UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 1-1520

GenCorp Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code

(916) 355-4000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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

      The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of May 28, 2004 was approximately $503 million.

      As of January 31, 2005, there were 54,519,818 outstanding shares of the Company’s Common Stock, $0.10 par value.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the 2005 Proxy Statement of GenCorp Inc. relating to its annual meeting of shareholders scheduled to be held on March 30, 2005 are incorporated by reference into Part III of this Report.

GENCORP INC.

Annual Report on Form 10-K

For the Fiscal Year Ended November 30, 2004

Table of Contents

PART I

Item 1.     Business

      Unless otherwise indicated or required by the context, as used in this Annual Report on Form 10-K, the terms “we,” “our” and “us” refer to GenCorp Inc. and all of its subsidiaries that are consolidated in conformity with accounting principles generally accepted in the United States.

      We are a technology-based manufacturer operating primarily in the United States. Our continuing operations are organized into two segments:

      Aerospace and Defense — includes the operations of Aerojet-General Corporation, or Aerojet, which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. We are one of the largest providers of both liquid and solid propulsion systems in the United States. Primary customers served include major prime contractors to the United States (U.S.) government, the Department of Defense (DoD), and the National Aeronautics and Space Administration (NASA).

      Real Estate — includes activities related to the development, sale, and leasing of our real estate assets. Through our Aerojet subsidiary, we own approximately 12,600 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California just east of Sacramento, which we refer to as the Sacramento Land. We are currently in the process of seeking zoning changes and other governmental approvals to allow the development of a portion of the Sacramento Land to optimize its value. We have filed applications with governmental and regulatory authorities for approvals necessary to develop over 5,800 acres of the Sacramento Land.

      During the second quarter of fiscal 2004, we announced plans to sell our GDX Automotive (GDX) business which developed and manufactured vehicle sealing systems for automotive original equipment manufacturers. This decision was a result of declining volumes and continued challenges in this market environment including adverse customer pricing pressures, increased material costs, high development and start-up costs and increased working capital requirements. In accordance with our plan to sell the GDX business, we classified our GDX business segment as a discontinued operation during the second quarter of fiscal 2004. During the third quarter of fiscal 2004, we completed the sale of GDX to Cerberus Capital Management, L.P. for $147 million, subject to adjustment, of which $140 million had been received as of November 30, 2004. In addition, on October 15, 2004, we announced our strategic decision to sell our Fine Chemicals business, which, through Aerojet Fine Chemicals, is a custom manufacturer of active pharmaceutical ingredients and registered intermediates for pharmaceutical and biotechnology companies. This plan was a result of management’s decision to focus our capital and resources on our Aerospace and Defense and Real Estate businesses. We will continue to operate our Fine Chemicals business in the ordinary course of business pending any sale. We classified our Fine Chemicals business segment as a discontinued operation as of the third quarter of fiscal 2004.

      We were incorporated in Ohio in 1915 and our principal executive offices are located at Highway 50 and Aerojet Road, Rancho Cordova, CA 95670. Our mailing address is P.O. Box 537012, Sacramento, CA 95853-7012 and our telephone number is 916-355-4000.

      Our Internet web site address is www.GenCorp.com. We have made available through our Internet web site, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). We also make available on our Internet web site our corporate governance guidelines and the charters for each of the following committees of the Company’s Board of Directors: Audit; Corporate Governance and Nominating; Finance; and Organization & Compensation. Our corporate governance guidelines and such charters are also available in print to any shareholder who requests them.

      Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2004, we are referring to the fiscal year ended on November 30 of that year.

Aerospace and Defense

      For over 60 years, Aerojet has been an industry leader and pioneer in the development of critical products and technologies that have strengthened the U.S. military and enabled the exploration of space. Aerojet focuses on creating military defense systems, as well as military, civil and commercial space systems, that address the needs of two broad industry sectors: defense systems and space systems. Aerojet believes it is in a unique competitive position, due to the diversity of its propulsion technologies (solid, liquid, air-breathing and electric) and synergy of its product lines to offer its customers the most innovative and advanced solutions available in the domestic propulsion market. Aerojet has historically been able to capitalize on its strong technical capabilities to become a critical provider of components and systems for major propulsion programs. Aerojet propulsion systems have flown prominently on manned and unmanned missions for NASA and the DoD since the inception of the U.S. Space Program. Principal customers include the DoD, NASA, The Boeing Company (Boeing), Lockheed Martin Corporation (Lockheed Martin) and Raytheon Company (Raytheon).

      Aerojet has been proactively engaged in the consolidation of the propulsion industry. In the third quarter of fiscal 2004, Aerojet acquired from Pratt & Whitney’s Chemical Systems Division (CSD) certain intellectual property and real property associated with several solid rocket motor programs for a nominal amount. This transaction highlights a key event in the continuing consolidation of the propulsion industry because CSD has now exited the solid propulsion business. In the fourth quarter of fiscal 2003, Aerojet acquired substantially all of the assets of the propulsion business of Atlantic Research Corporation (ARC) a subsidiary of Sequa Corporation. This acquisition makes Aerojet a leading supplier of solid rocket motors for tactical and missile defense applications and complements Aerojet’s capabilities for air-breathing and strategic systems. In fiscal 2002, Aerojet acquired the assets of the General Dynamics’ Ordnance and Tactical Systems Space Propulsion and Fire Suppression business (Redmond, Washington operations), a leading supplier of satellite propulsion systems for defense, civilian and commercial applications. These acquisitions have strengthened our market positions in both the defense systems and space systems industry sectors, and have provided leadership positions in the tactical and in-space propulsion market.

