,898		(11,847	)		(11,846	)

Total	$	(12,745	)	$	(11,972	)

5.		EARNINGS (LOSS) PER SHARE

		Shares used to compute loss per share are as follows:



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Net income (loss)	$	(4,573	)	$	(3,555	)	$	(4,897	)	$	(1,365	)


Basic weighted-average shares		7,491,000			7,483,000			7,489,000			7,482,000


Diluted:
Weighted-average shares, basic		7,491,000			7,483,000			7,489,000			7,482,000
Dilutive effect of stock options		-			-			-			-

Weighted-average shares, diluted		7,491,000			7,483,000			7,489,000			7,482,000


Basic loss per share	$	(0.61	)	$	(0.48	)	$	(0.65	)	$	(0.18	)
Diluted loss per share	$	(0.61	)	$	(0.48	)	$	(0.65	)	$	(0.18	)

As of June 30, 2010 and 2009, we had 658,926 and 340,161 antidilutive options outstanding, respectively.

DEBT

Our outstanding debt balances consist of the following:



	June 30,			September 30,
	2010			2009


Senior Notes, 9%, due 2015	$	105,000		$	110,000
Capital Leases, due through 2014		178			248

Total Debt		105,178			110,248
Less Current Portion		(65	)		(151	)

Total Long-term Debt	$	105,113		$	110,097

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DEBT (continued)

Senior Notes. In February 2007, we issued and sold $110,000 aggregate principal amount of 9.0% Senior Notes due February 1, 2015 (collectively, with the exchange notes issued in August 2007 as referenced below, the “Senior Notes”). Proceeds from the issuance of the Senior Notes were used to repay our former credit facilities. The Senior Notes accrue interest at an annual rate of 9.0%, payable semi-annually in February and August. The Senior Notes are guaranteed on a senior unsecured basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are:

	•		ranked equally in right of payment with all of our existing and future senior indebtedness;

	•		ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness;

	•		effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and

	•		structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes.

The Senior Notes may be redeemed by the Company, in whole or in part, under the following circumstances:

	•		at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of the Senior Notes plus an applicable premium as defined in the related indenture;

	•		at any time on or after February 1, 2011 at redemption prices beginning at 104.5% of the principal amount to be redeemed and reducing to 100% by February 1, 2013; and

	•		under certain changes of control, we must offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest.

The Senior Notes were issued pursuant to an indenture which contains certain customary events of default, including cross-default provisions if we default under our existing and future debt agreements having, individually or in the aggregate, a principal or similar amount outstanding of at least $10,000, and certain other covenants limiting, subject to exceptions, carve-outs and qualifications, our ability to:

	•		incur additional debt;

	•		pay dividends or make other restricted payments;

	•		create liens on assets to secure debt;

	•		incur dividend or other payment restrictions with regard to restricted subsidiaries;

	•		transfer or sell assets;

	•		enter into transactions with affiliates;

	•		enter into sale and leaseback transactions;

	•		create an unrestricted subsidiary;

	•		enter into certain business activities; or

	•		effect a consolidation, merger or sale of all or substantially all of our assets.

In connection with the closing of the sale of the Senior Notes, we entered into a registration rights agreement which required us to file a registration statement to offer to exchange the Senior Notes for notes that have substantially identical terms as the Senior Notes and are registered under the Securities Act of 1933, as amended. In July 2007, we filed a registration statement with the SEC with respect to an offer to exchange the Senior Notes as required by the registration rights agreement, which registration statement was declared effective by the SEC. In August 2007, we completed the exchange of 100% of the Senior Notes for substantially identical notes which are registered under the Securities Act of 1933, as amended.

- 10 -

DEBT (continued)

Senior Note Repurchase. In June 2010, we repurchased and cancelled $5,000 in principal amount of our Senior Notes for $4,900. As a result of this repurchase, we recorded an immaterial loss of $16 in other income (expense), net of deferred financing costs of $116.

Revolving Credit Facility. In February 2007, we entered into an Amended and Restated Credit Agreement, as amended as of July 7, 2009 (the “Revolving Credit Facility”), with Wachovia Bank, National Association (predecessor by merger to Wells Fargo Bank, National Association), and certain other lenders, which provides a secured revolving credit facility in an aggregate principal amount of up to $20,000 with an initial maturity of 5 years. We may prepay and terminate the Revolving Credit Facility at any time. The annual interest rates applicable to loans under the Revolving Credit Facility are, at our option, either the Alternate Base Rate or LIBOR Rate (each as defined in the Revolving Credit Facility) plus, in each case, an applicable margin. The applicable margin is tied to our total leverage ratio (as defined in the Revolving Credit Facility). In addition, we pay commitment fees, other fees related to the issuance and maintenance of letters of credit, and certain agency fees.

The Revolving Credit Facility is guaranteed by and secured by substantially all of the assets of our current and future domestic subsidiaries, subject to certain exceptions as set forth in the Revolving Credit Facility. The Revolving Credit Facility contains certain negative covenants restricting and limiting our ability to, among other things:

	•		incur debt, incur contingent obligations and issue certain types of preferred stock;

	•		create liens;

	•		pay dividends, distributions or make other specified restricted payments;

	•		make certain investments and acquisitions;

	•		enter into certain transactions with affiliates;

	•		enter into sale and leaseback transactions; and

	•		merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets.

Financial covenants under the Revolving Credit Facility include quarterly requirements for total leverage ratio of less than or equal to 5.25 to 1.00 (“Total Leverage Ratio”), and interest coverage ratio of at least 2.50 to 1.00 (“Interest Coverage Ratio”). The Revolving Credit Facility defines Total Leverage Ratio as the ratio of Consolidated Funded Debt to Consolidated EBITDA and Interest Coverage Ratio as the ratio of Consolidated EBITDA to Consolidated Interest Expense. With respect to these covenant compliance calculations, Consolidated EBITDA, as defined in the Revolving Credit Facility (hereinafter, referred to as “Credit Facility EBITDA”), differs from typical EBITDA calculations and our calculation of Adjusted EBITDA, which is used in certain of our public releases and in connection with our incentive compensation plan. The most significant difference in the Credit Facility EBITDA calculation is the inclusion of cash payments for environmental remediation as part of the calculation. The following statements summarize the elements of those definitions that are material to our computations. Consolidated Funded Debt generally includes principal amounts outstanding under our Senior Notes, Revolving Credit Facility, capital leases and notional amounts for outstanding letters of credit. Credit Facility EBITDA is generally computed as consolidated net income (loss) plus income tax expense (benefit), interest expense, depreciation and amortization, and stock-based compensation expense and less cash payments for environmental remediation and other non-recurring gains in excess of $50. In accordance with the definitions contained in the Revolving Credit Facility, as of June 30, 2010, our Total Leverage Ratio was 3.88 to 1.00 and our Interest Coverage Ratio was 2.72 to 1.00.

The Revolving Credit Facility also contains usual and customary events of default (subject to certain threshold amounts and grace periods), including cross-default provisions that include our Senior Notes. If an event of default occurs and is continuing, we may be required to repay the obligations

- 11 -

DEBT (continued)

under the Revolving Credit Facility prior to its stated maturity and the related commitments may be terminated.

As of June 30, 2010, under our Revolving Credit Facility, we had no borrowings outstanding, availability of $18,112, and we were in compliance with its various financial covenants. Availability is computed as the total commitment of $20,000 less outstanding borrowings and outstanding letters of credit, if any.

Letters of Credit. As of June 30, 2010, we had $1,888 in outstanding standby letters of credit which mature through July 2013. These letters of credit principally secure performance of certain water treatment equipment sold by us and payment of fees associated with the delivery of natural gas and power.

COMMITMENTS AND CONTINGENCIES

Regulatory Review of Perchlorates. Our Specialty Chemicals segment manufactures and sells products that contain perchlorates. Federal and state regulators continue to review the effects of perchlorate, if any, on human health and the related allowable maximum level of contaminant from perchlorate. While the presence of regulatory review presents general business risk to the Company, we are currently unaware of any regulatory proposal that would have a material effect on our results of operations and financial position or that would cause us to significantly modify or curtail our business practices, including our remediation activities discussed below.

Perchlorate Remediation Project in Henderson, Nevada. We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (“AMPAC Henderson Site”) from 1958 until the facility was destroyed in May 1988, after which we relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corporation (“KMCC”) also operated a perchlorate production facility in Henderson, Nevada (the “KMCC Site”) from 1967 to 1998. In addition, between 1956 and 1967, American Potash operated a perchlorate production facility and, for many years prior to 1956, other entities also manufactured perchlorate chemicals at the KMCC Site. As a result of a longer production history in Henderson, KMCC and its predecessor operations manufactured significantly greater amounts of perchlorate over time than we did at the AMPAC Henderson Site.

In 1997, the Southern Nevada Water Authority (“SNWA”) detected trace amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada and areas of Southern California. The Las Vegas Wash flows into Lake Mead from the Las Vegas valley.

In response to this discovery by SNWA, and at the request of the Nevada Division of Environmental Protection (“NDEP”), we engaged in an investigation of groundwater near the AMPAC Henderson Site and down gradient toward the Las Vegas Wash. The investigation and related characterization, which lasted more than six years, employed experts in the field of hydrogeology. This investigation concluded that although there is perchlorate in the groundwater in the vicinity of the AMPAC Henderson Site up to 700 parts per million, perchlorate from this site does not materially impact, if at all, water flowing in the Las Vegas Wash toward Lake Mead. It has been well established, however, by data generated by SNWA and NDEP, that perchlorate from the KMCC Site did impact the Las Vegas Wash and Lake Mead. KMCC’s successor, Tronox LLC, operates an above ground perchlorate groundwater remediation facility at their Henderson site.

Notwithstanding these facts, and at the direction of NDEP and the U.S. Environmental Protection Agency (the “EPA”), we conducted an investigation of remediation technologies for perchlorate in groundwater with the intention of remediating groundwater near the AMPAC Henderson Site. The technology that was chosen as most efficient and appropriate was in situ bioremediation (“ISB”). ISB reduces perchlorate in the groundwater by precise addition of an appropriate carbon source to the

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COMMITMENTS AND CONTINGENCIES (Continued)

		groundwater itself while it is still in the ground (as opposed to an above ground, more conventional, ex situ process). This induces naturally occurring organisms in the groundwater to reduce the perchlorate among other oxygen containing compounds.

		In 2002, we conducted a pilot test in the field of the ISB technology and it was successful. On the basis of the successful test and other evaluations, in the fiscal year ended September 30, 2005 (“Fiscal 2005”), we submitted a work plan to NDEP for the construction of a remediation facility near the AMPAC Henderson Site. The conditional approval of the work plan by NDEP in our third quarter of Fiscal 2005 allowed us to generate estimated costs for the installation and operation of the remediation facility to address perchlorate at the AMPAC Henderson Site. We commenced construction in July 2005. In December 2006, we began operations. The location of this facility is several miles, in the direction of groundwater flow, from the AMPAC Henderson Site.

		At the request of the NDEP, in the summer of 2009, we began renewed discussions, which remain on-going, to formalize our remediation efforts in a voluntary agreement that, if negotiated and executed, would provide more detailed regulatory guidance on environmental characterization and remedies at the AMPAC Henderson Site and vicinity. The agreement under discussion would be expected to be similar to others previously executed by the NDEP with other companies under similar circumstances. Typically, such agreements generally cover such matters as the scope of work plans, schedules, deliverables, remedies for non compliance, and reimbursement to the State of Nevada for past and future oversight.

		Henderson Site Environmental Remediation Reserve. We accrue for anticipated costs associated with environmental remediation that are probable and estimable. On a quarterly basis, we review our estimates of future costs that could be incurred for remediation activities. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used; otherwise, we accrue the minimum amount of the range.

		During our Fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at the AMPAC Henderson Site, including the costs for capital equipment, operating and maintenance (“O&M”), and consultants. The project consisted of two primary phases: the initial construction of the remediation equipment phase and the O&M phase. During the fiscal year ended September 30, 2006, we increased our total cost estimate of probable costs for the construction phase by $3,600 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time.

		ISB is a new technology on the scale being used at the AMPAC Henderson Site. Accordingly, as we gain ISB operational experience, we have been and are observing certain conditions, operating results and other data which we consider in updating the assumptions used to determine our cost estimates. The two most significant assumptions are the estimated speed of groundwater flowing to our remediation extraction wells and the estimated annual O&M costs.

		Late in the fiscal year ended September 30, 2009 (“Fiscal 2009”), we gained additional information from groundwater modeling that indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150 feet below ground surface) is moving toward our existing remediation facility at a much slower pace than previously estimated. Utilization of our existing facilities alone, at this lower groundwater pace, could, according to this more recently created groundwater model, extend the life of our remediation project to well in excess of fifty years. As a result of this additional data, we re-evaluated our remediation operations. This evaluation indicates that we should be able to significantly reduce the total project time, and ultimately the total cost of the project, by installing additional groundwater extraction wells in the deeper, more concentrated areas, thereby providing for a more aggressive remediation treatment. The additional wells and related remediation equipment will incorporate above ground treatment to supplement or possibly replace by consolidation our existing ISB process. With the additional extraction wells and equipment, we

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COMMITMENTS AND CONTINGENCIES (Continued)

		estimate that the total remaining project life for the existing and new, more aggressive deep zone systems could range from 10 to 29 years, beginning with the fiscal year ending September 30, 2010 (“Fiscal 2010”). Within that range, we estimate that a range of 13 to 23 years is more likely. Groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted groundwater extraction rates continue to be key variables underlying our estimate of the life of the project. If additional information becomes available in the future that is different than information currently available to us, our estimate of the resulting project life could change significantly.

		In our Fiscal 2009 fourth quarter, we accrued approximately $9,600 representing our estimate of the cost to engineer, design, and install this additional equipment. We anticipate that these amounts will be spent through and the new equipment operational in approximately fall 2011. However, because we are in the early design and engineering steps, this estimate involves a number of significant assumptions. Due to uncertainties inherent in making early stage estimates, our estimate may later require significant revision as new facts become available and circumstances change.

		In addition to accruing approximately $9,600 for engineering, design, installation and cost of additional equipment, in our Fiscal 2009 fourth quarter, we increased our estimate of total remaining O&M costs by $4,100 due primarily to incremental O&M costs to operate and maintain the additional equipment once installed. Total O&M expenses are currently estimated at approximately $1,000 per year and estimated to increase to approximately $1,300 per year after the additional equipment becomes operational. To estimate O&M costs, we consider, among other factors, the project scope and historical expense rates to develop assumptions regarding labor, utilities, repairs, maintenance supplies and professional service costs. If additional information becomes available in the future that is different than information currently available to us and thereby leads us to different conclusions, our estimate of O&M expenses could change significantly.

		In addition, certain remediation activities are conducted on public lands under operating permits. In general, these permits require us to return the land to its original condition at the end of the permit period. Estimated costs associated with removal of remediation equipment from the land are not material and are included in our range of estimated costs.

		As of June 30, 2010, the aggregate range of anticipated environmental remediation costs was from approximately $21,400 to approximately $45,600 based on a possible total remaining life of the project ranging from 10 to 29 years. The accrued amount was $25,162, based on 13 years (beginning with Fiscal 2010), or the low end of the more likely range of 13 to 23 years as no amount within the range was more likely. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate. A summary of our environmental reserve activity for the nine months ended June 30, 2010 is shown below:


Balance, September 30, 2009	$	26,690
Additions or adjustments		-
Expenditures		(1,528	)

Balance, June 30, 2010	$	25,162

AFC Environmental Matters. Our Fine Chemicals segment, Ampac Fine Chemicals LLC (“AFC”), is located on land leased from Aerojet-General Corporation (“Aerojet”). The leased land is part of a tract of land owned by Aerojet designated as a “Superfund site” under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). The tract of land had been used by Aerojet and affiliated companies to manufacture and test rockets and related equipment since the 1950s. Although the chemicals identified as contaminants on the leased land were not used by Aerojet Fine Chemicals LLC (predecessor in interest to AFC) as part of its operations, CERCLA, among other things, provides for joint and severable liability for environmental liabilities including, for example, environmental remediation expenses.

