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 for the years ended
September 30:

                                                2008      2007      2006

                  Fine Chemicals                 61 %       57 %      52 %

                  Specialty Chemicals:
                  Perchlorates                   26 %       28 %      28 %
                  Sodium azide                    0 %*       1 %       2 %
                  Halotron                        2 %        2 %       3 %

                  Total specialty chemicals      28 %       31 %      33 %

                  Aerospace Equipment             8 %        9 %      12 %

                  Other Businesses:
                  Real estate                     1 %        1 %       1 %
                  Water treatment equipment       2 %        2 %       2 %

                  Total other businesses          3 %        3 %       3 %

                  Total revenues                100 %      100 %     100 %

* Less than 1%

FINE CHEMICALS. On November 30, 2005, we acquired the fine chemicals business of GenCorp (the "AFC Business") through our newly-formed, wholly-owned subsidiary Ampac Fine Chemicals LLC ("AFC"). Our Fine Chemicals segment is a custom manufacturer of active pharmaceutical ingredients ("APIs") and registered intermediates. The pharmaceutical ingredients that we manufacture are used by our customers in drugs with applications in three primary areas: anti-viral, oncology, and central nervous system. We generate nearly all of our Fine Chemicals 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 or "cGMP" and other regulatory agencies such as the European Union's European Medicines Agency ("EMEA"). 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 highly potent (including cytotoxic) products, and performing energetic and nucleoside/nucleotide 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 ("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 have distinctive competency in handling highly toxic chemicals using our specialized high containment facilities in applications such as drugs used for oncology. We have significant experience and specially engineered facilities for energetic chemistry on a commercial-scale under cGMP. We use this capability in development and 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 method 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 approval and could take as long as six months to two years.

• 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 AP. 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. 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 propellants. For fiscal 2008, our largest programs were the Minuteman III propulsion replacement program, the Space Shuttle Reusable Solid Rocket Motor ("RSRM"), the Guided Multiple Launch Rocket System ("GMLRS") missile and the Ares next-generation space exploration vehicles.
Alliant Techsystems Inc. or "ATK" is our largest 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. On October 1, 2004, we acquired the former Atlantic Research Corporation's liquid in-space propulsion business ("ISP") from Aerojet-General Corporation," which is now our Aerospace Equipment segment. Our Aerospace Equipment segment 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 Aerospace Equipment segment is expected to grow over the next several years as a result of our customer relationships, competitive pricing and focus on technologies. Growth areas should include missile defense programs, the commercial satellite segment, space exploration and launch vehicles. 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.
DISCONTINUED OPERATIONS. We also held a 50% ownership stake in Energetic Systems, Inc. ("ESI"), an entity we consolidated under Financial Accounting Standards Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities", that manufactured and distributed commercial explosives. In June 2006, our board of directors approved, and we committed to, a plan to sell our interest in ESI, based on our determination that ESI's product lines were no longer a strategic fit with our business strategies. Revenues, expenses and cash flows associated with ESI's operations are presented as discontinued operations for all periods presented. ESI was formerly reported within our Specialty Chemicals segment. Effective September 30, 2006, we completed the sale of our interest in ESI for $7,510, which, after deducting direct expenses, resulted in a gain on the sale before income taxes of $258.

REVENUES

                                 Year Ended September 30,                Percentage Change
                             2008          2007          2006        08 vs. 07       07 vs. 06

    Fine Chemicals        $ 124,187     $ 104,441     $  74,026          19 %            41 %
    Specialty Chemicals      57,097        57,088        46,450           0 %            23 %
    Aerospace Equipment      16,435        17,348        17,394          (5 %)           (0 %)
    Other Businesses          5,410         5,051         4,034           7 %            25 %

    Total Revenues        $ 203,129     $ 183,928     $ 141,904          10 %            30 %

Fine Chemicals. We acquired our Fine Chemicals segment on November 30, 2005, two months after the beginning of fiscal 2006.
Fine Chemicals segment revenues increased $19,746 in fiscal 2008 compared to the prior fiscal year primarily driven by increased volume for anti-viral products. Specifically,
• The volume for our largest (measured in terms of revenues) anti-viral product increased by 45% to support our customer's increase in safety stock inventory of the final drug.

• Volume for our second largest anti-viral product increased by 21% in support of increases in demand for our customer's end product.

• Volume for our largest oncology product declined in fiscal 2008 because fiscal 2007 included additional quantities purchased by our customer to build on-hand safety stock quantities.