     Industry Overview

      Following a period of budget decreases in the post-Cold War era, the U.S. defense budget, as appropriated by Congress, has increased in recent years. Under the Bush Administration, the defense budget has experienced the first double-digit increase since the early 1990’s. The national defense budget, which totaled $350 billion in 2002, has risen steadily to over $375 billion in 2004, $416 billion in 2005, and there are proposals to increase it to $423 billion in 2006. We expect the U.S. defense budgets for research, development, test and evaluation, and procurement, the primary funding sources for Aerojet’s programs, to grow as well, with annual forecasts continuing to show increases through 2009. While the ultimate distribution of the

defense budget remains uncertain, Aerojet is well positioned to benefit from DoD investment in high priority transformational systems that address contemporary war fighting needs and requirements.

      The United States is demonstrating renewed commitment to space and planetary exploration. The Bush Administration has announced plans, which are subject to Congressional approval, to increase NASA’s 2004 budget of $15.4 billion by an average of 5% over the next three years and by approximately 1% in the two subsequent years. Near-term activities included in NASA’s budget are development of a new manned vehicle (the Crew Exploration Vehicle), robotic moon missions, and continued development of propulsion technologies for deep space exploration. We believe we are well-positioned to compete for significant roles on these projects. Furthermore, as a result of NASA’s intention to retire the Space Shuttle from service as early as 2010, and the limited time and funding to develop a replacement vehicle, we believe that NASA will focus on maneuvering and long-duration propulsion systems that are flight-proven, which will present opportunities for existing Aerojet systems.

     Competition

      Participation in the defense and space propulsion market is capital intensive and requires long research and development periods that represent significant barriers to entry. Aerojet may partner on various programs with its major customers or suppliers, some of whom are, from time to time, competitors on other programs.

      The table below lists the primary participants in the propulsion market serving the U.S. government and its agencies:

      Rocketdyne and Alliant Techsystems currently hold the largest share of the launch market segment, largely due to their sole-source production contracts for liquid (Rocketdyne) and solid (Alliant) propulsion systems on the current NASA Space Shuttle (now scheduled to be retired from service as early as 2010) and on the Delta family of expendable launch vehicles. Aerojet believes it is in a unique competitive position, due to the diversity of its technologies and synergy of its product lines, to offer its customers the most innovative and advanced solutions available in the domestic propulsion market. The basis on which Aerojet competes in the aerospace and defense industry varies by program, but generally is based upon price, technology, quality and service. Although competition is intensive for all of Aerojet’s products and services, Aerojet believes it possesses adequate resources to compete successfully.

     Major Customers

      As a merchant supplier to the aerospace and defense industry, we do not align ourselves with any single prime contractor except on a project-by-project basis. We believe that our position as a merchant supplier has helped us become a trusted partner to our customers, enabling us to maintain strong relationships with a variety of prime contractors. Under each of our contracts, we act either as a prime contractor, where we sell directly to the end user, or as a subcontractor, where we sell our products to other prime contractors.

      The principal end-user customers of our products and technology include agencies of the U.S. government. Since a majority of Aerojet’s sales are, directly or indirectly, to the U.S. government, funding for the purchase of Aerojet’s products and services generally follows trends in U.S. defense spending. However, individual government agencies, which include the military services, the Defense Advanced Research Projects Agency (DARPA), NASA, the Missile Defense Agency, and the prime contractors that serve these agencies, exercise independent purchasing power within “budget top-line” limits. Therefore, sales to the U.S. government are not regarded as sales to one customer and, accordingly, each contracting agency is viewed as a separate customer. Thus, while we believe the DoD and NASA budgets are generally relevant to our business outlook, closer examination of the needs and priorities of the U.S. government agencies provides a better indication of product area stability and growth potential.

      Aerojet contracts directly with a number of major prime contractors and directly with agencies of the U.S. government. During fiscal 2004, Lockheed Martin, Raytheon, and Boeing accounted for approximately 33%, 15%, and 10%, respectively, of aerospace and defense segment sales.

      Aerojet’s direct sales to the U.S. government and its agencies, or government customers, and indirect sales to government customers via direct sales to prime contractors accounted for a total of approximately 85% of net sales, or approximately $420 million, in fiscal 2004. The following are approximate percentages of Aerojet’s net sales by principal end user in fiscal 2004:

Major Programs

      A subset of our key defense systems programs is listed below:

      Space Systems Programs — Aerojet improved its already strong market position in the space systems industry segment in fiscal 2004 with several successful space exploration missions including both the MARS Rover missions, Cassini, Stardust and Mercury Messenger. In late 2004, Lockheed Martin and NASA

selected Aerojet to provide de-orbit propulsion for the Hubble Space Telescope. These successes, coupled with NASA’s plans to embark on the development of new manned and unmanned missions, provide opportunities to grow our over 40 year legacy of providing critical propulsion systems for the U.S. space program.