- 14 -

COMMITMENTS AND CONTINGENCIES (Continued)

		As part of the agreement by which we acquired the business of AFC from GenCorp Inc. (“GenCorp”), an Environmental Indemnity Agreement was entered into whereby GenCorp agreed to indemnify us against any and all environmental costs and liabilities arising out of or resulting from any violation of environmental law prior to the effective date of the sale, or any release of hazardous substances by Aerojet Fine Chemicals LLC, Aerojet or GenCorp on the AFC premises or Aerojet’s Sacramento site prior to the effective date of the sale.

		On November 29, 2005, EPA Region IX provided us with a letter indicating that the EPA does not intend to pursue any clean up or enforcement actions under CERCLA against future lessees of the Aerojet property for existing contamination, provided that the lessees do not contribute to or do not exacerbate existing contamination on or under the Aerojet Superfund site.

		*Other Matters.* Although we are not currently party to any material pending legal proceedings, we are from time to time subject to claims and lawsuits related to our business operations. We accrue for loss contingencies when a loss is probable and the amount can be reasonably estimated. Legal fees, which can be material in any given period, are expensed as incurred. We believe that current claims or lawsuits against us, individually and in the aggregate, will not result in loss contingencies that will have a material adverse effect on our financial condition, cash flows or results of operations.

SEGMENT INFORMATION

		We report our business in four operating segments: Fine Chemicals, Specialty Chemicals, Aerospace Equipment and Other Businesses. These segments are based upon business units that offer distinct products and services, are operationally managed separately and produce products using different production methods. Segment operating income or loss includes all sales and expenses directly associated with each segment. Environmental remediation charges, corporate general and administrative costs, which consist primarily of executive, investor relations, accounting, human resources and information technology expenses, and interest are not allocated to segment operating results.

		*Fine Chemicals.* Our Fine Chemicals segment includes the operating results of our wholly-owned subsidiaries Ampac Fine Chemicals LLC and AMPAC Fine Chemicals Texas, LLC (collectively, AMPAC Fine Chemicals or AFC). AFC is a custom manufacturer of active pharmaceutical ingredients and registered intermediates for commercial customers in the pharmaceutical industry. AFC operates in compliance with the U.S. Food and Drug Administration’s current Good Manufacturing Practices and other regulatory agencies such as the European Union’s European Medicines Agency and Japan’s Pharmaceuticals and Medical Devices Agency. AFC has distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing chemical compounds that require high containment and performing energetic chemistries at commercial scale.

		*Specialty Chemicals.* Our Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, principally ammonium perchlorate, which is the predominant oxidizing agent for solid propellant rockets, booster motors and missiles used in space exploration, commercial satellite transportation and national defense programs, (ii) sodium azide, a chemical used in pharmaceutical manufacturing, and (iii) Halotronâ, a series of clean fire extinguishing agents used in fire extinguishing products ranging from portable fire extinguishers to total flooding systems.

		*Aerospace Equipment*. Our Aerospace Equipment segment includes the operating results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries (collectively, “AMPAC ISP”). AMPAC ISP manufactures monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. In addition, AMPAC ISP designs, develops and manufactures high performance valves, pressure regulators, cold-gas propulsion systems, and precision structures for space applications, especially in the European space market.

- 15 -

8. SEGMENT INFORMATION (Continued)

Other Businesses. Our Other Businesses segment contains our water treatment equipment and real estate activities. Our water treatment equipment business designs, manufactures and markets systems for the control of noxious odors, the disinfection of water streams and the treatment of seawater. Our real estate activities are not material.

Our revenues are characterized by individually significant orders and relatively few customers. As a result, in any given reporting period, certain customers may account for more than ten percent of our consolidated revenues.

The following table provides disclosure of the percentage of our consolidated revenues attributed to customers that exceed ten percent of the total in each of the given periods.



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009


Fine chemicals customer		17	%		38	%		24	%		26	%
Fine chemicals customer		11	%								10	%
Fine chemicals customer		11	%
Fine chemicals customer		13	%
Specialty chemicals customer								12	%		17	%
Specialty chemicals customer					11	%

The following provides financial information about our segment operations:



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Revenues:
Fine Chemicals	$	19,951		$	15,644		$	63,128		$	67,766
Specialty Chemicals		8,168			6,299			35,057			40,940
Aerospace Equipment		8,647			9,085			27,140			21,977
Other Businesses		481			462			5,381			2,871

Total Revenues	$	37,247		$	31,490		$	130,706		$	133,554


Segment Operating Income (Loss):
Fine Chemicals	$	(2,458	)	$	(752	)	$	(698	)	$	(370	)
Specialty Chemicals		2,796			552			15,140			16,481
Aerospace Equipment		(120	)		417			(457	)		1,571
Other Businesses		(286	)		(215	)		(234	)		164

Total Segment Operating Income (Loss)		(68	)		2			13,751			17,846
Corporate Expenses		(3,551	)		(3,654	)		(11,796	)		(11,847	)

Operating Income (Loss)	$	(3,619	)	$	(3,652	)	$	1,955		$	5,999


Depreciation and Amortization:
Fine Chemicals	$	3,200		$	3,281		$	9,722		$	9,625
Specialty Chemicals		14			324			591			951
Aerospace Equipment		424			378			1,239			1,032
Other Businesses		4			3			12			9
Corporate		162			115			416			354

Total Depreciation and Amortization	$	3,804		$	4,101		$	11,980		$	11,971

- 16 -

INCOME TAXES

		We review our portfolio of uncertain tax positions and recorded liabilities based on the applicable recognition standards. In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We classify uncertain tax positions as non-current income tax liabilities unless expected to be settled within one year.

		As of June 30, 2010 and September 30, 2009, our recorded liability for unrecognized tax benefits was $329, of which $327 would affect our effective tax rate if recognized, and $652, respectively. The remaining balance is related to deferred tax items which only impact the timing of tax payments. It is reasonably possible that the gross liability for unrecognized tax benefits will decrease by $79 during the next twelve months primarily as a result of the lapsing of statutes of limitations.

		We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2010 and September 30, 2009, we had accrued $80 and $164, respectively, for the payment of tax-related interest and penalties. For the nine months ended June 30, 2010 and 2009, income tax benefit includes a benefit of $140 and $1, respectively, for interest and penalties.

		We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions. With few exceptions, we are no longer subject to federal or state income tax examinations for years before 2007.

10.

DEFINED BENEFIT PLANS

		We maintain three defined benefit pension plans which cover substantially all of our U.S. employees, excluding employees of our Aerospace Equipment segment: the Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC Pension Plan for Salaried Employees, and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees, each as amended and restated (collectively, the “Pension Plans”). In May 2010, our board of directors approved amendments to our Pension Plans which effectively closed the Pension Plans to participation by any new employees. Retirement benefits for existing U.S. employees and retirees through June 30, 2010 are not effected by this change. Beginning July 1, 2010, new U.S. employees will participate solely in one of the Company’s 401(k) plans.

		In addition, we maintain the American Pacific Corporation Supplemental Executive Retirement Plan, as amended and restated (the “SERP”), which includes certain of our existing and prior executive officers.

		We maintain two 401(k) plans in which participating employees may make contributions. One covers substantially all U.S. employees except AFC bargaining unit employees and the other covers AFC bargaining unit employees. For U.S. employees of the Company prior to July 1, 2010, we make matching contributions for AFC employees and U.S. employees of our Aerospace Equipment segment. In addition, we make a profit sharing contribution for U.S. employees of our Aerospace Equipment segment. Beginning July 1, 2010, for all eligible new U.S. employees we will make matching contributions.

		We provide healthcare and life insurance benefits to substantially all of our employees.

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10.

DEFINED BENEFIT PLANS (Continued)

Net periodic pension cost consists of the following:



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

*Pension Plans:*
Service Cost	$	397		$	524		$	1,647		$	1,538
Interest Cost		864			832			2,460			2,172
Expected Return on Plan Assets		(600	)		(448	)		(1,806	)		(1,650	)
Recognized Actuarial Losses		357			169			883			387
Amortization of Prior Service Costs		13			19			51			57

Net Periodic Pension Cost	$	1,031		$	1,096		$	3,235		$	2,504


*Supplemental Executive Retirement Plan:*
Service Cost	$	109		$	67		$	329		$	262
Interest Cost		94			73			281			277
Expected Return on Plan Assets		-			-			-			-
Recognized Actuarial Losses		-			-			-			-
Amortization of Prior Service Costs		105			116			315			326

Net Periodic Pension Cost	$	308		$	256		$	925		$	865

For the nine months ended June 30, 2010, we contributed $2,615 to the Pension Plans to fund benefit payments and anticipate making approximately $672 in additional contributions through September 30, 2010. For the nine months ended June 30, 2010, we contributed $95 to the SERP to fund benefit payments and anticipate making approximately $332 in additional contributions through September 30, 2010.

11.

GUARANTOR SUBSIDIARIES

As discussed in Note 6, in February 2007, American Pacific Corporation, a Delaware corporation (“Parent”) issued and sold $110,000 aggregate principal amount of Senior Notes. In connection with the issuance of the Senior Notes, the Parent’s material U.S. subsidiaries (“Guarantor Subsidiaries”) jointly, fully, severally, and unconditionally guaranteed the Senior Notes. The Parent’s foreign subsidiaries (“Non-Guarantor Subsidiaries”) are not guarantors of the Senior Notes. Each of the Parent’s subsidiaries is 100% owned. The Parent has no independent assets or operations. The following presents condensed consolidating financial information separately for the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries.

- 18 -

11.

GUARANTOR SUBSIDIARIES (Continued)


Condensed Consolidating Balance Sheet - June 30, 2010
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Assets:
Cash and Cash Equivalents	$	-		$	31,643		$	518		$	-		$	32,161
Accounts Receivable, Net		-			27,088			4,294			(549	)		30,833
Inventories		-			34,579			1,246			-			35,825
Prepaid Expenses and Other Assets		-			1,531			386			-			1,917
Income Taxes Receivable and Deferred Income Taxes		-			9,288			-			-			9,288

Total Current Assets		-			104,129			6,444			(549	)		110,024
Property, Plant and Equipment, Net		-			111,082			1,582			-			112,664
Intangible Assets, Net		-			847			1,018			-			1,865
Goodwill		-			-			2,631			-			2,631
Deferred Income Taxes		-			21,049			-			-			21,049
Other Assets		-			9,753			-			-			9,753
Intercompany Advances		79,929			4,333			-			(84,262	)		-
Investment in Subsidiaries, Net		91,145			3,646			-			(94,791	)		-

Total Assets	$	171,074		$	254,839		$	11,675		$	(179,602	)	$	257,986


Liabilitites and Stockholders’ Equity:
Accounts Payable and Other Current Liabilities	$	-		$	23,638		$	2,020		$	(549	)	$	25,109
Environmental Remediation Reserves		-			2,091			-			-			2,091
Deferred Revenues and Customer Deposits		-			5,735			1,570			-			7,305
Current Portion of Long-Term Debt		-			21			44			-			65
Intercompany Advances		-			79,929			4,333			(84,262	)		-

Total Current Liabilities		-			111,414			7,967			(84,811	)		34,570
Long-Term Debt		105,000			62			51			-			105,113
Environmental Remediation Reserves		-			23,071			-			-			23,071
Pension Obligations and Other Long-Term Liabilities		-			29,147			11			-			29,158

Total Liabilities		105,000			163,694			8,029			(84,811	)		191,912
Total Shareholders’ Equity		66,074			91,145			3,646			(94,791	)		66,074

Total Liabilities and Shareholders’ Equity	$	171,074		$	254,839		$	11,675		$	(179,602	)	$	257,986


Condensed Consolidating Statement of Operations - Three Months Ended June 30, 2010
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues	$	-		$	35,076		$	2,171		$	-		$	37,247
Cost of Revenues		-			27,571			1,349			-			28,920

Gross Profit		-			7,505			822			-			8,327
Operating Expenses		-			10,963			983			-			11,946

Operating Loss		-			(3,458	)		(161	)		-			(3,619	)
Interest and Other Income		2,649			10			(301	)		(2,649	)		(291	)
Interest Expense		2,649			2,669			2			(2,649	)		2,671

Loss before Income Tax and Equity Account for Subsidiaries		-			(6,117	)		(464	)		-			(6,581	)
Income Tax Benefit		-			(1,877	)		(131	)		-			(2,008	)

Loss before Income Tax and Equity Account for Subsidiaries		-			(4,240	)		(333	)		-			(4,573	)
Equity Account for Subsidiaries		(4,573	)		(333	)		-			4,906			-

Net Loss	$	(4,573	)	$	(4,573	)	$	(333	)	$	4,906		$	(4,573	)

- 19 -

11.

GUARANTOR SUBSIDIARIES (Continued)


Condensed Consolidating Statement of Operations - Nine Months Ended June 30, 2010
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues	$	-		$	123,452		$	7,271		$	(17	)	$	130,706
Cost of Revenues		-			87,942			5,129			(17	)		93,054

Gross Profit		-			35,510			2,142			-			37,652
Operating Expenses		-			32,659			3,038			-			35,697

Operating Income (Loss)		-			2,851			(896	)		-			1,955
Interest and Other Income		7,982			86			(582	)		(8,045	)		(559	)
Interest Expense		7,982			8,097			68			(8,045	)		8,102

Loss before Income Tax and Equity Account for Subsidiaries		-			(5,160	)		(1,546	)		-			(6,706	)
Income Tax Benefit		-			(1,699	)		(110	)		-			(1,809	)

Loss before Equity Account for Subsidiaries		-			(3,461	)		(1,436	)		-			(4,897	)
Equity Account for Subsidiaries		(4,897	)		(1,436	)		-			6,333			-

Net Loss	$	(4,897	)	$	(4,897	)	$	(1,436	)	$	6,333		$	(4,897	)


Condensed Consolidating Statement of Cash Flows - Nine Months Ended June 30, 2010
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated


Net Cash Provided (Used) by Operating Activities	$	-		$	24,775		$	(1,764	)	$	-		$	23,011


Cash Flows from Investing Activities:
Capital expenditures		-			(6,762	)		(630	)		-			(7,392	)
Other investing activities		-			10			-			-			10

Net Cash Used in Investing Activities		-			(6,752	)		(630	)		-			(7,382	)


Cash Flows from Financing Activities:
Payments of long-term debt		-			(5,014	)		(34	)		-			(5,048	)
Issuances of common stock		11			-			-			-			11
Intercompany advances, net		(11	)		(1,412	)		1,423			-			-

Net Cash Provided (Used) by Financing Activities		-			(6,426	)		1,389			-			(5,037	)


Effect of Changes in Currency Exchange Rates		-			-			(112	)		-			(112	)

Net Change in Cash and Cash Equivalents		-			11,597			(1,117	)		-			10,480
Cash and Cash Equivalents, Beginning of Period		-			20,046			1,635			-			21,681

Cash and Cash Equivalents, End of Period	$	-		$	31,643		$	518		$	-		$	32,161

- 20 -

11.