Fine Chemicals segment revenues increased $30,415 in fiscal 2007 compared to the prior fiscal year. On a pro forma basis, assuming the acquisition of the AFC Business was effective October 1, 2005, Fine Chemicals segment revenues increased from pro forma revenues of $92,268 in fiscal 2006 to $104,441 in fiscal 2007, representing 13% organic growth. Overall, the pro forma Fine Chemicals segment revenue growth is driven primarily by additional volumes for our anti-viral products almost entirely in the HIV-related area. Fine Chemicals segment revenues are anticipated to decline in fiscal 2009 by approximately 10% as compared to fiscal 2008. The expected decline reflects an approximately 85% reduction in volume for the anti-viral product that was our largest product in fiscal 2008. The fiscal 2009 decline in volume for this product is due to our customer's supply chain strategy and their desire to reduce their current levels of inventory. Over the longer term, we believe that the pharmaceutical fine chemicals market will continue to present growth opportunities. The trend toward more outsourcing by the pharmaceutical industry continues and AFC's pipeline of new products continues to grow. We believe that the key to enabling our growth in this segment is investment through strategic acquisitions and to a lesser extent investment in our facilities.
Specialty Chemicals. Specialty Chemicals segment revenues include revenues from our perchlorate, sodium azide and Halotron product lines, with perchlorates comprising 91%, 89%, and 86% of Specialty Chemicals revenues in fiscal 2008, 2007 and 2006, respectively. The year over year variances in Specialty Chemicals revenues reflect the following factors:
• A 13% increase in perchlorate volume in fiscal 2008 and a 10% decline in the related average price per pound.

• A 31% increase in Grade I AP volume in fiscal 2007 and a 2% increase in the related average price per pound.

• Sodium azide revenues decreased 63% in fiscal 2008 and 35% in fiscal 2007, each compared to the prior fiscal year.

• Halotron revenues increased 4% in fiscal 2008 and 11% in fiscal 2007, each compared to the prior fiscal year.

For fiscal 2008, our largest programs were the Minuteman III propulsion replacement program, the Space Shuttle Reusable Solid Rocket Motor ("RSRM"), the GMLRS missile and the Ares next-generation space exploration vehicles. The average price per pound of perchlorate sold in fiscal 2008 decreased compared to fiscal 2007 due to higher total sales volume of Grade I AP in fiscal 2008 compared to fiscal 2007.
For fiscal 2007, the increase in perchlorate volume is generally distributed equally among the various solid rocket motor propulsion programs for which we supply AP. There are numerous variations of Grade I AP that we produce for our customers. The average price per pound of Grade I AP sold in fiscal 2007 increased compared to fiscal 2006 because a greater percentage of the volume related to specialized blends of Grade I AP which are sold at higher unit prices than others.
We expect Grade I AP demand in fiscal 2009 to be less than fiscal 2008, primarily due to the completion of the three year Minuteman III propulsion replacement program. The expected decline in volume is not expected to have a corresponding effect on revenues due to the pricing under our contractual price-volume matrix. Over the longer term, we expect annual demand for Grade I AP to be within the range of 6 million to 9 million pounds based on current NASA and U.S. Department of Defense production programs. However, AP demand could increase if there is a substantial increase in Space Shuttle flights. In addition, Grade I AP revenues are typically derived from a relatively few large orders. As a result, quarterly revenue amounts can vary significantly depending on the timing of individual orders throughout the year. Average price per pound may continue to fluctuate somewhat in future periods, depending upon product mix and volume.
The decrease in sodium azide revenues in fiscal 2008 and 2007 reflects a continued reduction in demand for sodium azide used in pharmaceutical applications. We do not anticipate a significant increase in demand for sodium azide.
Increases in Halotron revenues are driven by volume changes which have been and are expected to be consistent year over year.
Aerospace Equipment. Our Aerospace Equipment segment reflects the operating results of our wholly-owned subsidiary Ampac-ISP Corp. ("ISP"). Aerospace Equipment segment revenues declined $913 in fiscal 2008 compared to the prior fiscal year. The decline is primarily due to the awards of new contracts occurring in the later part of fiscal 2008, and accordingly did not produce as much revenue within fiscal 2008.
Fiscal 2008 Aerospace Equipment segment contract awards include:
• a contract to develop a liquid divert and attitude control system ("DACS") for the Ballistic Missile Defense System. The work will apply proven component and subsystem design to develop a modular and scalable DACS. The program will leverage ISP's design for manufacturing experience to develop a low cost, low risk propulsion system for interceptor kill vehicles. The cost-plus-fixed-fee contract, of approximately $15,000, is anticipated to culminate in the delivery of a qualification unit and two flight test units in September 2010. ISP is teamed with Moog Inc. Space and Defense Group, East Aurora, New York, which will provide subsystem design and component support.

• initial funding from General Dynamics Advanced Information Systems to initiate the Landsat Data Continuity Mission ("LDCM") contract. The expected value of the contract is approximately $4,000 to deliver a propulsion system for the Landsat satellite. This satellite is funded by NASA Goddard and provides earth observation for land and water resource planning.

• a contract by Microsat Systems to provide 18 propulsion systems to be used on the Orbcomm OG2 program. The initial multimillion dollar contract for 18 systems also has an option for another 30 systems. Orbcomm satellites provide GPS data for tracking and global satellite data communications.