      A subset of our key space systems programs is listed below:

      Aerojet’s top five programs accounted for less than 30% of fiscal 2004 net sales. No single program accounted for more than 10% of Aerojet’s fiscal 2004 net sales and most programs accounted for less than 5% of Aerojet’s fiscal 2004 net sales.

     Contract Types

      Under each of its contracts, Aerojet acts either as a prime contractor, where it sells directly to the end user, or as a subcontractor, selling its products to other prime contractors. Research and development contracts are awarded during the inception stage of a program’s development. Production contracts provide for the production and delivery of mature products for operational use. Aerojet’s contracts can generally be categorized as either “cost-reimbursable” or “fixed-price.” During fiscal 2004, approximately 57% of Aerojet’s total sales were achieved on fixed-price contracts, 41% on cost-reimbursable contracts, and 2% on other contract types.

      Cost-reimbursable contracts are typically (i) cost plus fixed fee, (ii) cost plus incentive fee, or (iii) cost plus award fee contracts. For cost plus fixed fee contracts, Aerojet typically receives reimbursement of its costs, to the extent the costs are allowable under contractual provisions, in addition to receipt of a fixed fee. For cost plus incentive fee contracts and cost plus award fee contracts, Aerojet receives adjustments in the contract fee, within designated limits, based on its actual results as compared to contractual targets for factors such as cost, performance, quality, and schedule.

      Fixed-price contracts are typically (i) fixed-price, (ii) fixed-price-incentive, or (iii) fixed-price level of effort contracts. For fixed-price contracts, Aerojet performs work for a fixed price and realizes all of the profit or loss resulting from variations in costs of performance. For fixed-price-incentive contracts, Aerojet receives increased or decreased fees or profits based upon actual performance against established targets or other criteria. For fixed-price level of effort contracts, Aerojet generally receives a structured fixed price per labor hour, dependent upon the customer’s labor hour needs. All fixed-price contracts present the risk of unreimbursed cost overruns.

      Many programs under contract have product lifecycles exceeding 10 years, such as the Delta, Standard Missile, and Tomahawk programs. It is typical for U.S. government propulsion contracts to be relatively small ($2.5 million a year on average) during development phases that can last from five to seven years, followed by low-rate and then full-rate production, where annual funding can grow as high as $30 million a year over many years.

     Backlog

      Aerojet’s contract backlog as of November 30, 2004 was $879 million compared to $830 million as of November 30, 2003. Funded backlog, which includes only the amount for which money has been directly authorized by the U.S. Congress, or for which a purchase order has been received from a commercial customer, was $538 million as of November 30, 2004, compared to funded backlog of $425 million on November 30, 2003. Overall, backlog growth reflects contract awards in excess of sales on both production and development programs.

     Research and Development

      Aerojet views its research and development efforts as critical to maintain its leadership positions in markets in which it competes. We maintain an active research and development effort supported primarily by customer funding. Customer-funded research and development expenditures are funded under contract specifications, typically research and development contracts, several of which we believe will become key programs in the future. Historically, over 90% of our research and development expenditures were customer funded. We believe customer-funded research and development activities are vital to our ability to compete for contracts and to enhance our technology base.

      Aerojet’s company-funded research and development effort include expenditures for technical activities that are vital to the development of new products, services, processes or techniques, as well as those expenses for significant improvements to existing products or processes.

      The following table summarizes Aerojet’s research and development expenses during the past three fiscal years:

      The ARC acquisition in October 2003 contributed an additional $30 million in customer-funded research and development expense in fiscal 2004 as compared to fiscal 2003 (see Note 11 in Notes to Consolidated Financial Statements).

     Raw Materials, Suppliers and Seasonality

      Availability of raw materials and supplies to Aerojet is generally sufficient. Aerojet is sometimes dependent, for a variety of reasons, upon sole-source suppliers for procurement requirements but has experienced no significant difficulties in meeting production and delivery obligations because of delays in delivery or reliance on such suppliers.

      Aerojet’s business is not subject to predictable seasonality. Primary factors affecting the timing of Aerojet’s sales include the timing of government awards, the availability of U.S. government funding, contractual product delivery requirements and customer acceptances.

      Where appropriate, Aerojet obtains patents in the U.S. and other countries covering various aspects of the design and manufacture of its products. We consider these patents to be important to Aerojet as they illustrate Aerojet’s innovative design ability and product development capabilities. We do not believe the loss or expiration of any single patent would have a material adverse effect on the business or financial results of Aerojet or on our business as a whole.