GUARANTOR SUBSIDIARIES (Continued)


Condensed Consolidating Balance Sheet - September 30, 2009
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Assets:
Cash and Cash Equivalents	$	-		$	20,046		$	1,635		$	-		$	21,681
Accounts Receivable, Net		-			40,399			3,951			(322	)		44,028
Inventories		-			35,223			1,133			-			36,356
Prepaid Expenses and Other Assets		-			1,645			166			-			1,811
Income Taxes Receivable and Deferred Income Taxes		-			8,465			-			-			8,465

Total Current Assets		-			105,778			6,885			(322	)		112,341
Property, Plant and Equipment, Net		-			113,143			1,502			-			114,645
Intangible Assets, Net		-			1,775			1,778			-			3,553
Goodwill		-			-			3,144			-			3,144
Deferred Income Taxes		-			21,121			-			-			21,121
Other Assets		-			10,037			-			-			10,037
Intercompany Advances		79,918			2,535			-			(82,453	)		-
Investment in Subsidiaries, Net		101,179			6,229			-			(107,408	)		-

Total Assets	$	181,097		$	260,618		$	13,309		$	(190,183	)	$	264,841


Liabilitites and Stockholders’ Equity:
Accounts Payable and Other Current Liabilities	$	-		$	19,894		$	1,936		$	(322	)	$	21,508
Environmental Remediation Reserves		-			2,522			-			-			2,522
Deferred Revenues and Customer Deposits		-			4,579			2,332			-			6,911
Current Portion of Long-Term Debt		-			99			52			-			151
Intercompany Advances		-			79,918			2,535			(82,453	)		-

Total Current Liabilities		-			107,012			6,855			(82,775	)		31,092
Long-Term Debt		110,000			-			97			-			110,097
Environmental Remediation Reserves		-			24,168			-			-			24,168
Pension Obligations and Other Long-Term Liabilities		-			28,259			128			-			28,387

Total Liabilities		110,000			159,439			7,080			(82,775	)		193,744
Total Shareholders’ Equity		71,097			101,179			6,229			(107,408	)		71,097

Total Liabilities and Shareholders’ Equity	$	181,097		$	260,618		$	13,309		$	(190,183	)	$	264,841


Condensed Consolidating Statement of Operations - Three Months Ended June 30, 2009
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues	$	-		$	29,485		$	2,054		$	(49	)	$	31,490
Cost of Revenues		-			22,686			1,590			(49	)		24,227

Gross Profit		-			6,799			464			-			7,263
Operating Expenses		-			10,019			896			-			10,915

Operating Loss		-			(3,220	)		(432	)		-			(3,652	)
Interest and Other Income		2,666			30			5			(2,673	)		28
Interest Expense		2,666			2,682			8			(2,673	)		2,683

Loss before Income Tax and Equity Account for Subsidiaries		-			(5,872	)		(435	)		-			(6,307	)
Income Tax Benefit		-			(2,752	)		-			-			(2,752	)

Loss before Equity Account for Subsidiaries		-			(3,120	)		(435	)		-			(3,555	)
Equity Account for Subsidiaries		(3,555	)		(435	)		-			3,990			-

Net Loss	$	(3,555	)	$	(3,555	)	$	(435	)	$	3,990		$	(3,555	)

- 21 -

11.

GUARANTOR SUBSIDIARIES (Continued)


Condensed Consolidating Statement of Operations - Nine Months Ended June 30, 2009
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues	$	-		$	128,098		$	5,622		$	(166	)	$	133,554
Cost of Revenues		-			90,431			3,995			(166	)		94,260

Gross Profit		-			37,667			1,627			-			39,294
Operating Expenses		-			31,213			2,082			-			33,295

Operating Income (Loss)		-			6,454			(455	)		-			5,999
Interest and Other Income (Expense)		7,999			152			(65	)		(8,016	)		70
Interest Expense		7,999			8,052			26			(8,016	)		8,061

Loss before Income Tax and Equity Account for Subsidiaries		-			(1,446	)		(546	)		-			(1,992	)
Income Tax Benefit		-			(627	)		-			-			(627	)

Loss before Equity Account for Subsidiaries		-			(819	)		(546	)		-			(1,365	)
Equity Account for Subsidiaries		(1,365	)		(546	)		-			1,911			-

Net Loss	$	(1,365	)	$	(1,365	)	$	(546	)	$	1,911		$	(1,365	)


Condensed Consolidating Statement of Cash Flows - Nine Months Ended June 30, 2009
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net Cash Provided by Operating Activities	$	-		$	10,055		$	1,297		$	-		$	11,352

Cash Flows from Investing Activities:
Capital expenditures		-			(5,810	)		(502	)		-			(6,312	)
Acquisition on business, net of cash acquired		-			(7,195	)		470			-			(6,725	)

Net Cash Used by Investing Activities		-			(13,005	)		(32	)		-			(13,037	)


Cash Flows from Financing Activities:
Payments of long-term debt		-			(211	)		(61	)		-			(272	)
Issuance of common stock		32			-			-			-			32
Intercompany advances, net		(32	)		(509	)		541			-			-

Net Cash Provided (Used) by Financing Activities		-			(720	)		480			-			(240	)

Net Change in Cash and Cash Equivalents		-			(3,670	)		1,745			-			(1,925	)
Cash and Cash Equivalents, Beginning of Period		-			26,664			229			-			26,893

Cash and Cash Equivalents, End of Period	$	-		$	22,994		$	1,974		$	-		$	24,968

- 22 -

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands)

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: our expectations regarding working capital and related variances in the future, our potential incurrence of additional debt, including through refinancing, or legal or other costs in the future, our belief that our cash flows and debt will be adequate for the foreseeable future to satisfy the needs of our operations and that existing circumstances will not materially affect our ability to meet future liquidity requirements, our expectations regarding anticipated contributions and obligations with respect to our defined benefit pension plans and supplemental executive retirement plan, our estimates and expectations regarding anticipated cash expenditures and timing for environmental remediation in connection with our former Henderson, Nevada site, our statement regarding the anticipated total volume of perchlorate products to be sold in the current fiscal year, our statement regarding Congressional resistance to the cancellation of the Constellation program, our statement regarding one of the significant factors that will affect comparisons of our consolidated gross margins in the future, our expectations regarding segment revenues for the current fiscal year, our expectations regarding fulfillment of existing backlog within the next twelve months, our anticipated capital expenditures for the current fiscal year, and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as “may,” “can,” “will,” “could,” “should,” “expect,” “anticipate,” “believe,” “estimate,” or “future,” or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout this document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from future results or outcomes expressed or implied in such forward-looking statements. Please see the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of factors that could affect future results. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, unless otherwise required by law. Any business risks discussed later in this Item 2, among other things, should be considered in evaluating our prospects and future financial performance.

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. The following discussion and analysis is intended to provide a narrative discussion of our financial results and an evaluation of our financial condition and results of operations with respect to the third fiscal quarter and nine-month period of the year ending September 30, 2010 (“Fiscal 2010”) as compared to the third fiscal quarter and nine-month period of the year ended September 30, 2009 (“Fiscal 2009”). The discussion should be read in conjunction with our Annual Report on Form 10-K for Fiscal 2009 filed with the Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for Fiscal 2009.

OUR COMPANY

We are a leading custom manufacturer of fine chemicals, specialty chemicals and propulsion products within our focused markets. We supply active pharmaceutical ingredients (“APIs”) and registered intermediates to the pharmaceutical industry. For the aerospace and defense industry we provide specialty chemicals used in solid rocket motors for space launch and military missiles. We also design and manufacture liquid propulsion systems, valves and structures for space and missile defense applications. We produce clean agent chemicals for the fire protection industry, as well as electro-chemical equipment for the water treatment industry. Our technical and manufacturing expertise and customer service focus has gained us a reputation for quality, reliability, technical performance and innovation. Given the mission critical nature of our products, we maintain long-standing strategic

- 23 -

customer relationships. We work collaboratively with our customers to develop customized solutions that meet rigorous federal and international regulatory standards. We generally sell our products through long-term contracts under which we are the sole-source or limited-source supplier.

OUR BUSINESS SEGMENTS

Our operations comprise four reportable business segments: (i) Fine Chemicals, (ii) Specialty Chemicals, (iii) Aerospace Equipment and (iv) Other Businesses. The following table reflects the revenue contribution percentage from our business segments and each of their major product lines:



	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2010			2009			2010			2009


Fine Chemicals		54	%		50	%		48	%		51	%

Specialty Chemicals:
Perchlorates		18	%		14	%		23	%		28	%
Sodium Azide		1	%		3	%		1	%		1	%
Halotron		3	%		3	%		3	%		2	%

Total Specialty Chemicals		22	%		20	%		27	%		31	%

Aerospace Equipment		23	%		29	%		21	%		16	%

Other Businesses:
Real Estate		0%	*		0%	*		0%	*		0%	*
Water Treatment Equipment		1	%		1	%		4	%		2	%

Total Other Businesses		1	%		1	%		4	%		2	%

Total Revenues		100	%		100	%		100	%		100	%


* less than 1%

FINE CHEMICALS. Our Fine Chemicals segment, operated through our wholly-owned subsidiaries Ampac Fine Chemicals LLC and AMPAC Fine Chemicals Texas, LLC (collectively “AFC”), is a custom manufacturer of APIs and registered intermediates for commercial customers in the pharmaceutical industry. The products we manufacture are used by our customers in drugs with indications in three primary areas: anti-viral, oncology, and central nervous system. We generate nearly all of our Fine Chemicals segment sales from manufacturing chemical compounds that are proprietary to our customers. We operate in compliance with the U.S. Food and Drug Administration’s (the “FDA”) current Good Manufacturing Practices (“cGMP”) and the requirements of certain other regulatory agencies such as the European Union’s European Medicines Agency and Japan’s Pharmaceuticals and Medical Devices Agency. Our Fine Chemicals segment’s strategy is to focus on high growth markets where our technological position, combined with our chemical process development and engineering expertise, leads to strong customer allegiances and limited competition.

We have distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing chemical compounds that require high containment and performing energetic chemistries at commercial scale. We have invested significant resources in our facilities and technology base. We believe we are the U.S. leader in performing chiral separations using commercial-scale simulated moving bed, or “SMB,” technology and own and operate two large-scale SMB machines, both of which are among the largest in the world operating under cGMP. We believe our distinctive competency in manufacturing chemical compounds that require specialized high containment facilities and handling expertise provide us a significant competitive advantage in competing for various opportunities associated with high potency, highly toxic and cytotoxic products. Many oncology drugs are made with APIs that are high potency or cytotoxic. AFC is one of the few companies in the world that can manufacture such compounds at a multi-ton annual rate. Moreover, our significant experience and specially engineered facilities make us one of the few companies in the world with the capability to use energetic chemistry on a commercial-scale under cGMP. We use this capability in development and

- 24 -

production of products such as those used in anti-viral drugs, including HIV-related and influenza-combating drugs.

We have established long-term, sole-source and limited-source contracts, which help provide us with earnings stability and visibility. In addition, the inherent nature of custom pharmaceutical fine chemicals manufacturing encourages stable, long-term customer relationships. We work collaboratively with our customers to develop reliable, safe and cost-effective, custom solutions. Once a custom manufacturer has been qualified as a supplier on a cGMP product, there are several potential barriers that discourage transferring the manufacturing of the product to an alternative supplier, including the following:

•

Alternative Supply May Not Be Readily Available. We are currently the sole-source supplier on several of our fine chemicals products.

•

Regulatory Approval. Applications to and approvals from the FDA and other regulatory authorities generally require the chemical contractor to be named. Switching contractors may require additional regulatory approvals and could take as long as two years to complete.

•

Significant Financial Costs. Switching contractors and amending various filings can result in significant costs associated with technology transfer, process validation and re-filing with the FDA and other regulatory authorities.

SPECIALTY CHEMICALS. Our Specialty Chemicals segment is principally engaged in the production of ammonium perchlorate (“AP”), which is the predominant oxidizing agent for solid propellant rockets, booster motors and missiles used in space exploration, commercial satellite transportation and national defense programs. In addition, we produce and sell sodium azide, a chemical used in pharmaceutical manufacturing, and Halotron^®, a series of clean fire extinguishing agents used in fire extinguishing products ranging from portable fire extinguishers to total flooding systems.

We have supplied AP for use in space and defense programs for over 50 years and we have been the only AP supplier in North America since 1998, when we acquired the AP business of our principal competitor, Kerr-McGee Chemical Corporation. A significant number of existing and planned space launch vehicles use solid propellant and thus depend, in part, upon our AP. Many of the rockets and missiles used in national defense programs are also powered by solid propellant.

Alliant Techsystems Inc. or “ATK” is a significant AP customer. We sell Grade I AP to ATK under a long-term contract that requires us to maintain a ready and qualified capacity for Grade I AP and that requires ATK to purchase its Grade I AP requirements from us, subject to certain terms and conditions. The contract, which expires in 2013, provides fixed pricing in the form of a price volume matrix for annual Grade I AP volumes ranging from 3 million to 20 million pounds. Pricing varies inversely to volume and includes annual escalations.

AEROSPACE EQUIPMENT. Our Aerospace Equipment segment reflects the operating results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries.

Our U.S.-based Aerospace Equipment operation is one of two major North American manufacturers of monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. Our products are utilized on various satellite and launch vehicle programs such as Space Systems/Loral’s 1300 series geostationary satellites.

Our European-based Aerospace Equipment operation designs, develops and manufactures liquid propulsion thrusters, high performance valves, pressure regulators, cold-gas propulsion systems, and precision structures for space applications, especially in the European space market. These products are used on various satellites and spacecraft, as well as on the Ariane 5 launch vehicle.

OTHER BUSINESSES. Our Other Businesses segment contains our water treatment equipment and real estate activities. Our water treatment equipment business designs, manufactures and markets systems for the control of noxious odors, the disinfection of water streams and the treatment of seawater. Our real estate activities are not material.

- 25 -

RESULTS OF OPERATIONS

REVENUES



	June 30,				Increase			Percentage
	2010		2009		(Decrease)			Change

Three Months Ended:
Fine Chemicals	$	19,951	$	15,644	$	4,307			28%
Specialty Chemicals		8,168		6,299		1,869			30%
Aerospace Equipment		8,647		9,085		(438	)		(5	%)
Other Businesses		481		462		19			4%

Total Revenues	$	37,247	$	31,490	$	5,757			18%


Nine Months Ended:
Fine Chemicals	$	63,128	$	67,766	$	(4,638	)		(7	%)
Specialty Chemicals		35,057		40,940		(5,883	)		(14	%)
Aerospace Equipment		27,140		21,977		5,163			23%
Other Businesses		5,381		2,871		2,510			87%

Total Revenues	$	130,706	$	133,554	$	(2,848	)		(2	%)

Fine Chemicals. The increase in Fine Chemicals segment revenues for the Fiscal 2010 third quarter compared to the prior fiscal year third quarter primarily reflects an increase in revenues from our development products. Development product revenues include revenues from research products, products which are not yet commercialized, and products which are commercial but for which we are not the current commercial producer. Typically, development product activities are the source for future core products.

The decrease in Fine Chemicals segment revenues for the Fiscal 2010 nine-month period reflects reductions in orders for our antiviral products, offset partially by increases in revenues from development products. The decline in segment revenues for the Fiscal 2010 nine-month period is consistent with our expectation that annual Fiscal 2010 revenues for this segment will decline in the range of 20% to 25% as compared to Fiscal 2009.

Specialty Chemicals. Specialty Chemicals segment revenues include the operating results from our perchlorate, sodium azide and Halotron product lines, with our perchlorate product lines comprising 87% and 89% of Specialty Chemicals segment revenues in the Fiscal 2010 and Fiscal 2009 nine-month periods, respectively. The variances in Specialty Chemicals segment revenues reflect the following factors:

•		A 42% increase in perchlorate volume and a 2% increase in the related average price per pound for the Fiscal 2010 third quarter compared to the prior fiscal year third quarter.

•		A 29% decrease in perchlorate volume offset by an 18% increase in the related average price per pound for the Fiscal 2010 nine-month period compared to the prior fiscal year nine-month period.

•		Sodium azide revenues for the Fiscal 2010 third quarter decreased $485 compared to the prior fiscal year third quarter and, for the Fiscal 2010 nine-month period, were consistent with the prior fiscal year period.

•		Halotron revenues increased approximately $300 for both the Fiscal 2010 third quarter and nine-month period, each compared to the comparable Fiscal 2009 periods.