Aerospace Equipment revenues for fiscal 2007 were consistent with the prior fiscal year. The fiscal 2007 revenues reflect several months of lower volume related to the timing of orders from ISP's largest customer. With respect to this customer, ISP completed production under a multi-year contract in May

2007. Production on a follow-on order began in August 2007. As a result, revenues in fiscal 2007 were reduced by the lag time between orders. Conversely, revenues for the fourth quarter of fiscal 2007 increased compared to the prior year quarter reflecting production associated with the aforementioned order. During fiscal 2007, our Aerospace Equipment segment spent substantial bid and proposal costs and efforts for the NASA Crew Launch Vehicle ("CLV") program and continued our push into propulsion systems. Our efforts bidding propulsion systems are anticipated not only to affect future commercial programs but also military programs, one of which we are under contract for the first phase and in consideration with respect to the second phase.
Other Businesses. Other Businesses segment revenues include PEPCON Systems' water treatment equipment and related spare parts sales and real estate revenues. Water treatment equipment sales increased $325 in fiscal 2008 and $1,032 in fiscal 2007, each compared to the prior fiscal years. The revenue increases were driven by new system sales.

COST OF REVENUES AND GROSS MARGIN

                                   Year Ended September 30,                Percentage Change
                               2008          2007          2006        08 vs. 07      07 vs. 06

  Revenues                  $ 203,129     $ 183,928     $ 141,904           10 %             30 %
  Cost of Revenues            135,388       120,230        97,043           13 %             24 %

  Gross Margin                 67,741        63,698        44,861            6 %             42 %

  Gross Margin Percentage          33 %          35 %          32 %

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 two largest segments because our Specialty Chemicals segment typically has higher gross margins than our Fine Chemicals segment. Measured in terms of revenues, Specialty Chemicals accounted for 28%, 31% and 33% of our operations during fiscal 2008, 2007 and 2006, respectively. Fine Chemicals has grown as a percentage of total revenues, comprising 61%, 57% and 52% of consolidated revenues in fiscal 2008, 2007 and 2006, respectively.
Fiscal 2008 cost of revenues increased $15,158, or 13%, to $135,388 from $120,230 for the prior fiscal year. The consolidated gross margin percentage declined to 33% compared to 35% for the prior fiscal year. The following factors affect our fiscal 2008 consolidated gross margin comparisons:
• Fine Chemicals segment gross margin percentage for the fiscal 2008 declined five points compared to the prior fiscal year, reflecting the following:

o Our product mix changed such that fiscal 2008 contained a greater percentage of lower-margin products than fiscal 2007.

o During the fourth quarter of fiscal 2008, we implemented a new process for a large-volume anti-viral product and experienced start-up difficulties. This negatively impacted margins. While we have made progress toward our expectations for the new process, the effects are expected to continue into the early part of fiscal 2009.

• Specialty Chemicals segment gross margin percentage improved approximately eight points for fiscal 2008 compared to the prior fiscal year, reflecting the following:

o Mid fiscal 2008 second quarter, the Specialty Chemicals segment completed the amortization of the value assigned to the perchlorate customer list acquired in fiscal 1998. This reduction in amortization expense improved the Specialty Chemicals segment gross margin percentage by four points for fiscal 2008.

o The remaining improvement in the Specialty Chemicals segment gross margin percentage reflects better absorption of fixed manufacturing costs due to the higher production volume in fiscal 2008.

• Aerospace Equipment segment gross margin percentage was the same in fiscal 2008 and fiscal 2007.

Fiscal 2007 cost of revenues increased $23,187, or 24%, to $120,230 from $97,043 for the prior fiscal year. The consolidated gross margin percentage improved to 35% compared to 32% for the prior fiscal year. The following factors affect our fiscal 2007 consolidated gross margin comparisons:
• Fine Chemicals segment gross margin percentage for fiscal 2007 improved two points compared to the prior fiscal year because of a change in product mix and the effect of several continuous improvement projects.

• Specialty Chemicals segment gross margin percentage improved approximately four points for fiscal 2007 compared to the prior fiscal year primarily because the higher volumes and average selling price per pound in fiscal 2007 resulted in improved coverage of fixed manufacturing overhead costs.

• Aerospace Equipment segment gross margin percentage improved approximately five points for fiscal 2007 compared to the prior fiscal year largely due to fiscal 2007 activity including more standard production thruster work compared to the prior fiscal year which included a greater volume of development activities.

OPERATING EXPENSES

                                    Year Ended September 30,             Percentage Change
                                 2008         2007         2006       08 vs. 07      07 vs. 06

     Operating Expenses       $ 42,865     $ 39,841     $ 38,202           8 %             4 %
     Percentage of Revenues         21 %         22 %         27 %        (3 %)          (20 %)

Operating expenses increased $3,024 in fiscal 2008 compared to the prior fiscal year primarily attributed to:
• A decrease in Fine Chemicals segment operating expenses including a decrease in incentive compensation of $742 offset partially by an increase in recruiting and personnel relocation expenses of $482.

• A $125 decrease in Specialty Chemicals segment operating expenses due to various individually insignificant changes in general and administrative expenses.

• A $506 increase in Aerospace Equipment segment operating expenses due to various individually insignificant changes in staffing and marketing expenses.

. . .