Real Estate

      Through our Aerojet subsidiary, we own approximately 12,600 acres of land (Sacramento Land), located 15 miles northeast of downtown Sacramento, along U.S. Highway 50, a key growth corridor in the region. Our Real Estate segment’s primary activity is the development of a substantial portion of the Sacramento Land, which is one of the largest single owner land tracts in the Sacramento region. The Sacramento Land was acquired by Aerojet in the early 1950s for the manufacturing and testing of propulsion products. Most of the Sacramento Land was never used for production or testing purposes; rather, most of such land was used to provide safe buffer zones for testing propulsion products. Aerojet’s testing operations now require a much smaller industrial footprint within the Sacramento Land as a result of recent aerospace and defense acquisitions and their testing capabilities, advances in manufacturing processes, propulsion technologies, and increased use of government testing facilities.

      Demand for residential real estate in the Sacramento area has grown dramatically in recent years due to population and non-agricultural employment growth, increases in household income and continued low mortgage interest rates. The result of this demand has led to substantial appreciation in the value of raw land, residentially-zoned land, and new homes in the Sacramento area.

      We believe the compelling demographic and real estate dynamics in the Sacramento area provide an opportunity to create value by developing a substantial portion of the Sacramento Land for a wide variety of uses, including residential, office, and commercial/retail. Developed as contemplated, we expect that the Sacramento Land will have significantly greater value than as currently zoned.

      Despite limited acreage that was used for propulsion testing and production, much of the Sacramento Land is encumbered by environmental restrictions imposed by federal and state regulatory agencies. These restrictions were imposed because of the historical propulsion activities of our Aerospace and Defense segment. Until these restrictions are released, we will be unable to develop those portions of the Sacramento Land. In 1997, state regulators released 1,115 acres of the Sacramento Land from environmental restrictions. This land was sold to a regional homebuilder in fiscal 2001. In fiscal 2002, state and federal regulators released

environmental restrictions on an additional 2,600 acres of the Sacramento Land. Additionally, the development process requires various governmental and regulatory approvals. We have made applications for general plan amendments and zoning changes for the initial portions of the Sacramento Land to be developed. Descriptions of those portions of the Sacramento Land and additional information regarding the government and regulatory approval process are included below.

      We have filed applications with government and regulatory authorities for approvals necessary to develop over 5,800 acres of the Sacramento Land, of which over 3,300 acres are restricted by environmental regulations. Under California law, these government and regulatory authorities are required to determine if an Environment Impact Report (EIR) is necessary and, if necessary, what, if any, impacts a project will have on the environment. In the preparation of this report, the authority must consider numerous elements. One important element is the project’s source of water. We have attempted to address this critical element with our 2003 settlement agreement with Sacramento County (the County). Pursuant to the agreement with the County, Aerojet agreed to transfer all of its remediated groundwater to the County. Subject to various provisions in the agreement with the County, including approval under the California Environmental Quality Act, the County will assume Aerojet’s responsibility for providing replacement water to impacted water purveyors up to the amount of remediated water Aerojet transfers to the County. If the amount of Aerojet’s transferred water is in excess of the replacement water provided to the impacted water purveyors, the County has committed to make such water available for the development of the Sacramento Land in an amount equal to the excess.

      The table below summarizes the Sacramento Land by use and by environmental status (in acres):

      Rio Del Oro — In fiscal 2002, we filed an application for general plan amendments and requests for rezoning of a 2,724 acre development project called Rio Del Oro, which is now part of the City of Rancho Cordova (Rancho Cordova) which was incorporated in fiscal 2003. Rio Del Oro is planned as a mixed-use master-planned community that includes office and industrial uses, retail and support services, recreational opportunities, and a broad range of housing types. This project has extensive areas of habitat for certain species on the Federal Endangered Species List and these areas will be preserved as part of the development. Our application was submitted in conjunction with an application by a regional homebuilder for the property the homebuilder owns west and adjacent to the Rio del Oro land. We have granted a regional homebuilder the right to purchase 400 acres of Rio Del Oro.

      Rancho Cordova is having an EIR prepared for this project and it is expected that the first draft of the EIR will be ready for review by Rancho Cordova in April 2005. Rancho Cordova’s approval of our application is not expected before late fiscal 2006. For development to proceed, certain state environmental restrictions must be lifted. We are working with state regulators to determine actions necessary to remove these restrictions. We believe the first portions of the Rio Del Oro land should have environmental restrictions lifted at approximately the same time that our general plan amendment and zoning application is approved.

      Glenborough and Easton Place — In early fiscal 2004, we announced plans for an approximately 1,400 acre master planned community originally called Easton (and now referred to as Glenborough and Easton Place) and filed applications with the County for general plan amendments and rezoning requests. The Glenborough plan comprised of approximately 1,250 acres, incorporates a wide mix of residential, commercial and recreational uses, including an approximate 300-acre regional open space along Alder Creek. Easton Place, consisting of approximately 150 acres, is planned as a high-density mixed-use urban hub connecting Glenborough and Westborough. Easton Place will take full advantage of a new light rail station, the existing Aerojet employment center and its location on the Highway 50 corridor.

      We expect the County to commence the EIR for Glenborough and Easton Place during the first half of fiscal 2005. This project has extensive habitat for an invertebrate on the Federal Endangered Species List. We expect to be required to mitigate for any incidental takings of habitat associated with the development of the project. To that end, we are working with federal agencies to develop a comprehensive mitigation plan that will provide suitable alternative habitat. This mitigation plan will be part of the approval of the application. We expect County approval of this project to be granted in late fiscal 2007 or thereafter.