For the Fiscal 2010 third quarter, the increase in perchlorate volume, as compared to the prior year third quarter, reflects a difference in timing of perchlorate sales between the quarterly periods within each fiscal year. The decrease in volume for the Fiscal 2010 nine-month period is consistent with our expectation that, for the full Fiscal 2010 year, perchlorate volume will be down approximately 50% compared to the prior fiscal year.

- 26 -

The increases in average prices per pound reflect two offsetting factors:

•		The average price per pound of Grade I AP increased approximately proportionate and inverse to the decrease in Grade I AP volume consistent with the contractual Grade I AP price-volume matrix and comparable catalog pricing.

•		This was offset, in part, by our other lower-priced perchlorate products, such as sodium perchlorate and potassium perchlorate, which accounted for a greater percentage of all perchlorate product volume in the Fiscal 2010 periods. This change in the mix of perchlorate product sales had a reducing effect on the overall average price per pound of all perchlorate products. This factor had a greater effect on the Fiscal 2010 third quarter than on the Fiscal 2010 nine-month period.

Tactical missile programs accounted for a significant portion of perchlorate revenues in the Fiscal 2010 third quarter. In addition to the Fiscal 2010 third quarter activity, perchlorate revenues for the Fiscal 2010 nine-month period include space related programs, primarily the Ares program. For the Fiscal 2009 nine-month period, the greatest contributor to segment revenues was product for the Space Shuttle Reusable Solid Rocket Motor (“RSRM”) program.

In February 2010, the administration released its fiscal year 2011 budget which included the proposed cancellation of NASA’s Constellation space exploration program. The Ares rocket, produced by our customer ATK, is a major part of the Constellation program. We are, of course, a major supplier of chemicals for this program, and it is a significant portion of the perchlorate demand. Congress will ultimately determine as part of the 2011 authorization and appropriation legislative process the policy and funding levels for NASA and will decide on the future funding level for Constellation. We believe that there is strong Congressional resistance to this new direction.

Aerospace Equipment. Aerospace Equipment segment revenues decreased 5% for the Fiscal 2010 third quarter compared to the prior year third quarter because quarterly Fiscal 2010 segment revenues are expected to be weighted more to the first two quarters of Fiscal 2010. This differs from quarterly Fiscal 2009 segment revenues which were weighted more to the last two quarters of Fiscal 2009. Aerospace Equipment segment revenues increased 23% for the Fiscal 2010 nine-month period as compared to the prior fiscal year nine-month period. Revenue growth for the Fiscal 2010 nine-month period was driven by revenues for in-space propulsion engines. We expect that Aerospace Equipment segment revenues for the full Fiscal 2010 year will grow by approximately 10% compared to the prior fiscal year.

COST OF REVENUES AND GROSS MARGIN



	June 30,				Increase			Percentage
	2010		2009		(Decrease)			Change

Three Months Ended:
Revenues	$	37,247	$	31,490	$	5,757			18%
Cost of Revenues		28,920		24,227		4,693			19%

Gross Margin		8,327		7,263		1,064			15%

Gross Margin Percentage		22%		23%

Nine Months Ended:
Revenues	$	130,706	$	133,554	$	(2,848	)		(2	%)
Cost of Revenues		93,054		94,260		(1,206	)		(1	%)

Gross Margin		37,652		39,294		(1,642	)		(4	%)

Gross Margin Percentage		29%		29%

In addition to the factors detailed below, one of the most significant factors that affects, and should continue to affect, the comparison of our consolidated gross margins from period to period is the change in revenue mix between our segments.

- 27 -

Fine Chemicals. For the Fiscal 2010 third quarter, the Fine Chemicals segment gross margin percentage declined ten points. The primary reason for the reduction in the third quarter gross margin percentage is higher than anticipated costs associated with validating a process change for a core product. In addition, the third quarter experienced other general manufacturing inefficiencies. On a year-to-date basis, Fine Chemicals segment Fiscal 2010 gross margins improved two points. Manufacturing improvements from the first two quarters of Fiscal 2010 were substantially offset by the Fiscal 2010 third quarter performance.

Specialty Chemicals. Specialty Chemicals segment gross margin percentage was substantially lower in both the Fiscal 2010 and 2009 third quarters, each as compared to the nine-month periods in the corresponding fiscal years. This quarterly decline in gross margin occurs because segment revenues do not occur evenly between the quarters as compared to general and administrative expenses which tend to be more consistent from quarter to quarter. As a result, quarters with lower volume, as was the case with the Fiscal 2010 and 2009 third quarters, report lower operating margin percentages.

Specialty Chemicals segment gross margin percentage improved three points for the Fiscal 2010 nine-month period as compared to the prior fiscal year nine-month period. This improvement reflects the absorption of manufacturing overhead to inventory which is currently being produced to support early fiscal 2011 orders

Aerospace Equipment. Aerospace Equipment segment gross margin percentage declined by one point for the Fiscal 2010 third quarter and seven points for the Fiscal 2010 nine-month periods. These declines are attributed primarily to increases in estimated costs to complete certain systems contracts, as well as the impact on contract margins that results from late deliveries.

OPERATING EXPENSES



	June 30,				Increase		Percentage
	2010		2009		(Decrease)		Change

Three Months Ended:
Operating Expenses	$	11,946	$	10,915	$	1,031		9	%
Percentage of Revenues		32%		35%

Nine Months Ended:
Operating Expenses	$	35,697	$	33,295	$	2,402		7	%
Percentage of Revenues		27%		25%

For our Fiscal 2010 third quarter, operating expenses increased $1,031 to $11,946 from $10,915 for the prior fiscal year third quarter. For our Fiscal 2010 nine-month period, operating expenses increased $2,402 to $35,697 from $33,295 for the prior fiscal year nine-month period. The most significant components of the net increases include:

•		Fine Chemicals segment operating expenses increased $504 for the Fiscal 2010 third quarter as compared to the prior fiscal year third quarter. The increase is largely attributed to incremental costs associated with the successful three-year renewal of our collective bargaining agreement, as well as additional costs associated with our recently acquired facility in Texas. For the Fiscal 2010 nine-month period, as compared to the prior fiscal year nine-month period, operating expenses increased $793 reflecting the above mentioned third quarter increases and an increase in business development activities.

•		Aerospace Equipment segment operating expenses increased $344 for the Fiscal 2010 third quarter and $1,534 for the Fiscal 2010 nine-month period, each as compared to the corresponding prior fiscal year periods, primarily as a result of additional management and organization structure which was added to support the segment’s European growth strategy, as well as increases in research and development expenses in both the U.S. and Europe.

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SEGMENT OPERATING INCOME (LOSS)



	June 30,						Favorable			Percentage
	2010			2009			(Unfavorable)			Change

Three Months Ended:
Fine Chemicals	$	(2,458	)	$	(752	)	$	(1,706	)		(227	%)
Specialty Chemicals		2,796			552			2,244			407%
Aerospace Equipment		(120	)		417			(537	)	NM
Other Businesses		(286	)		(215	)		(71	)		(33	%)

Segment Operating Income		(68	)		2			(70	)	NM
Corporate Expenses		(3,551	)		(3,654	)		103			3%

Operating Loss	$	(3,619	)	$	(3,652	)	$	33			1%


Nine Months Ended:
Fine Chemicals	$	(698	)	$	(370	)	$	(328	)		(89	%)
Specialty Chemicals		15,140			16,481			(1,341	)		(8	%)
Aerospace Equipment		(457	)		1,571			(2,028	)	NM
Other Businesses		(234	)		164			(398	)	NM

Segment Operating Income		13,751			17,846			(4,095	)		(23	%)
Corporate Expenses		(11,796	)		(11,847	)		51			0%

Operating Income	$	1,955		$	5,999		$	(4,044	)		(67	%)

NM=Not meaningful

Segment operating income or loss includes all sales and expenses directly associated with each segment. Environmental remediation charges, corporate general and administrative costs and interest are not allocated to segment operating results. Fluctuations in segment operating income or loss are driven by changes in segment revenues, gross margins and operating expenses, each of which is discussed in greater detail above.

BACKLOG

Agreements with our Fine Chemicals segment customers typically include multi-year supply agreements. These agreements may contain provisional order volumes, minimum order quantities, take-or-pay provisions, termination fees and other customary terms and conditions, which we do not include in our computation of backlog. Fine Chemicals segment backlog includes unfulfilled firm purchase orders received from a customer, including both purchase orders which are issued against a related supply agreement and stand-alone purchase orders. Fine Chemicals segment backlog was $43,300 and $28,200 as of June 30, 2010 and September 30, 2009, respectively. We anticipate order backlog as of June 30, 2010 to be substantially filled during the next twelve months.

Our Aerospace Equipment segment is supplier to government contractors, and accordingly, total backlog includes both funded backlog (contracts, or portions of contracts, for which funding is contractually obligated by the customer) and unfunded backlog (contracts, or portions of contracts, for which funding is not currently contractually obligated by the customer). We compute Aerospace Equipment segment total and funded backlog as the total contract value less revenues that have been recognized under the percentage-of-completion method of accounting. Aerospace Equipment segment total backlog and funded backlog were approximately $42,500 and $36,800, respectively, as of June 30, 2010, compared to total backlog and funded backlog of $46,800 and $38,900, respectively, as of September 30, 2009. We anticipate funded backlog as of June 30, 2010 to be substantially completed during the next twelve months.

Backlog is not a meaningful measure for our other business lines.

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LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS



	Nine Months Ended June 30,									Percentage
	2010			2009			Change			Change

Cash Provided (Used) By:
Operating activities	$	23,011		$	11,352		$	11,659			103%
Investing activities		(7,382	)		(13,037	)		5,655			(43	%)
Financing activities		(5,037	)		(240	)		(4,797	)		1,999%
Effect of changes in exchange rates on cash		(112	)		-			(112	)	NM

Net change in cash for period	$	10,480		$	(1,925	)	$	12,405			(644	%)

NM = Not meanginful.

Operating Activities. Operating activities provided cash of $23,011 for the Fiscal 2010 nine-month period compared to $11,352 for the prior fiscal year nine-month period, resulting in an increase of $11,659 from the prior fiscal year period.

Significant components of the change in cash flow from operating activities include:

•		A decrease in cash due to less profit from our operations of $4,503.

•		An increase in cash provided by working capital accounts of $16,183, excluding the effects of interest and income taxes.

•		An increase in cash taxes refunded of $121.

•		An increase in cash paid for interest of $229.

•		An increase in cash used for environmental remediation of $541.

•		Other increases in cash provided by operating activities of $628.

The increase in cash provided by working capital accounts for the Fiscal 2010 nine-month period reflects timing, and in particular as of June 30, 2010, the lower business volume and associated working capital requirements. We consider these working capital changes to be routine and within the normal production cycle of our products. The production of most fine chemical products requires a length of time that exceeds one quarter. In addition, the timing of Aerospace Equipment segment revenues recognized under the percentage-of-completion method differs from the timing of the related billings to customers. Therefore, in any given quarter, accounts receivable, work-in-progress inventory or deferred revenues can increase or decrease significantly. We expect that our working capital may vary normally by as much as $10,000 from quarter to quarter.

Investing Activities. Capital expenditures increased by $1,080 in the Fiscal 2010 nine-month period compared to the prior fiscal year nine-month period due to the timing of expenditures. In April 2010, our Fine Chemicals segment expanded its manufacturing capacity through the purchase of a fine chemicals facility in La Porte, Texas at a total cost of approximately $1,200, including direct purchase costs. The purchase of this facility is accounted for as a capital expenditure and accounts for the increase in capital expenditures as compared to the prior fiscal year period. Remaining capital expenditures in both periods were primarily maintenance capital related.

We are anticipating our capital expenditures, which do not include environmental remediation spending, for Fiscal 2010 to be approximately $14,000, which we fund primarily from our working capital.

Financing Activities. In June 2010, we repurchased and cancelled $5,000 in principal amount of our 9% Senior Notes for $4,900, which approximated our carrying value of the notes, net of deferred financing costs.

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LIQUIDITY AND CAPITAL RESOURCES. As of June 30, 2010, we had cash of $32,161. Our primary source of working capital is cash flows from operations. In addition, we have available funds under our committed revolving credit line, which matures in February 2012. Our revolving line of credit had availability of $18,112 as of June 30, 2010. Availability is computed as the total commitment of $20,000 less outstanding borrowings and outstanding letters of credit, if any. We believe that changes in cash flow from operations during our Fiscal 2010 periods reflect short-term timing and as such do not represent significant changes in our sources and uses of cash. Because our revenues, and related customer invoices and collections, are characterized by relatively few individually significant transactions, our working capital balances can vary normally by as much as $10,000 from period to period.

We may incur additional debt to fund capital projects, strategic initiatives or for other general corporate purposes, subject to our existing leverage, the value of our unencumbered assets and borrowing limitations imposed by our lenders. The availability of our cash inflows is affected by the timing, pricing and magnitude of orders for our products. From time to time, we may explore options to refinance our borrowings.

The timing of our cash outflows is affected by payments and expenses related to the manufacture of our products, capital projects, pension funding, interest on our debt obligations and environmental remediation or other contingencies, which may place demands on our short-term liquidity. Although we are not currently party to any material pending legal proceedings, we are from time to time subject to claims and lawsuits related to our business operations and we have incurred legal and other costs as a result of litigation and other contingencies. We may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods, and, to the extent not covered by insurance, they may adversely affect our liquidity.

In contemplating the adequacy of our liquidity and available capital, we consider factors such as:

•		current results of operations, cash flows and backlog;

•		anticipated changes in operating trends, including anticipated changes in revenues and margins;

•		cash requirements related to our debt agreements and pension plans; and

•		cash requirements related to our remediation activities, including amounts that we expect to spend through fall 2011 for the engineering, design, installation and cost of additional remediation equipment (“Remediation Capital”). See further discussion under the heading “Environmental Remediation – AMPAC Henderson Site” below.

We do not currently anticipate that the factors noted above will have material affects on our ability to meet our future liquidity requirements. We anticipate funding Remediation Capital with cash on hand. We continue to believe that our cash flows from operations, existing cash balances and existing or future debt arrangements will be adequate for the foreseeable future to satisfy the needs of our operations on both a short-term and long-term basis. Further, accounting charges for environmental remediation and cash spent for Remediation Capital do not impact our bank covenant compliance charges.

LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES

•		ranked equally in right of payment with all of our existing and future senior indebtedness;

•		ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness;

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•		effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and

•		structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes.

The Senior Notes may be redeemed by us, in whole or in part, under the following circumstances:

•		at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of the Senior Notes plus an applicable premium as defined in the related indenture;

•		at any time on or after February 1, 2011 at redemption prices beginning at 104.5% of the principal amount to be redeemed and reducing to 100% by February 1, 2013; and

•		under certain changes of control, we must offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest.

•		incur additional debt;

•		pay dividends or make other restricted payments;

•		create liens on assets to secure debt;

•		incur dividend or other payment restrictions with regard to restricted subsidiaries;

•		transfer or sell assets;

•		enter into transactions with affiliates;

•		enter into sale and leaseback transactions;

•		create an unrestricted subsidiary;

•		enter into certain business activities; or

•		effect a consolidation, merger or sale of all or substantially all of our assets.

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•		incur debt, incur contingent obligations and issue certain types of preferred stock;

•		create liens;

•		pay dividends, distributions or make other specified restricted payments;

•		make certain investments and acquisitions;

•		enter into certain transactions with affiliates;

•		enter into sale and leaseback transactions; and

•		merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets.

PENSION BENEFITS. We maintain three defined benefit pension plans which cover substantially all of our U.S. employees, excluding employees of our Aerospace Equipment segment: the Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC Pension Plan for Salaried Employees (the “AFC Salaried Plan”), and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees (the “AFC Bargaining Plan”), each as amended and restated. Collectively, these three plans are referred to as the “Pension Plans”. In May 2010, our board of directors approved amendments to our Pension Plans which effectively closed the Pension Plans to participation by any new employees. Retirement benefits for existing U.S. employees and retirees through June 30, 2010 are not affected by this change. Beginning July 1, 2010, new U.S. employees will participate solely in one of the Company’s 401(k) plans. Pension Plan benefits are paid based on an average of earnings, retirement age, and length of service, among other factors.