      Portions of the land designated for this project totaling approximately 330 acres are subject to state and federal environmental restrictions, which must be released before development of those acres can proceed. We are working with state and federal agencies to determine and carry out the actions necessary to ensure the successful delisting of those portions of the project. We believe that restrictions covering some areas of this project will be removed about the same time as the Glenborough and Easton Place general plan amendment and zoning application is approved by the County. Although we expect that some areas will remain subject to environmental restrictions for a period of time after receipt of County approval, we do not expect any delays in our development schedule as development of those portions of the project are not expected to begin for several years.

      Westborough and Easton Place — In November 2004, we filed an application with Rancho Cordova for a general plan amendment for a 1,665 acre project named Westborough at Easton. We are currently working with Rancho Cordova to expand the application to include the rezoning of the property. A portion of this project will be a 150-acre expansion to Easton Place (discussed above), and the balance will be known as Westborough. The Easton Place expansion will be consistent with the plans for the balance of Easton Place (as discussed above). We intend Westborough to have a wide mix of residential, business, community and recreational uses. We have granted a regional homebuilder the right to purchase 100 acres of Westborough at Easton.

      During 2005, we will be working with Rancho Cordova to determine the scope of the project so that Rancho Cordova may commence the EIR for Westborough and Easton Place during 2006. Since the EIR takes approximately one year to prepare, we do not expect that Rancho Cordova will complete a first draft of the EIR for review until 2007. This project has extensive habitat for an invertebrate on the Federal Endangered Species List. We are working with federal agencies to develop a comprehensive mitigation plan that will provide suitable alternative habitat in connection with any incidental taking of habitat associated with the development of the project. This mitigation plan will be part of the approval of the application. We expect Rancho Cordova approval of this project during 2008.

      Approximately 280 acres of this project are subject to federal environmental restrictions which we do not expect to be removed for several years. Although we expect that some areas will remain subject to environmental restrictions for a period of time after receipt of Rancho Cordova approval, we do not expect any delays in our development schedule as development of those portions of the project are not expected to begin for several years.

      Office Park and Auto Mall — We are preparing a subdivision application for submittal to the County for approximately 55 acres of the Sacramento Land. We intend to develop this land as an office park. The previously announced joint venture in March 2003 with a local real estate developer will be part of this subdivision.

      We have submitted an application to the County for a conditional use permit to allow the sale of new cars on approximately 30-acres of the land, a portion of which was sold to two automobile dealers in fiscal 2003. We expect the County to approve this application in 2005.

      We believe it will be several years before any of the 1,628 acres of our Sacramento Land will be ready for development. Portions of such land are far from existing infrastructure, making it uneconomical to develop at this time. Other parts of such land will go through a lengthy annexation process and development will not occur until that process is completed.

      We believe that the Aerojet operations land is more than adequate for Aerojet’s long-term needs, and as a result, portions of this area may be available for development in the future.

      In addition to the projects described above, we currently lease to third parties approximately 330,000 square feet of office space and 10 acres of land. These leasing activities generated $6 million in revenue in fiscal 2004.

      In fiscal 2004, we concluded a property usage agreement with Sacramento Regional Transit and a mining agreement with Granite Construction Company, both of which support our goal of enhancing the value of our real estate assets. Initial proceeds received in fiscal 2004 total $9 million for these transactions.

      As we work toward the development of the Sacramento Land, we will continue to explore other alternatives to enhance the value of our real estate assets, including outright sales, and/or joint ventures with real estate developers or other third parties.

Environmental Matters

      Our operations are subject to and affected by federal, state, local and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. Our policy is to conduct our businesses with due regard for the preservation and protection of the environment. We continually assess compliance with these regulations and management

of environmental matters. We believe our operations are in substantial compliance with all applicable environmental laws and regulations.

      Operation and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of our operations. These costs are not significant relative to total operating costs and most such costs are incurred by our Aerospace and Defense segment and are generally allowable costs under contracts with the U.S. government.

      Under existing U.S. environmental laws a Potentially Responsible Party (PRP) is jointly and severally liable, and therefore we are potentially liable to the government or third parties for the full cost of remediating the contamination at our facilities or former facilities or at third-party sites where we have been designated as a PRP by the Environmental Protection Agency or a state environmental agency. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remediation measures. However, we review these matters and accrue for costs associated with environmental remediation when it becomes probable that a liability has been incurred and the amount of the liability, usually based on proportionate sharing, can be reasonably estimated. These liabilities have not been discounted to their present value as the timing of cash payments is not fixed or reliably determinable. See Management’s Discussion and Analysis in Part II, Item 7 of this Report for additional information.

Employees

      As of November 30, 2004, excluding employees of our discontinued operations, approximately 17% of our 2,857 employees were covered by collective bargaining or similar agreements all of which are due to expire within one year. We believe that our relations with employees are good.

Executive Officers of the Registrant

      See Part III, Item 10 of this Report for information about Executive Officers of the Company.

Risk Factors

      Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth in Management’s Discussion and Analysis in Part II, Item 7 of this Report.