Benefit obligations are measured annually as of September 30. As of September 30, 2009, the Pension Plans had an unfunded benefit obligation of $21,221. For Fiscal 2009, we made contributions to the Pension Plans in the amount of $2,941. We anticipate making minimum Pension Plan contributions in the amount of $3,287 during Fiscal 2010. We are required to make minimum contributions to our Pension Plans pursuant to the minimum funding requirements of the Internal Revenue Code of 1986, as amended,

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and the Employee Retirement Income Security Act of 1974, as amended. In accordance with federal requirements, our minimum funding obligations are determined annually based on a measurement date of October 1. The fair value of Pension Plan assets is a key factor in determining our minimum funding obligations. Holding all other variables constant, a 10% decline in asset value as of September 30, 2009 would increase our minimum funding obligations for Fiscal 2010 by approximately $500.

In addition, we maintain the American Pacific Corporation Supplemental Executive Retirement Plan, as amended and restated (the “SERP”) that includes five participants comprised of active and former executive officers. The SERP is an unfunded plan and as of September 30, 2009, the SERP obligation was $6,981. For Fiscal 2009, we paid SERP retirement benefits of $127. We anticipate paying SERP retirement benefits in the amount of $427 during Fiscal 2010. Payments for retirement benefits should increase in future years when each of the three current active participants retires. The future increase in such retirement benefits will be determined based on certain variables including each participating individual’s actual retirement date, rate of compensation and years of service.

During Fiscal 2009, our aggregate Pension Plans and SERP liability increased significantly primarily due to changes in actuarial assumption such as the discount rate. The change was recorded as an increase in Pension Obligations and a corresponding decrease in Shareholders’ Equity (Accumulated Other Comprehensive Loss). The increase in Pension Obligation is not anticipated to cause a material change in our Fiscal 2010 funding requirements.

ENVIRONMENTAL REMEDIATION – AMPAC HENDERSON SITE. We accrue for anticipated costs associated with environmental remediation that are probable and estimable. On a quarterly basis, we review our estimates of future costs that could be incurred for remediation activities. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used; otherwise, we accrue the minimum amount of the range.

During the third quarter of our fiscal year ended September 30, 2005, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at our former facility in Henderson, Nevada (the “AMPAC Henderson Site”), including the costs for capital equipment, operating and maintenance (“O&M”), and consultants. The project consisted of two primary phases: the initial construction of the remediation equipment phase and the O&M phase. During the fiscal year ended September 30, 2006, we increased our total cost estimate of probable costs for the construction phase by $3,600 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time.

In-situ bioremediation (“ISB”) is a new technology on the scale being used at the AMPAC Henderson Site. Accordingly, as we gain ISB operational experience, we have been and are observing certain conditions, operating results and other data which we consider in updating the assumptions used to determine our cost estimates. The two most significant assumptions are the estimated speed of groundwater flowing to our remediation extraction wells and the estimated annual O&M costs.

Late in Fiscal 2009, we gained additional information from groundwater modeling that indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150 feet below ground surface) is moving toward our existing remediation facility at a much slower pace than previously estimated. Utilization of our existing facilities alone, at this lower groundwater pace, could, according to this more recently created groundwater model, extend the life of our remediation project to well in excess of fifty years. As a result of this additional data, we re-evaluated our remediation operations. This evaluation indicates that we should be able to significantly reduce the total project time, and ultimately the total cost of the project, by installing additional groundwater extraction wells in the deeper, more concentrated areas, thereby providing for a more aggressive remediation treatment. The additional wells and related remediation equipment will incorporate above ground treatment to supplement or possibly replace by consolidation our existing ISB process. With the additional extraction wells and equipment, we estimate that the total remaining project life for the existing and new, more aggressive deep zone systems could range from 10 to 29 years, beginning with Fiscal 2010. Within that

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range, we estimate that a range of 13 to 23 years is more likely. Groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted groundwater extraction rates continue to be key variables underlying our estimate of the life of the project. If additional information becomes available in the future that is different than information currently available to us, our estimate of the resulting project life could change significantly.

In our Fiscal 2009 fourth quarter, we accrued approximately $9,600 representing our estimate of the cost to engineer, design, and install this additional equipment. We anticipate that these amounts will be spent through and the new equipment operational in approximately fall 2011. However, because we are in the early design and engineering steps, this estimate involves a number of significant assumptions. Due to uncertainties inherent in making early stage estimates, our estimate may later require significant revision as new facts become available and circumstances change.

In addition to accruing approximately $9,600 for engineering, design, installation and cost of additional equipment, in our Fiscal 2009 fourth quarter, we increased our estimate of total remaining O&M costs by $4,100 due primarily to incremental O&M costs to operate and maintain the additional equipment once installed. Total O&M expenses are currently estimated at approximately $1,000 per year and estimated to increase to approximately $1,300 per year after the additional equipment becomes operational. To estimate O&M costs, we consider, among other factors, the project scope and historical expense rates to develop assumptions regarding labor, utilities, repairs, maintenance supplies and professional service costs. If additional information becomes available in the future that is different than information currently available to us and thereby leads us to different conclusions, our estimate of O&M expenses could change significantly.

In addition, certain remediation activities are conducted on public lands under operating permits. In general, these permits require us to return the land to its original condition at the end of the permit period. Estimated costs associated with removal of remediation equipment from the land are not material and are included in our range of estimated costs.

As of June 30, 2010, the aggregate range of anticipated environmental remediation costs was from approximately $21,400 to approximately $45,600 based on a possible total remaining life of the project ranging from 10 to 29 years. The accrued amount was $25,162, based on 13 years (beginning with Fiscal 2010), or the low end of the more likely range of 13 to 23 years as no amount within the range was more likely. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate.

CONTRACTUAL OBLIGATIONS. Our contractual obligations are summarized in our Annual Report on Form 10-K for Fiscal 2009. We have contractual obligations related to our Senior Notes, interest on Senior Notes, capital leases, interest on capital leases, and operating leases. As of June 30, 2010, there have been no material changes to our contractual obligations from September 30, 2009.

In addition, at June 30, 2010:

•		We have recorded an estimated liability for environmental remediation of $25,162 (see Note 7 to the condensed consolidated financial statements included in Item 1 of this report). We expect to spend approximately $2,522 for environmental remediation during Fiscal 2010.

•		We have recorded aggregate unfunded Pension Plans and SERP obligations of $29,653, including $728 which is classified as current employee related liabilities (see Note 10 to the condensed consolidated financial statements included in Item 1 of this report). We expect to contribute $3,714 to our Pension Plans and SERP during Fiscal 2010.

•		We have uncertain tax positions totaling $329. We are unable to reasonably estimate the timing of the related payments, if any.

•		We also maintain the Revolving Credit Facility, which provides revolving credit in an aggregate principal amount of up to $20,000 with an initial maturity in February 2012. We had no balance outstanding under the Revolving Credit Facility. We may prepay and terminate the Revolving Credit Facility at any time.

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OFF-BALANCE SHEET ARRANGEMENTS

Employee Agreements. We have an employment agreement with our Chief Executive Officer. The term of the employment agreement currently ends on September 30, 2012, unless amended or extended in accordance with the terms of the agreement or otherwise. Significant contract provisions include annual base salary, health care benefits, and non-compete provisions. The employment agreement is primarily an “at will” employment agreement, under which we may terminate the executive officer’s employment for any or no reason. Generally, the agreement provides that a termination without cause obligates us to pay certain severance benefits specified in the contract.

Effective as of July 8, 2008, we entered into severance agreements with each of our Vice President, Administration and our Chief Financial Officer, which, generally, provide that a termination of the executive without cause obligates us to pay certain severance benefits specified in the contract.

In addition, certain other key divisional executives are eligible for severance benefits. Estimated minimum aggregate severance benefits under all of these agreements and arrangements was $4,200 as of June 30, 2010.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires that we adopt accounting policies and 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 significant judgment, 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, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

SALES AND REVENUE RECOGNITION. Revenues from our Specialty Chemicals segment, Fine Chemicals segment, and Other Businesses segment are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, title passes, the price is fixed or determinable and collectability is reasonably assured. Almost all products sold by our Fine Chemicals segment are subject to customer acceptance periods. Specifically, these customers have contractually negotiated acceptance periods from the time they receive certificates of analysis and compliance (“Certificates”) to reject the material based on issues with the quality of the product, as defined in the applicable agreement. At times we receive payment in advance of customer acceptance. If we receive payment in advance of customer acceptance, we record deferred revenues and deferred costs of revenue upon delivery of the product and recognize revenues in the period when the acceptance period lapses or the customer’s acceptance has occurred.

Some of our perchlorate and fine chemicals products customers have requested that we store materials purchased from us in our facilities (“Bill and Hold” transactions or arrangements). We recognize revenue prior to shipment of these Bill and Hold transactions when we have satisfied the criteria included in the relevant accounting standard, which include the point at which title and risk of ownership transfer to our customers. These customers have specifically requested in writing, pursuant to a contract, that we invoice for the finished product and hold the finished product until a later date. For our Bill and Hold arrangements that contain customer acceptance periods, we record deferred revenues and deferred

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costs of revenues when such products are available for delivery and Certificates have been delivered to the customers. We recognize revenue on our Bill and Hold transactions in the period when the acceptance period lapses or the customer’s acceptance has occurred. The sales value of inventory, subject to Bill and Hold arrangements, at our facilities was $19,612 and $25,882 as of June 30, 2010, and September 30, 2009, respectively.

Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for using the percentage-of-completion method and measure progress on a cost-to-cost basis. Contract revenues include change orders and claims when approved by the customer. The percentage-of-completion method recognizes revenue as work on a contract progresses. Revenues are calculated based on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately. We do not incur material pre-contract costs.

DEPRECIABLE OR AMORTIZABLE LIVES OF LONG-LIVED ASSETS. Our depreciable or amortizable long-lived assets include property, plant and equipment and intangible assets, which are recorded at cost. Depreciation or amortization is recorded using the straight-line method over the shorter of the asset’s estimated economic useful life or the lease term, if the asset is subject to a capital lease. Economic useful life is the duration of time that we expect the asset to be productively employed by us, which may be less than its physical life. Significant assumptions that affect the determination of estimated economic useful life include: wear and tear, obsolescence, technical standards, contract life, and changes in market demand for products.

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, we 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. We test our property, plant and equipment and amortizable intangible assets for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such circumstances include, but are not limited to, operating or cash flow losses from the use of such assets or changes in our intended uses of such assets. To test for recovery, we group assets (an “Asset Group”) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Our Asset Groups are typically identified by facility because each facility has a unique cost overhead and general and administrative expense structure that is supported by cash flows from products produced at the facility. The carrying amount of an Asset Group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the Asset Group.

If we determine that an Asset Group is not recoverable, then we would record an impairment charge if the carrying value of the Asset Group exceeds its fair value. Fair value is based on estimated discounted future cash flows expected to be generated by the Asset Group. The assumptions underlying cash flow projections would represent management’s best estimates at the time of the impairment review. Some of the factors that management would consider or estimate include: industry and market conditions, sales volume and prices, costs to produce and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. We would use reasonable and supportable assumptions when performing impairment reviews but cannot predict the occurrence of future events and circumstances that could result in impairment charges.

When we review Asset Groups for recoverability, we also consider depreciation estimates and methods or the amortization period, in each case as required by applicable accounting standards. Any revision to the

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remaining useful life of a long-lived asset resulting from that review also is considered in developing estimates of future cash flows used to test the Asset Group for recoverability.

GOODWILL. Goodwill is not amortized. We test goodwill for impairment at the reporting unit level on an annual basis, as of September 30, or more frequently if an event occurs or circumstances change that indicate that the fair value of a reporting unit could be below its carrying amount. The impairment test consists of comparing the fair value of a reporting unit with its carrying amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss would be recognized for the carrying amount of goodwill in excess of its implied fair value.

ENVIRONMENTAL COSTS. We are subject to environmental regulations that relate to our past and current operations. We record liabilities for environmental remediation costs when our assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. On a quarterly basis, we review our estimates of future costs that could be incurred for remediation activities. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used; otherwise, we accrue the minimum amount of the range. Estimates of liabilities are based on currently available facts, existing technologies and presently enacted laws and regulations. These estimates are subject to revision in future periods based on actual costs or new circumstances. Accrued environmental remediation costs include the undiscounted cost of equipment, operating and maintenance costs, and fees to outside law firms and consultants, for the estimated duration of the remediation activity. Estimating environmental cost requires us to exercise substantial judgment regarding the cost, effectiveness and duration of our remediation activities. Actual future expenditures could differ materially from our current estimates.

We evaluate potential claims for recoveries from other parties separately from our estimated liabilities. We record an asset for expected recoveries when recoveries of the amounts are probable.

INCOME TAXES. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured, separately for each tax-paying entity in each tax jurisdiction, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

When measuring deferred tax assets, we assess whether a valuation allowance should be established. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment of valuation allowance requirements, if any, involves significant estimates regarding the timing and amount of reversal of taxable temporary differences, future taxable income and the implementation of tax planning strategies. We rely on deferred tax liabilities in our assessment of the realizability of deferred tax assets if the temporary timing difference is anticipated to reverse in the same period and jurisdiction and the deferred tax liabilities are of the same character as the temporary differences giving rise to the deferred tax assets. We weigh both positive and negative evidence in determining whether it is more likely than not that a valuation allowance is required.

As of September 30, 2009, recovery of our U.S. jurisdiction deferred tax assets, net of applicable deferred tax liabilities, required that we generate approximately $68,000 in taxable income in periods ranging from one to at least 13 years in the future. To determine whether a valuation allowance is required, we project our future taxable income. The projections require us to make assumptions regarding our product revenues, gross margins and operating expenses.

For our U.S. tax jurisdictions, the most significant positive evidence is our historical long-term trend of profitable operations and our forecast that such trend will continue in future periods when temporary

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differences are anticipated to reverse. Positive evidence also includes the lack of reliance on success in implementing tax planning strategies, utilization of short carry-back periods or appreciated asset values. Further, we do not have a history of tax credits expiring unused. For foreign tax jurisdictions, the most compelling negative evidence is a history of unprofitable operations. Accordingly, we have fully reserved our foreign deferred tax assets.

We account for uncertain tax positions in accordance with an accounting standard which creates a single model to address uncertainty in income tax positions and prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under this standard, we may recognize tax benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. 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.

PENSION BENEFITS. We sponsor four defined benefit pension plans in various forms for employees who meet eligibility requirements. Applicable accounting standards require that we make assumptions and use statistical variables in actuarial models to calculate our pension obligations and the related periodic pension expense. The most significant assumptions are the discount rate and the expected rate of return on plan assets. Additional assumptions include the future rate of compensation increases, which is based on historical plan data and 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.

The discount rate is used to estimate the present value of projected future pension payments to all participants. The discount rate is generally based on the yield on AAA/AA-rated corporate long-term bonds. At September 30 of each year, the discount rate is determined using bond yield curve models matched with the timing of expected retirement plan payments. Our discount rate assumption was 6.40 percent as of September 30, 2009. Holding all other assumptions constant, a hypothetical increase or decrease of 25 basis points in the discount rate assumption would increase or decrease annual pension expense by approximately $300.

The expected long-term rate of return on plan assets represents the average rate of earnings expected on the plan funds invested in a specific target asset allocation. The expected long-term rate of return assumption on pension plan assets was 8.00 percent in Fiscal 2009. Holding all other assumptions constant, a hypothetical 25 basis point increase or decrease in the assumed long-term rate of return would increase or decrease annual pension expense by approximately $100.

RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS. In September 2006, the Financial Accounting Standards Board (the “FASB”) issued a new standard which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States of America, and expands disclosures about fair value measurements. In February 2008, the FASB deferred this standard for one year as it applied to certain items, including assets and liabilities initially measured at fair value in a business combination, reporting units and certain assets and liabilities measured at fair value in connection with goodwill impairment tests, and long-lived assets measured at fair value for impairment assessments. The standard applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. This standard was effective for us on October 1, 2008; however, we did not adopt all the provisions of the standard as the FASB delayed

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the effective date of its application to non-financial assets and liabilities. The remaining provisions became effective for us beginning October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

In December 2007, the FASB issued a new standard that significantly changed the accounting for business combinations. Under the standard, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. The standard also includes a substantial number of new disclosure requirements. The standard applies to us for business combinations with acquisition dates on or after October 1, 2009. We expect that the new standard will have an impact on our accounting for future business combinations, but the effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued a new standard that establishes revised accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the standard requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. The standard requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The standard also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The standard was effective for us beginning on October 1, 2009. We currently have no entities or arrangements that were affected by the adoption of this standard.

In April 2008, the FASB issued a new standard which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The standard for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements must be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The standard was effective for us beginning on October 1, 2009. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows.

In December 2008, the FASB issued a new standard that provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures include disclosure of investment allocation decisions, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets, the effect of certain fair value measurements, and significant concentrations of risk within plan assets. The expanded disclosure requirements are effective for our fiscal year ending September 30, 2010. The adoption of this standard is not expected to have a material impact on our results of operations, financial position or cash flows.

In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17, which provides guidance on defining a milestone under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. We are currently evaluating the impact of adopting this ASU, which is effective for us beginning on October 1, 2010.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK – Not Applicable.

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ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of June 30, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of such date to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

As previously reported in Item 9A(T), “Controls and Procedures,” within “Management’s Report on Internal Controls Over Financial Reporting” contained in the Company’s Annual Report on Form 10-K for Fiscal 2009, as filed with the SEC on December 29, 2009, and as further reported in Item 4, “Controls and Procedures,” in each of the Company’s Quarterly Reports on Form 10-Q for the quarters ended December 31, 2009 and March 31, 2010, management had first identified, in its evaluation as of September 30, 2009, a material weakness relating to the Company’s internal control over financial reporting, which we view as part of our disclosure controls and procedures, due to inadequate controls for non-routine transactions at the Company’s Fine Chemicals segment.

Solely as a result of this material weakness, management had concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2009, December 31, 2009 and March 31, 2010. Subsequent to March 31, 2010, and during the quarterly period ended June 30, 2010, the Company completed the implementation of strengthened review and control procedures to address the previously reported material weakness, including:

	•		Effecting improvements in the Fine Chemicals segment contract administration process to ensure the proper approval and circulation of all sales arrangements, including non-standard commitments;

	•		Providing additional and on-going training to Fine Chemicals segment finance and accounting staff on the application of technical accounting pronouncements, especially in the area of revenue recognition. Additionally, we continued to provide training to Fine Chemicals segment product managers and others involved in negotiating contractual arrangements with our customers to heighten the awareness of revenue recognition concepts, with emphasis on non-standard contracts; and

	•		Establishing a process whereby corporate finance personnel provide a second review of the Fine Chemicals segment’s accounting treatment for significant sales arrangements.

Based on the foregoing, the Company believes that the material weakness has been corrected. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than those activities described above.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Although we are not currently party to any material pending legal proceedings, we are from time to time subject to claims and lawsuits related to our business operations. Any such claims and lawsuits could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such claims and lawsuits, we may be subject to significant damages or equitable remedies relating to the operation of our business. Any such claims and lawsuits may materially harm our business, results of operations and financial condition.

ITEM 1A. RISK FACTORS (Dollars in Thousands)

There have been no material changes in our assessment of risk factors affecting our business since those presented in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2009. Our updated risk factors are included below in this Item 1A.

Our business, financial condition and operating results can be affected by a number of factors, including those described below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. Any of these risks could also materially and adversely affect our business, financial condition or the price of our common stock or other securities.

We depend on a limited number of customers for most of our sales in our Specialty Chemicals, Aerospace Equipment and Fine Chemicals segments and the loss of one or more of these customers could have a material adverse effect on our financial position, results of operations and cash flows.

Most of the perchlorate chemicals we produce, which accounted for 88% of our total revenues in the Specialty Chemicals segment for the fiscal year ended September 30, 2009 (“Fiscal 2009”) and approximately 28% of our total revenues for Fiscal 2009, are purchased by a small number of customers. For example, Alliant Techsystems Inc., one of our ammonium perchlorate, or AP, customers, accounted for 15% of our total revenues for Fiscal 2009. Should our relationship with one or more of our major Specialty Chemicals or Aerospace Equipment customers change adversely, the resulting loss of business could have a material adverse effect on our financial position, results of operations and cash flows. In addition, if one or more of our major Specialty Chemicals or Aerospace Equipment customers substantially reduced their volume of purchases from us or otherwise delayed some or all of their purchase from us, it could have a material adverse effect on our financial position, results of operations and cash flows. Should one of our major Specialty Chemicals or Aerospace Equipment customers encounter financial difficulties, the exposure on uncollectible receivables and unusable inventory could have a material adverse effect on our financial position, results of operations and cash flows.

Furthermore, our Fine Chemicals segment’s success is largely dependent upon the manufacturing by Ampac Fine Chemicals LLC (“AFC”) of a limited number of registered intermediates and active pharmaceutical ingredients for a limited number of key customers. One customer of AFC accounted for 24% of our consolidated revenue and the top four customers of AFC accounted for approximately 93% of its revenues, and 46% of our consolidated revenues, in Fiscal 2009. Negative development in these customer relationships or in the customer’s business, or failure to renew or extend certain contracts, may have a material adverse effect on the results of operations of AFC. Moreover, from time to time key customers have reduced their orders, and one or more of these customers might reduce their orders in the future, or one or more of them may attempt to renegotiate prices, any of which could have a similar negative effect on the results of operations of AFC. For example, in Fiscal 2009, Fine Chemicals segment revenues declined as compared to the fiscal year ended September 30, 2008 (“Fiscal 2008”), in part due to a decline in revenues from central nervous system products related to a customer deferring a portion of an order for a central nervous system product in Fiscal 2009. In addition, if the pharmaceutical

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products that AFC’s customers produce using its compounds experience any problems, including problems related to their safety or efficacy, delays in filing with or approval by the U.S. Food and Drug Administration, or FDA, failures in achieving success in the market, expiration or loss of patent/regulatory protection, or competition, including competition from generic drugs, these customers may substantially reduce or cease to purchase AFC’s compounds, which could have a material adverse effect on the revenues and results of operations of AFC.

The inherent limitations of our fixed-price or similar contracts may impact our profitability.

A substantial portion of our revenues are derived from our fixed-price or similar contracts. When we enter into fixed-price contracts, we agree to perform the scope of work specified in the contract for a predetermined price. Many of our fixed-price or similar contracts require us to provide a customized product over a long period at a pre-established price or prices for such product. For example, when AFC is initially engaged to manufacture a product, we often agree to set the price for such product, and any time-based increases to such price, at the beginning of the contracting period and prior to fully testing and beginning the customized manufacturing process. Depending on the fixed price negotiated, these contracts may provide us with an opportunity to achieve higher profits based on the relationship between our total estimated contract costs and the contract’s fixed price. However, we bear the risk that increased or unexpected costs, or external factors that may impact contract costs, fixed prices or profit yields, such as fluctuations in international currency exchange rates, may reduce our profit or cause us to incur a loss on the contract, which could reduce our net sales and net earnings. Ultimately, fixed-price contracts and similar types of contracts present the inherent risk of un-reimbursed cost overruns and unanticipated external factors that negatively impact contract costs, fixed prices or profit yields, any of which could have a material adverse effect on our operating results, financial condition, or cash flows. Moreover, to the extent that we do not anticipate the increase in cost or the effect of external factors over time on the production or pricing of the products which are the subject of our fixed-price contracts, our profitability could be adversely affected.

The numerous and often complex laws and regulations and regulatory oversight to which our operations and properties are subject, the cost of compliance, and the effect of any failure to comply could reduce our profitability and liquidity.

The nature of our operations subject us to extensive and often complex and frequently changing federal, state, local and foreign laws and regulations and regulatory oversight, including with respect to emissions to air, discharges to water and waste management as well as with respect to the sale and, in certain cases, export of controlled products. For example, in our Fine Chemicals segment, modifications, enhancements or changes in manufacturing sites of approved products are subject to complex regulations of the FDA, and, in many circumstances, such actions may require the express approval of the FDA, which in turn may require a lengthy application process and, ultimately, may not be obtainable. The facilities of AFC are periodically subject to scheduled and unscheduled inspection by the FDA and other governmental agencies. Operations at these facilities could be interrupted or halted if such inspections are unsatisfactory and we could experience fines and/or other regulatory actions if we are found not to be in regulatory compliance. AFC’s customers face similarly high regulatory requirements. Before marketing most drug products, AFC’s customers generally are required to obtain approval from the FDA based upon pre-clinical testing, clinical trials showing safety and efficacy, chemistry and manufacturing control data, and other data and information. The generation of these required data is regulated by the FDA and can be time-consuming and expensive, and the results might not justify approval. Even if AFC’s customers are successful in obtaining all required pre-marketing approvals, post-marketing requirements and any failure on either AFC’s or its customer’s part to comply with other regulations could result in suspension or limitation of approvals or commercial activities pertaining to affected products.

Because we operate in highly regulated industries, we may be affected significantly by legislative and other regulatory actions and developments concerning or impacting various aspects of our operations and products or our customers. To meet changing licensing and regulatory standards, we may be required to

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make additional significant site or operational modifications, potentially involving substantial expenditures or the reduction or suspension of certain operations. For example, in our Fine Chemicals segment, any regulatory changes could impose on AFC or its customers changes to manufacturing methods or facilities, pharmaceutical importation, expanded or different labeling, new approvals, the recall, replacement or discontinuance of certain products, additional record keeping, testing, price or purchase controls or limitations, and expanded documentation of the properties of certain products and scientific substantiation. AFC’s failure to comply with governmental regulations, in particular those of the FDA, can result in fines, unanticipated compliance expenditures, recall or seizure of products, delays in, or total or partial suspension or withdrawal of, approval of production or distribution, suspension of the FDA’s review of relevant product applications, termination of ongoing research, disqualification of data for submission to regulatory authorities, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although we have instituted internal compliance programs, if regulations or the standards by which they are enforced change and/or compliance is deficient in any significant way, such as a failure to materially comply with the FDA’s current Good Manufacturing Practices or “cGMP” guidelines, or if a regulatory authority asserts publically or otherwise such a deficiency or takes action against us whether or not the underlying asserted deficiency is ultimately found to be sustainable, it could have a material adverse effect on us. In our Specialty Chemicals and Fine Chemicals segments, changes in environmental regulations could result in requirements to add or modify emissions control, water treatment, or waste handling equipment, processes or arrangements, which could impose significant additional costs for equipment at and operation of our facilities.

Moreover, in other areas of our business, we, like other government and military contractors and subcontractors, are subject directly or indirectly in many cases to government contracting regulations and the additional costs, burdens and risks associated with meeting these heightened contracting requirements. Failure to comply with government contracting regulations may result in contract termination, the potential for substantial civil and criminal penalties, and, under certain circumstances, our suspension and debarment from future U.S. government contracts for a period of time. For example, these consequences could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks or filing false claims. In addition, the U.S. government and its principal prime contractors periodically investigate the U.S. government’s contractors and subcontractors, including with respect to financial viability, as part of the U.S. government’s risk assessment process associated with the award of new contracts. Consequently, for example, if the U.S. government or one or more prime contractors were to determine that we were not financially viable, our ability to continue to act as a government contractor or subcontractor would be impaired. Further, a portion of our business involves the sale of controlled products overseas, such as supplying AP to various foreign defense programs and commercial space programs. Foreign sales subject us to numerous additional complex U.S. and foreign laws and regulations, including laws and regulations governing import-export controls applicable to the sale and export of munitions and other controlled products and commodities, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act, and the anti-boycott provisions of the U.S. Export Administration Act. The costs of complying with the various and often complex and frequently changing laws and regulations and regulatory oversight applicable to us and the businesses in which we engage, and the consequences should we fail to comply, even inadvertently, with such requirements, could be significant and could reduce our profitability and liquidity.

In addition, we are subject to numerous federal laws and regulations due to our status as a publicly traded company, as well as rules and regulations of The NASDAQ Stock Market LLC. Any changes in these legal and regulatory requirements could increase our compliance costs and negatively affect our results of operations.

A significant portion of our business depends on contracts with the government or its prime contractors or subcontractors and these contracts are impacted by governmental priorities and are subject to potential fluctuations in funding or early termination, including for convenience, any of which could have a material adverse effect on our operating results, financial condition or cash flows.

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Sales to the U.S. government and its prime contractors and subcontractors represent a significant portion of our business. In Fiscal 2009, our Specialty Chemicals segment generated approximately 26% of consolidated revenues, primarily sales of Grade I AP, and our Aerospace Equipment segment generated approximately 6% of consolidated revenues, each from sales to the U.S. government, its prime contractors and subcontractors. One significant use of Grade I AP historically has been in NASA’s Space Shuttle program. Consequently, the long-term demand for Grade I AP may be driven by the timing of the retirement of the Space Shuttle fleet as well as by the development of next-generation space exploration vehicles, including the development and testing of a new heavy launch vehicle used to transport materials and supplies to the International Space Station, and potentially elsewhere, and the number of space exploration launches. Accordingly, demand for AP remains subject to potential changes in space exploration program direction and budgetary restrictions, which may result in changes in next-general space exploration vehicles and the timing associated with their development. If the use of AP as the oxidizing agent for solid propellant rockets or the use of solid propellant rockets in NASA’s space exploration programs are discontinued or significantly reduced, it could have a material adverse effect on our operating results, financial condition, or cash flows.

The funding of U.S. governmental programs is generally subject to annual congressional appropriations, and congressional priorities are subject to change. In the case of major programs, U.S. government contracts are usually incrementally funded. In addition, U.S. government expenditures for defense and NASA programs may fluctuate from year to year and specific programs, in connection with which we may receive significant revenue, may be terminated or curtailed. Recent credit and other economic crises, and the U.S. government’s corresponding actions, may result in cutbacks in major government programs. A decline in government expenditures or any failure by Congress to appropriate additional funds to any program in which we or our customers participate, or any contract modification as a result of funding changes, could materially delay or terminate the program for us or for our customers. Moreover, the U.S. government may terminate its contracts with its suppliers either for its convenience or in the event of a default by the supplier. Since a significant portion of our customer base is either the U.S. government or U.S. government contractors or subcontractors, we may have limited ability to collect fully on our contracts when the U.S. government terminates its contracts. If a contract is terminated by the U.S. government for convenience, recovery of costs typically would be limited to amounts already incurred or committed, and our profit would be limited to work completed prior to termination. Moreover, in such situations where we are a subcontractor, the U.S. government contractor may cease purchasing our products if its contracts are terminated. We may have resources applied to specific government-related contracts and, if any of those contracts were terminated, we may incur substantial costs redeploying these resources. Given the significance to our business of U.S. government contracts or contracts based on U.S. government contracts, fluctuations or reductions in governmental funding for particular governmental programs and/or termination of existing governmental programs and related contracts may have a material adverse effect on our operating results, financial condition or cash flow.

We may be subject to potentially material costs and liabilities in connection with environmental or health matters.

Some of our operations may create risks of adverse environmental and health effects, any of which might not be covered by insurance. In the past, we have been required to take remedial action to address particular environmental and health concerns identified by governmental agencies in connection with the production of perchlorate. It is possible that we may be required to take further remedial action in the future in connection with our production of perchlorate, whether at our former facility in Henderson, Nevada, or at our current production facility in Iron County, Utah, or we may enter voluntary agreements with governmental agencies to take such actions. Moreover, in connection with other operations, we may become obligated in the future for environmental liabilities if we fail to abide by limitations placed on us by governmental agencies. There can be no assurance that material costs or liabilities will not be incurred or restrictions will not be placed upon us in order to rectify any past or future occurrences related to environmental or health matters. Such material costs or liabilities, or increases in, or charges associated with, existing environmental or health-related liabilities, also may have a material adverse effect on our operating results, earnings or financial condition.