      Sales, directly and indirectly, to the U.S. government and its agencies accounted for approximately 85% of our Aerospace and Defense segment net sales and 84% of our total net sales from continuing operations in fiscal 2004. Our contracts typically permit the U.S. government to unilaterally modify or terminate a contract or to discontinue funding for a particular program at any time. The cancellation of one or more significant contracts could have a material adverse effect on our ability to realize anticipated sales and profits. The cancellation of a contract, if terminated for cause, could also subject us to liability for the excess costs incurred by the U.S. government in procuring undelivered items from another source. If terminated for convenience, our recovery of costs would be limited to amounts already incurred or committed, and our profit would be limited to work completed prior to termination.

      The Under Secretary of the Air Force has indicated that in 2005 the DoD intends to revise the Evolved Expendable Launch Vehicle (EELV) program, under which we provide propulsion systems for the Atlas V rocket, to address cost pressures resulting from continued low commercial launch activity. Details of the form and terms of the anticipated changes are unknown at this time; however, we cannot assure you that any significant change to the program will lead to a satisfactory resolution for launch vehicle manufacturers. The cancellation or material modification of the EELV program could adversely affect our revenues from that program and our ability to recover the costs we have incurred to date under the program.

      Our primary aerospace and defense customers include the DoD and its agencies, the government prime contractors that supply products to these customers, and NASA. As a result, we rely on particular levels of U.S. government spending on propulsion systems for defense and space applications and armament systems for precision tactical weapon systems and munitions applications, and our backlog depends, in large part, on continued funding by the U.S. government for the programs in which we are involved. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general political support for this type of spending. The overall U.S. defense budget declined from the mid-1980s through the early 1990s. Although the DoD currently forecasts continued defense budget increases through its fiscal year 2009, which is the remainder of the DoD’s detailed forecast period, future levels of defense spending may not increase and could decrease. Moreover, although our contracts often contemplate that our services will be performed over a period of several years, Congress usually must approve funds for a given program each government fiscal year and may significantly reduce or eliminate funding for a program. A decrease in U.S. military expenditures, or the elimination or curtailment of a material program in which we are involved, could negatively affect our revenues.

      Our aerospace and defense contracts generally can be categorized as either “fixed-price” or “cost-reimbursable” contracts. Under fixed-price contracts, we agree to perform specified work for a fixed price and realize all of the profit or loss resulting from variations in the costs of performing the contract. As a result, all fixed-price contracts involve the inherent risk of unreimbursed cost overruns. To the extent we were to incur unanticipated cost overruns on a program or platform subject to a fixed-price contract, our profitability would be adversely affected. For example, our Atlas V program contract is a fixed-price contract that has not been profitable for us to date in part as a result of unexpected costs of development and production. During fiscal

2004, we recorded an inventory write-down of $16 million related to the Atlas V program. The write-down relates to unanticipated transition costs from the development phase to the production phase of the contract and the value of materials rendered obsolete by a decision to proceed with qualification and production of an enhanced motor configuration. As of November 30, 2004, the Atlas V inventory balance was $128 million. The current contract provides for production of 44 motors over a number of years and for the order of an additional 52 motors at the option of our prime contractor, Lockheed Martin. Full recovery of our Atlas V investment is subject to uncertainties, including: (i) our ability to produce motors at our estimated average unit price, (ii) final pricing of the enhanced motor configuration, and (iii) a satisfactory renegotiation of contract terms with Lockheed Martin, and Lockheed Martin’s exercise of its option for additional motors. If we are unable to recover our costs, we will be required to take additional write-downs related to the Atlas V program. If the cost overruns associated with our Atlas V program continue, the program may not become profitable during the contract term and we may not be able to fully recover our investment in the program.

      During fiscal 2004, approximately 57% of Aerojet’s total sales were achieved on fixed-price contracts, 41% on cost reimbursable contracts, and 2% on other contract types.

      We encounter intense competition in bidding for contracts. Many of our competitors have financial, technical, production and other resources substantially greater than ours. Although the downsizing of the defense industry in the early 1990s has resulted in a reduction in the aggregate number of competitors, the consolidation has also strengthened the capabilities of some of the remaining competitors resulting in an increasingly competitive environment. The U.S. government also has its own manufacturing capabilities in some areas. 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 these contracts. Further, the U.S. government may open to competition programs on which we are currently the sole supplier, which could also adversely affect our revenues.

      In the performance of contracts with the U.S. government, we are subject to complex and extensive procurement and other related laws and regulations. Possible consequences of a failure to comply, even inadvertently, with these laws and regulations include civil and criminal fines and penalties, in some cases, double or triple damages, and suspension or debarment from future government contracts and exporting of goods for a specified period of time.

      These laws and regulations provide for ongoing audits and reviews of incurred costs as well as contract procurement, performance and administration. The U.S. government may, if appropriate, conduct an investigation into possible illegal or unethical activity in connection with these contracts. Investigations of this nature are common in the aerospace and defense industry, and lawsuits may result. In addition, the U.S. government and its principal prime contractors periodically investigate the financial viability of its contractors and subcontractors as part of its risk assessment process associated with the award of new contracts. 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.