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Review of Perchlorate Toxicity by the EPA. Perchlorate is not currently included in the list of hazardous substances compiled by the U.S. Environmental Protection Agency, or EPA, but it is on the EPA’s Contaminant Candidate List 3. The National Academy of Sciences, the EPA and certain states have set or discussed certain guidelines on the acceptable levels of perchlorate in water. The outcome of the federal EPA action, as well as any similar state regulatory action, will influence the number, if any, of potential sites that may be subject to remediation action, which could, in turn, cause us to incur material costs. While the presence of regulatory review presents general business risk to our company, we are currently unaware of any regulatory proposal that would have a material effect on our results of operations and financial position or that would cause us to significantly modify or curtail our business practices. It is possible that the regulatory agencies may change existing, or establish new, standards for perchlorate, which could lead to additional expenditures for environmental remediation in the future, and/or additional, potentially material costs to defend against new claims resulting from such regulatory agency actions.

Perchlorate Remediation Project in Henderson, Nevada. We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada, or the “AMPAC Henderson Site”, until May 1988. In 1997, the Southern Nevada Water Authority, or SNWA, detected trace amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada and areas of Southern California. The Las Vegas Wash flows into Lake Mead from the Las Vegas valley. In response to this discovery by SNWA, and at the request of the Nevada Division of Environmental Protection, or NDEP, we engaged in an investigation of groundwater near the AMPAC Henderson Site and down gradient toward the Las Vegas Wash. At the direction of NDEP and the EPA, we conducted an investigation of remediation technologies for perchlorate in groundwater with the intention of remediating groundwater near the AMPAC Henderson Site. In the fiscal year ended September 30, 2005 (“Fiscal 2005”), we submitted a work plan to NDEP for the construction of a remediation facility near the AMPAC Henderson Site. The permanent plant began operation in December 2006. Late in Fiscal 2009, we gained additional information from groundwater modeling that indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150 feet below ground surface) is moving toward our existing remediation facility at a much slower pace than previously estimated. As a result of this additional data, we re-evaluated our existing remediation operations and determined to install additional groundwater extraction wells in the deeper, more concentrated areas, thereby providing for a more aggressive remediation treatment. We currently anticipate that the new equipment at such extraction wells will become operational in approximately fall 2011.

Henderson Site Environmental Remediation Reserve. During Fiscal 2005 and the fiscal year ended September 30, 2006, we recorded charges totaling $26,000 representing our estimate of the probable costs of our remediation efforts at the AMPAC Henderson Site, including the costs for capital equipment, operating and maintenance (“O&M”), and consultants. The project consisted of two primary phases: the initial construction of the remediation equipment phase and the O&M phase. We commenced the construction phase in late Fiscal 2005, completed an interim system in June 2006, and completed the permanent facility in December 2006. In the fiscal year ended September 30, 2007, we began the O&M phase. However, following the receipt, in late Fiscal 2009, of new data regarding groundwater movement, and following our determination to install additional groundwater extraction wells, we increased our accruals by approximately $9,600 for the engineering, design, installation and cost of additional remediation equipment, and we separately increased our accruals by $4,100 for our estimate of total remaining O&M costs, due primarily to incremental O&M costs to operate and maintain the additional equipment once installed. The amount of $13,700, representing the sum of the estimated costs for the additional equipment and the anticipated incremental O&M costs, was recorded as a charge to earnings in our Fiscal 2009 fourth quarter. For future periods, total O&M expenses are currently estimated at approximately $1,000 per year and estimated to increase to approximately $1,300 per year after the additional above-ground remediation equipment becomes operational. With the additional extraction wells and equipment, we estimate that the total remaining project life for the existing and new, more aggressive deep zone systems could range from 10 to 29 years, beginning with the fiscal year ending September 30, 2010 (“Fiscal 2010”). Within that range, we estimate that a range of 13 to 23 years is more likely. We are unable to predict over the longer term the most probable life. Key factors in

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determining the total estimated cost of our remediation efforts include groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted groundwater extraction rates and annual O&M costs. As of June 30, 2010, the aggregate range of anticipated environmental remediation costs was from approximately $21,400 to approximately $45,600 based on a possible total remaining life of the project ranging from 10 to 29 years, beginning with Fiscal 2010. The accrued amount was $25,162, based on the low end of the more likely range of 13 to 23 years, or 13 years, as no amount within the range was more likely. Our estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate.

Other Environmental Matters. As part of our acquisition of the fine chemicals business of GenCorp Inc., AFC leased approximately 240 acres of land on a Superfund site in Rancho Cordova, California, owned by Aerojet-General Corporation, a wholly-owned subsidiary of GenCorp Inc. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, has very strict joint and several liability provisions that make any “owner or operator” of a “Superfund site” a “potentially responsible party” for remediation activities. AFC could be considered an “operator” for purposes of CERCLA and, in theory, could be a potentially responsible party for purposes of contribution to the site remediation, although we received a letter from the EPA in November 2005 indicating that the EPA does not intend to pursue any clean up or enforcement actions under CERCLA against future lessees of the Aerojet property for existing contamination, provided that the lessees do not contribute to or do not exacerbate existing contamination on or under the Superfund site. Additionally, pursuant to the EPA consent order governing remediation for this site, AFC will have to abide by certain limitations regarding construction and development of the site which may restrict AFC’s operational flexibility and require additional substantial capital expenditures that could negatively affect the results of operations for AFC.

Although we have established an environmental reserve for remediation activities in Henderson, Nevada, given the many uncertainties involved in assessing environmental liabilities, our environmental-related risks may from time to time exceed any related reserves.

As of June 30, 2010, we had established reserves in connection with the AMPAC Henderson Site of approximately $25,162, which we believe to be sufficient to cover our estimated environmental liabilities for that site as of such time. However, as of such date, we had not established any other environmental-related reserves. Given the many uncertainties involved in assessing environmental liabilities, our environmental-related risks may, from time to time, exceed any related reserves, as we may not have established reserves with respect to such environmental liabilities, or any reserves we have established may prove to be insufficient. We continually evaluate the adequacy of our reserves on a quarterly basis, and they could change. For example, as of the end of Fiscal 2009, we increased our environmental reserves in connection with the AMPAC Henderson Site by approximately $13,700 as a result of an increase in anticipated costs associated with remediation efforts at the site. In addition, reserves with respect to environmental matters are based only on known sites and the known contamination at those sites. It is possible that additional remediation sites will be identified in the future or that unknown contamination, or further contamination beyond that which is currently known, at previously identified sites will be discovered. The discovery of additional environmental exposures at sites that we currently own or operate or at which we formerly operated, or at sites to which we have sent hazardous substances or wastes for treatment, recycling or disposal, could lead us to have additional expenditures for environmental remediation in the future and, given the many uncertainties involved in assessing environmental liabilities, we may not have adequately reserved for such liabilities or any reserves we have established may prove to be insufficient.

For each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments, most production is conducted in a single facility and any significant disruption or delay at a particular facility could have a material adverse effect on our business, financial position and results of operations.

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Most of our Specialty Chemicals segment products are produced at our Iron County, Utah facility. Most of our Fine Chemicals segment products are produced at our Rancho Cordova, California facility and most of our Aerospace Equipment segment products are produced at our Niagara Falls, New York facility. Our Aerospace Equipment segment also has small manufacturing facilities in Ireland and the U.K. Any of these facilities could be disrupted or damaged by fire, floods, earthquakes, power loss, systems failures or similar events. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. A significant disruption at one of our facilities, even on a short-term basis, could impair our ability to produce and ship the particular business segment’s products to market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.

The release or explosion of dangerous materials used in our business could disrupt our operations and cause us to incur additional costs and liabilities.

Our operations involve the handling, production, storage, and disposal of potentially explosive or hazardous materials and other dangerous chemicals, including materials used in rocket propulsion. Despite our use of specialized facilities to handle dangerous materials and intensive employee training programs, the handling and production of hazardous materials could result in incidents that shut down (on a short-term basis or for longer periods) or otherwise disrupt our manufacturing operations and could cause production delays. Our manufacturing operations could also be the subject of an external or internal event, such as a terrorist attack or external or internal accident, that, despite our security, safety and other precautions, results in a disruption or delay in our operations. It is possible that a release of hazardous materials or other dangerous chemicals from one of our facilities or an explosion could result in death or significant injuries to employees and others. Material property damage to us and third parties could also occur. For example, 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. There can be no assurance that another incident would not interrupt some or all of the activities carried on at our current AP manufacturing site. The use of our products in applications by our customers could also result in liability if an explosion, fire or other similarly disruptive event were to occur. Any release or explosion could expose us to adverse publicity or liability for damages or cause production delays, any of which could have a material adverse effect on our reputation and profitability and could cause us to incur additional costs and liabilities.

Disruptions in the supply of key raw materials and difficulties in the supplier qualification process, as well as increases in prices of raw materials, could adversely impact our operations.

Key raw materials used in our operations include sodium chlorate, graphite, ammonia, sodium metal, nitrous oxide, HCFC-123, and hydrochloric acid. We closely monitor sources of supply to assure that adequate raw materials and other supplies needed in our manufacturing processes are available. In addition, as a U.S. government contractor or subcontractor, we are frequently limited to procuring materials and components from sources of supply that can meet rigorous government and/or customer specifications. In addition, as business conditions, the U.S. defense budget, and congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low volume items from their product lines, which may require, as it has in the past, qualification of new suppliers for raw materials on key programs. The qualification process may impact our profitability or ability to meet contract deliveries and/or delivery timelines. Moreover, we could experience inventory shortages if we are required to use an alternative supplier on short notice, which also could lead to raw materials being purchased on less favorable terms than we have with our regular suppliers. We are

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further impacted by the cost of raw materials used in production on fixed-price contracts. The increased cost of natural gas and electricity also has a significant impact on the cost of operating our Specialty Chemicals segment facility.

AFC uses substantial amounts of raw materials in its production processes, in particular chemicals, including specialty and bulk chemicals, which include petroleum-based solvents. Increases in the prices of raw materials which AFC purchases from third party suppliers could adversely impact operating results. In certain cases, the customer provides some of the raw materials which are used by AFC to produce or manufacture the customer’s products. Failure to receive raw materials in a timely manner, whether from a third party supplier or a customer, could cause AFC to fail to meet production schedules and adversely impact revenues and operating results. Certain key raw materials are obtained from sources from outside the U.S. Factors that can cause delays in the arrival of raw materials include weather or other natural events, political unrest in countries from which raw materials are sourced or through which they are delivered, terrorist attacks or related events in such countries or in the U.S., and work stoppages by suppliers or shippers. A delay in the arrival of the shipment of raw materials from a third party supplier could have a significant impact on AFC’s ability to meet its contractual commitments to customers.

Prolonged disruptions in the supply of any of our key raw materials, difficulty completing qualification of new sources of supply, implementing use of replacement materials or new sources of supply, or a continuing increase in the prices of raw materials and energy could have a material adverse effect on our operating results, financial condition or cash flows.

Each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments may be unable to comply with customer specifications and manufacturing instructions or may experience delays or other problems with existing or new products, which could result in increased costs, losses of sales and potential breach of customer contracts.

Each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments produces products that are highly customized, require high levels of precision to manufacture and are subject to exacting customer and other requirements, including strict timing and delivery requirements.

For example, our Fine Chemicals segment produces chemical compounds that are difficult to manufacture, including highly energetic and highly toxic materials. These chemical compounds are manufactured to exacting specifications of our customers’ filings with the FDA and other regulatory authorities worldwide. The production of these chemicals requires a high degree of precision and strict adherence to safety and quality standards. Regulatory agencies, such as the FDA and the European Medicines Agency, or EMEA, have regulatory oversight over the production process for many of the products that AFC manufactures for its customers. AFC employs sophisticated and rigorous manufacturing and testing practices to ensure compliance with the FDA’s current Good Manufacturing Practices or “cGMP” guidelines and the International Conference on Harmonization Q7A. Because the chemical compounds produced by AFC are so highly customized, they are also subject to customer acceptance requirements, including strict timing and delivery requirements. If AFC is unable to adhere to the standards required or fails to meet the customer’s timing and delivery requirements, the customer may reject the chemical compounds. In such instances, AFC may also be in breach of its customer’s contract.

Like our Fine Chemicals segment, our Specialty Chemicals and Aerospace Equipment segments face similar production demands and requirements. In each case, a significant failure or inability to comply with customer specifications and manufacturing requirements or delays or other problems with existing or new products could result in increased costs, losses of sales and potential breaches of customer contracts, which could affect our operating results and revenues.

Successful commercialization of pharmaceutical products and product line extensions is very difficult and subject to many uncertainties. If a customer is not able to successfully commercialize its products for which AFC produces compounds or if a product is subsequently recalled, then the operating results of AFC may be negatively impacted.

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Successful commercialization of pharmaceutical products and product line extensions requires accurate anticipation of market and customer acceptance of particular products, customers’ needs, the sale of competitive products, and emerging technological trends, among other things. Additionally, for successful product development, our customers must complete many complex formulation and analytical testing requirements and timely obtain regulatory approvals from the FDA and other regulatory agencies. When developed, new or reformulated drugs may not exhibit desired characteristics or may not be accepted by the marketplace. Complications can also arise during production scale-up. In addition, a customer’s product that includes ingredients that are manufactured by AFC may be subsequently recalled or withdrawn from the market by the customer. The recall or withdrawal may be for reasons beyond the control of AFC. Moreover, products may encounter unexpected, irresolvable patent conflicts or may not have enforceable intellectual property rights. If the customer is not able to successfully commercialize a product for which AFC produces compounds, or if there is a subsequent recall or withdrawal of a product manufactured by AFC or that includes ingredients manufactured by AFC for its customers, it could have an adverse impact on AFC’s operating results, including its forecasted or actual revenues.

A strike or other work stoppage, or the inability to renew collective bargaining agreements on favorable terms, could have a material adverse effect on the cost structure and operational capabilities of AFC.

As of September 30, 2009, AFC had approximately 133 employees that were covered by collective bargaining or similar agreements. We consider our relationships with our unionized employees to be satisfactory. In July 2010, AFC’s collective bargaining and similar agreements were renegotiated and extended to June 2013. If we are unable to negotiate acceptable new agreements with the union representing these employees upon expiration of the existing contracts, we could experience strikes or work stoppages. Even if AFC is successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase AFC’s operating costs and could adversely affect its profitability. If the unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, AFC could experience a significant disruption of operations at its facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of its major customers or suppliers could also have similar effects on AFC.

The pharmaceutical fine chemicals industry is a capital-intensive industry and if AFC does not have sufficient financial resources to finance the necessary capital expenditures, its business and results of operations may be harmed.

The pharmaceutical fine chemicals industry is a capital-intensive industry. Consequently, AFC’s capital expenditures consume cash from our Fine Chemicals segment and our other operations and from borrowings. Increases in capital expenditures may result in low levels of working capital or require us to finance working capital deficits, which may be potentially costly or even unavailable given on-going conditions of the credit markets in the U.S. These factors could substantially constrain AFC’s growth, increase AFC’s costs and negatively impact its operating results.

We may be subject to potential liability claims for our products or services that could affect our earnings and financial condition and harm our reputation.