      The aerospace and defense industry has undergone rapid and significant technological development over the last few years. Our competitors may implement new technologies before we are able to, allowing them to provide more effective products at more competitive prices. Future technological developments could:

      Many of the products we develop and manufacture are technologically advanced systems that must function under demanding operating conditions. Even though we believe that we employ sophisticated and rigorous design, manufacturing and testing processes and practices, we may not be able to successfully launch or manufacture our products on schedule or our products may not perform as intended.

      Some of our contracts require us to forfeit a portion of our expected profit, receive reduced payments, provide a replacement product or service or reduce the price of subsequent sales to the same customer if our products fail to perform adequately. Performance penalties also may be imposed should we fail to meet delivery schedules or other measures of contract performance. We do not generally insure against potential costs resulting from any required remedial actions or costs or loss of sales due to postponement or cancellation of scheduled operations or product deliveries.

      We are subject to foreign, federal, state and local environmental laws and regulations that, among other things, require us to obtain permits to operate and install pollution control equipment and regulate the generation, storage, handling, transportation, treatment and disposal of hazardous and solid wastes. We may also be subject to fines and penalties, and are subject to toxic tort and asbestos suits as well as other third-party lawsuits, due to either our past or present use of hazardous substances or the alleged on-site or off-site contamination of the environment through past or present operations. We may incur material costs in defending these proceedings or claims. Any unexpected adverse judgment or cash outlay could reduce our profitability and leave us with less cash available to service our debt.

      In one matter, GenCorp Inc. v. Olin Corporation, we are currently subject to a judgment order in the amount of approximately $29 million entered November 21, 2002 by the U.S. District Court for the Northern District of Ohio, Eastern Division. On November 22, 2004, this judgment order was upheld by the U.S. Sixth Circuit Court of Appeals. We have filed a petition for rehearing with the Sixth Circuit. If the petition is not granted and the offsets to which we believe we are entitled are not realized, the judgment will have a material adverse impact on our cash flow and financial condition.

      For additional discussion of environmental and legal matters, please see the environmental discussion in Note 13 to Consolidated Financial Statements.

      Under an agreement with the U.S. government, the U.S. government recognizes as allowable for government contract cost purposes up to 88% of environmental expenses at our Sacramento and former Azusa sites. Aerojet’s mix of contracts can affect the actual reimbursement made by the U.S. government. Because these costs are recovered through forward pricing arrangements, our ability to continue recovering these costs from the U.S. government depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business. We also may seek recovery of our environmental costs from insurers.

      As of November 30, 2004, we had established reserves of $304 million, which we believe to be sufficient to cover our estimated share of the environmental remediation costs at that time. However, given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient. We continually evaluate the adequacy of those reserves, and they could change. In addition, the reserves 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 at previously identified sites will be discovered. This could lead us to have additional expenditures for environmental remediation in the future and given the many uncertainties involved in assessing liability for environmental claims, our reserves may prove to be insufficient.

      For additional discussion of environmental matters, please see the environmental discussion in Note 13 to Consolidated Financial Statements.

      The operations of our Aerospace and Defense business involve the handling and production of potentially explosive 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 temporarily shut down or otherwise disrupt our manufacturing operations and could cause production delays. It is possible that a release of these chemicals 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. The use of these products in applications by our customers could also result in liability if an explosion or fire 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.

      We closely monitor sources of supply to assure that adequate raw materials and other supplies needed in our manufacturing processes are available. As a U.S. government contractor, we are frequently limited to procuring materials and components from sources of supply that can meet rigorous customer and/or government specifications. In addition, as business conditions, the DoD 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 supply of ammonium perchlorate, a principal raw material used in our operations, is limited to a single source that supplies the entire domestic solid propellant industry. This single source, however, maintains two separate manufacturing lines a reasonable distance apart, which mitigates the likelihood of a fire, explosion, or other problem impacting all production. We also presently rely on one primary supplier for graphite fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for graphite fiber. Although other sources of graphite fiber exist, the addition of a new supplier would require us to qualify the new source for use.

      Current suppliers of some insulation materials used in rocket motors have announced plans to close manufacturing plants and discontinue product lines. These materials include polymers used in ethylene propylene diene monomer rubber insulation and aerospace-grade rayon used in nozzles. We are in the process of qualifying new replacement materials for some programs. For other programs, we have produced sufficient inventory to cover current program requirements and are in the process of qualifying new replacement materials to be qualified in time to meet future production needs.

      We are also impacted by increases in the prices of raw materials used in production on fixed-price contracts. Most recently, we have seen an increase in the price of commodity metals, primarily steel and aluminum.

      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 could have a material adverse effect on our operating results, financial condition or cash flows.

      As a result of the geographic concentration of our properties, our long-term performance and the value of our properties will depend upon conditions in the Sacramento region, including:

      There can be no assurance that the Sacramento market will continue to grow or that conditions will remain favorable. If unfavorable economic or other conditions occur in the region, our development plans and business strategy could be adversely affected.

      While we have owned our real estate for over 50 years, we have no significant real estate development experience. Therefore, we do not have any real estate development history from which you can draw conclusions about our ability to execute our real estate business plan.