We may face potential liability claims based on our products or services in our several lines of business under certain circumstances, and any such claims could result in significant expenses, disrupt sales and affect our reputation and that of our products. For example, a customer’s product may include ingredients that are manufactured by AFC. Although such ingredients are generally made pursuant to specific instructions from our customer and tested using techniques provided by our customer, the customer’s product may, nevertheless, be subsequently recalled or withdrawn from the market by the customer, and the recall or withdrawal may be due in part or wholly to product failures or inadequacies that may or may not be related to the ingredients we manufactured for the customer. In such a case, the recall or withdrawal may result in claims being made against us. Although we seek to reduce our potential liability through measures such as contractual indemnification provisions with customers, we cannot assure you

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that such measures will be enforced or effective. We could be materially and adversely affected if we were required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the indemnity, although legally enforceable, is not applicable in accordance with its terms or if our liability exceeds the amount of the applicable indemnification, or if the amount of the indemnification exceeds the financial capacity of our customer. In certain instances, we may have in place product liability insurance coverage, which is generally available in the market, but which may be limited in scope and amount. In other instances, we may have self-insured the risk for any such potential claim. There can be no assurance that our insurance coverage, if available, will be adequate or that insurance coverage will continue to be available on terms acceptable to us. Given the current economic environment, it is also possible that our insurers may not be able to pay on any claims we might bring. Unexpected results could cause us to have financial exposure in these matters in excess of insurance coverage and recorded reserves, requiring us to provide additional reserves to address these liabilities, impacting profits. Moreover, any claim brought against us, even if ultimately found to be insignificant or without merit, could damage our reputation, which, in turn, may impact our business prospects and future results.

Technology innovations in the markets that we serve may create alternatives to our products and result in reduced sales.

Technology innovations to which our current and potential customers might have access could reduce or eliminate their need for our products, which could negatively impact the sale of those products. Our customers constantly attempt to reduce their manufacturing costs and improve product quality, such as by seeking out producers using the latest manufacturing techniques or by producing component products themselves, if outsourcing is perceived to be not cost effective. To continue to succeed, we will need to manufacture and deliver products, and develop better and more efficient means of manufacturing and delivering products, that address evolving customer needs and changes in the market on a timely and cost-effective basis, using the latest and/or most efficient technology available. We may be unable to respond on a timely basis to any or all of the changing needs of our customer base. Separately, our competitors may develop technologies that render our existing technology and products obsolete or uncompetitive. Our competitors may also implement new technologies before we are able to do so, allowing them to provide products at more competitive prices. Technology developed by others in the future could, among other things, require us to write-down obsolete facilities, equipment and technology or require us to make significant capital expenditures in order to stay competitive. Our failure to develop, introduce or enhance products and technologies able to compete with new products and technologies in a timely manner could have an adverse effect on our business, results of operations and financial condition.

We are subject to strong competition in certain industries in which we participate and therefore may not be able to compete successfully.

Other than the sale of AP, for which we are the only North American provider, we face competition in all of the other industries in which we participate. Many of our competitors have financial, technical, production, marketing, research and development and other resources substantially greater than ours. As a result, they may be better able to withstand the effects of periodic economic or business segment downturns. Moreover, barriers to entry, other than capital availability, are low in some of the product segments of our business. Consequently, we may encounter intense bidding for contracts. Capacity additions or technological advances by existing or future competitors may also create greater competition, particularly in pricing. Further, the pharmaceutical fine chemicals market is fragmented and competitive. Pharmaceutical fine chemicals manufacturers generally compete based on their breadth of technology base, research and development and chemical expertise, flexibility and scheduling of manufacturing capabilities, safety record, regulatory compliance history and price. AFC faces increasing competition from pharmaceutical contract manufacturers, in particular competitors located in the People’s Republic of China and India, where facilities, construction and operating costs are significantly less. If AFC is unable to compete successfully, its results of operations may be materially adversely impacted. Furthermore, there is a worldwide over-capacity of the ability to produce sodium azide, which creates significant price competition for that product. Maintaining and improving our competitive position will require continued

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investment in our existing and potential future customer relationships as well as in our technical, production, and marketing operations. We may be unable to compete successfully with our competitors and our inability to do so could result in a decrease in revenues that we historically have generated from the sale of our products.

Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating results to fluctuate.

Our quarterly and annual sales are affected by a variety of factors that could lead to significant variability in our operating results. In our Specialty Chemicals segment, the need for our products is generally based on contractually defined milestones that our customers are bound by and these milestones may fluctuate from quarter to quarter resulting in corresponding sales fluctuations. In our Fine Chemicals segment, some of our products require multiple steps of chemistry, the production of which can span multiple quarterly periods. Revenue is typically recognized after the final step and when the product has been delivered and accepted by the customer. As a result of this multi-quarter process, revenues and related profits can vary from quarter to quarter. Consequently, due to factors inherent in the process by which we sell our products, changes in our operating results may fluctuate from quarter to quarter and could result in volatility in our common stock price.

The inherent volatility of the chemical industry affects our capacity utilization and causes fluctuations in our results of operations.

Our Specialty Chemicals and Fine Chemicals segments are subject to volatility that characterizes the chemical industry generally. Thus, the operating rates at our facilities will impact the comparison of period-to-period results. Different facilities may have differing operating rates from period to period depending on many factors, such as transportation costs and supply and demand for the product produced at the facility during that period. As a result, individual facilities may be operated below or above rated capacities in any period. We may idle a facility for an extended period of time because an oversupply of a certain product or a lack of demand for that product makes production uneconomical. The expenses of the shutdown and restart of facilities may adversely affect quarterly results when these events occur. In addition, a temporary shutdown may become permanent, resulting in a write-down or write-off of the related assets. Moreover, workforce reductions in connection with any short-term or long-term shutdowns, or related cost-cutting measures, could result in an erosion of morale, affect the focus and productivity of our remaining employees, including those directly responsible for revenue generation, and impair our ability to retain and recruit talent, all of which in turn may adversely affect our future results of operations.

A loss of key personnel or highly skilled employees, or the inability to attract and retain such personnel, could disrupt our operations or impede our growth.

Our executive officers are critical to the management and direction of our businesses. Our future success depends, in large part, on our ability to retain these officers and other capable management personnel. From time to time we have entered into employment or similar agreements with some of our executive officers and we may do so in the future, as competitive needs require. These agreements typically allow the officer to terminate employment with certain levels of severance under particular circumstances, such as a change of control affecting our company. In addition, these agreements generally provide an officer with severance benefits if we terminate the officer without cause. Although we believe that we will be able to attract and retain talented personnel and replace key personnel should the need arise, our inability to do so or to do so in a timely fashion could disrupt the operations of the segment affected or our overall operations. Furthermore, our business is very technical and the technological and creative skills of our personnel are essential to establishing and maintaining our competitive advantage. For example, customers often turn to AFC because very few companies have the specialized experience and capabilities and associated personnel required for energetic chemistries and projects that require high containment. Our future growth and profitability in part depends upon the knowledge and efforts of our highly skilled employees, in particular their ability to keep pace with technological changes in the fine

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chemicals, specialty chemicals and aerospace equipment industries, as applicable. We compete vigorously with various other firms to recruit these highly skilled employees. Our operations could be disrupted by a shortage of available skilled employees or if we are unable to attract and retain these highly skilled and experienced employees.

We may continue to expand our operations in part through acquisitions, which could divert management’s attention and expose us to unanticipated liabilities and costs. We may experience difficulties integrating the acquired operations, and we may incur costs relating to acquisitions that are never consummated.

Our business strategy includes growth through future possible acquisitions, in particular in connection with our Fine Chemicals segment. Our future growth is likely to depend, in significant part, on our ability to successfully implement this acquisition strategy. However, our ability to consummate and integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive and suitable acquisition targets, internal demands on our resources and our ability to obtain or otherwise facilitate cost-effective financing, especially during difficult and unsettled economic times in the credit market. Our success in integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid diversion of management’s attention from operational matters, integrate general and administrative services and key information processing systems and, where necessary, requalify our customer programs. In addition, future acquisitions could result in the incurrence of additional debt, costs and contingent liabilities. We may also incur costs and divert management’s attention to acquisitions that are never consummated. Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated. It is also possible that expected synergies from past or future acquisitions may not materialize.

Although we undertake a diligence investigation of each acquisition target that we pursue, there may be liabilities of the acquired companies or assets that we fail to or are unable to discover during the diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the ultimate actual liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.

We have a substantial amount of debt, and the cost of servicing that debt could adversely affect our ability to take actions, our liquidity or our financial condition.

As of June 30, 2010, we had outstanding debt totaling $105,178, for which we are required to make interest payments. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future or we may refinance some or all of this debt. Our level of debt places significant demands on our cash resources, which could:

•		make it more difficult for us to satisfy any other outstanding debt obligations;

•		require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the amount of our cash flow available for working capital, capital expenditures, acquisitions, developing our real estate assets and other general corporate purposes;

•		limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;

•		place us at a competitive disadvantage compared to our competitors, some of which have lower debt service obligations and greater financial resources than we do;

•		limit our ability to borrow additional funds; or

•		increase our vulnerability to general adverse economic and industry conditions.

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We are obligated to comply with various ongoing covenants in our debt, which could restrict our operations, and if we should fail to satisfy any of these covenants, the payment under our debt could be accelerated, which would negatively impact our liquidity.

We are obligated to comply with financial and other covenants in our debt that could restrict our operating activities, and the failure to comply could result in defaults that accelerate the payment under our debt. Our outstanding debt generally contains various restrictive covenants. These covenants include provisions restricting our ability to, among other things:

•		incur additional debt;

•		pay dividends or make other restricted payments;

•		create liens on assets to secure debt;

•		incur dividend or other payment restrictions with regard to restricted subsidiaries;

•		transfer or sell assets;

•		enter into transactions with affiliates;

•		enter into sale and leaseback transactions;

•		create an unrestricted subsidiary;

•		enter into certain business activities; or

•		effect a consolidation, merger or sale of all or substantially all of our assets.

Any of the covenants described above may restrict our operations and our ability to pursue potentially advantageous business opportunities. Our failure to comply with these covenants could also result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, which would negatively impact our liquidity.

Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could affect our estimates of pension obligations, which in turn could affect future funding requirements and related costs and impact our future earnings.

As of June 30, 2010, we had unfunded pension obligations, including the current and non-current portions, of $29,653. Pension obligations, periodic pension expense, and funding requirements are determined using actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate and the long-term expected return on assets. Other assumptions include salary increases and retirement age, mortality and turnover. Some of these assumptions, such as the discount rate and return on pension assets, are largely outside of our control. Changes in these assumptions could affect our estimates of pension obligations, which in turn could affect future funding requirements and related costs and impact our future earnings.

Our shareholder rights plan, Restated Certificate of Incorporation, as amended, and Amended and Restated By-laws discourage unsolicited takeover proposals and could prevent stockholders from realizing a premium on their common stock.

We have a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan would cause substantial dilution to a person or group which attempts to acquire us on terms not approved in advance by our board of directors. In addition, our Restated Certificate of Incorporation, as amended, and Amended and Restated By-laws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include:

•		a classified board of directors;

•		the ability of our board of directors to designate the terms of and issue new series of preferred stock;

•		advance notice requirements for nominations for election to our board of directors; and

•		special voting requirements for the amendment, in certain cases, of our Restated Certificate of Incorporation, as amended, and our Amended and Restated By-laws.

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We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, our charter provisions, Delaware law and the shareholder rights plan may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

Our proprietary and intellectual property rights may be violated, compromised, circumvented or invalidated, which could damage our operations.

We have numerous patents, patent applications, exclusive and non-exclusive licenses to patents, and unpatented trade secret technologies in the U.S. and certain foreign countries. There can be no assurance that the steps taken by us to protect our proprietary and intellectual property rights will be adequate to deter misappropriation of these rights. In addition, independent third parties may develop competitive or superior technologies that could circumvent the future need to use our intellectual property, thereby reducing its value. They may also attempt to invalidate patent rights that we own directly or that we are entitled to exploit through a license. If we are unable to adequately protect and utilize our intellectual property or proprietary rights, our results of operations may be adversely affected.

Our common stock price may fluctuate substantially, and a stockholder’s investment could decline in value.

The market price of our common stock has been highly volatile during the past several years. For example, during the 12 months ended September 30, 2009, the highest closing price for our common stock was $13.11 and the lowest closing price for our common stock was $3.91. The realization of any of the risks described in these Risk Factors or other unforeseen risks could have a dramatic and adverse effect on the market price of our common stock. Moreover, the market price of our common stock may fluctuate substantially due to many factors, including:

•		actual or anticipated fluctuations in our results of operations;

•		events or concerns related to our products or operations or those of our competitors, including public health, environmental and safety concerns related to products and operations;

•		material public announcements by us or our competitors;

•		changes in government regulations or policies, such as new legislation, laws or regulatory decisions that are adverse to us and/or our products;

•		changes in key members of management;

•		developments in our industries;

•		changes in investors’ acceptable levels of risk;

•		trading volume of our common stock; and

•		general economic conditions.

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to companies’ operating performance. In addition, the global economic environment and potential uncertainty have created significant additional volatility in the United States capital markets. Broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, stockholder derivative lawsuits and/or securities class action litigation has often been instituted against that company. Such litigation, if instituted against us, and whether with or without merit, could result in substantial costs and divert management’s attention and resources, which could harm our business and financial condition, as well as the market price of our common stock. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees or to use our stock to acquire other companies at a time when use of cash or financing for such acquisitions may not be available or in the best interests of our stockholders.

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EXHIBIT INDEX


EXHIBIT NO.		DOCUMENT DESCRIPTION


3.1		Restated Certificate of Incorporation, as amended, of American Pacific Corporation (incorporated by reference to Exhibit 4.(a) to the registrant’s Registration Statement on Form S-3 (File No. 33-15674))

3.2		Articles of Amendment to the Restated Certificate of Incorporation of American Pacific Corporation, as filed with the Secretary of State, State of Delaware, on October 7, 1991 (incorporated by reference to Exhibit 4.3 to the registrant’s Registration Statement on Form S-3 (File No. 33-52196))

3.3		Articles of Amendment to the Restated Certificate of Incorporation of American Pacific Corporation, as filed with the Secretary of State, State of Delaware, on April 21, 1992 (incorporated by reference to Exhibit 4.4 to the registrant’s Registration Statement on Form S-3 (File No. 33-52196))

3.4		American Pacific Corporation Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on September 15, 2008)

3.5		Rights Agreement, dated as of August 3, 1999, between American Pacific Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 1 to the registrant’s Registration Statement on Form 8-A (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on August 6, 1999)

3.6		Form of Letter to Stockholders that accompanied copies of the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 2 to the registrant’s Registration Statement on Form 8-A (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on August 6, 1999)

3.7		Amendment, dated as of July 11, 2008, between American Pacific Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on July 11, 2008)

10.1+		First Amendment to American Pacific Corporation Defined Benefit Pension Plan, executed by American Pacific Corporation on June 28, 2010

10.2+		First Amendment to Ampac Fine Chemicals LLC Pension Plan for Salaried Employees, executed by American Pacific Corporation on June 28, 2010

10.3+		First Amendment to Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees, executed by American Pacific Corporation on June 28, 2010

10.4+		Second Amendment to Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees, executed by American Pacific Corporation on July 15, 2010

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements			1

Condensed Consolidated Statements of Operations (unaudited)			1

Condensed Consolidated Balance Sheets (unaudited)			2

Condensed Consolidated Statements of Cash Flows (unaudited)			3

Notes to Condensed Consolidated Financial Statements (unaudited)			4

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			40

ITEM 4. Controls and Procedures			41

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings			42

ITEM 1A. Risk Factors			42

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			56

ITEM 3. Defaults Upon Senior Securities			56

ITEM 4. (Removed and Reserved)			56

ITEM 5. Other Information			56

ITEM 6. Exhibits			56
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	AMERICAN PACIFIC CORPORATION
Date: August 6, 2010	/s/ JOSEPH CARLEONE
	Joseph Carleone
	President and Chief Executive Officer (Principal Executive Officer)


	/s/ DANA M. KELLEY
	Dana M. Kelley
	Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


+		Management contract or compensatory plan or arrangement.

*		Exhibits 32.1 and 32.2 are furnished to accompany this Quarterly Report on Form 10-Q but shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.