      Our real estate development activities may subject us to the following risks:

      Additionally, the time frame required for development of these properties means that we may have to wait years for a significant cash return.

      For the past three years, interest rates in the U.S. have been at historically low levels, which has facilitated the financing and purchase of homes. Historical evidence has shown that significant increases in interest rates have a negative impact on housing demand. Since June 30, 2004, the federal funds rate has increased from 1% to 2.50%. During that time, the Federal Reserve Board’s rate-setting committee has met six times, and each time raised the federal funds rate by 0.25%. If interest rates continue to increase, and the ability or willingness of prospective buyers to finance home purchases is diminished, the value of our real estate assets may decrease.

      We have a substantial amount of debt for which we are required to make interest and principal payments. As of November 30, 2004, we had total consolidated debt of $577 million. Subject to the limits contained in some of the agreements governing our outstanding debt, we may incur additional debt in the future.

      Our level of debt places significant demands on our cash resources, which could:

      Continuing operations generated $5 million of cash in fiscal 2004, compared to negative cash flow from continuing operations in fiscal 2003 and fiscal 2002. We may experience negative net cash flow from continuing operations in the future. Our ability to record positive cash flow from continuing operations for the next fiscal year will depend in part on positive cash flow from our Real Estate business. If we are unable to generate sufficient cash flow to service our debt and fund our operating costs, our liquidity may be adversely affected.

      Our outstanding debt generally contains various restrictive covenants. These covenants include, among others, provisions restricting our ability to:

      Our secured debt also contains other customary covenants, including, among others, provisions:

      In addition, certain covenants in our bank facilities require us and our subsidiaries to maintain certain financial ratios. Any of the covenants described in this risk factor 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.

      All of the operations of our Aerospace and Defense and Real Estate businesses are conducted through subsidiaries. Consequently, our cash flow and ability to service our debt obligations will be largely dependent upon the earnings of our operating subsidiaries and the distribution of those earnings to us, or upon loans, advances or other payments made by these subsidiaries to us. The ability of our subsidiaries to pay dividends or make other payments or advances to us will depend upon their operating results and will be subject to applicable laws and any contractual restrictions contained in the agreements governing their debt, if any.

      Our business strategy contemplates continued expansion of our Aerospace and Defense operations, including growth through future acquisitions. 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 acquisition targets, internal demands on our resources and our ability to obtain financing. 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 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 business that we acquire, there may be liabilities of the acquired companies 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 liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.

      We have announced that we intend to divest our Fine Chemicals business. However, our ability to do so on favorable terms may be limited by the availability of interested purchasers and internal demand on our resources. We may not be able to identify a purchaser and negotiate an acceptable agreement on a timely basis or at all. In that event, we may be unable to complete our strategy of focusing our operations in our Aerospace and Defense and Real Estate businesses.

      In connection with divestitures, including our recent sale of our GDX business, we may incur costs, including costs related to the closure of a manufacturing facility in Chartres, France. This closure requires us to comply with certain procedures and processes that are defined under local law and labor regulations. These costs may require additional cash expenditures, thereby reducing our profitability and our liquidity.

      As of November 30, 2004, we had approximately 2,857 employees in our ongoing operations, of which approximately 17% were covered by collective bargaining or similar agreements. Of the covered employees, all are covered by collective bargaining agreements that are due to expire within one year. If we are unable to negotiate acceptable new agreements with the unions representing our employees upon expiration of the existing contracts, we could experience strikes or work stoppages. Even if we are successful in negotiating new agreements, the new agreements could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability. If our unionized workers were to engage in a strike or other work stoppage, or other non-unionized operations were to become unionized, we could experience a significant disruption of operations at our facilities or higher ongoing labor costs. A strike or other work stoppage in the facilities of any of our major customers could also have similar effects on us.

      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. In general, we do not enter into employment agreements with our executive officers. We have entered into severance agreements with several of our officers that allow those officers to terminate their employment under particular circumstances, such as a change of control affecting our company. 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 could disrupt the operations of the segment affected or our overall operations. In addition, because of the complex nature of many of our products and programs, we are generally dependent on an educated and highly-skilled engineering staff and workforce. Our operations could be disrupted by a shortage of available skilled employees.

      Changes in our operating results from quarter to quarter could result in volatility in our common stock price. Our quarterly and annual sales are affected by a variety of factors that could lead to significant variability in our operating results:

      We have announced that we plan to sell our Fine Chemicals business. We will continue to operate our Fine Chemicals business in the ordinary course of business pending any sale. This business is subject to the following operational risks:

      Any of these factors could have a material adverse effect on the business and financial results of the Fine Chemicals business.

Item 2.     Properties

      Significant operating, manufacturing, research, design and/or marketing facilities are set forth below.

Facilities

Corporate Headquarters

GenCorp Inc.

Highway 50 and Aerojet Road

Rancho Cordova, California 95670

Mailing address:

P.O. Box 537012

Sacramento, California 95853-7012

Manufacturing/ Research/ Design/ Marketing Locations

      We believe each of the facilities is adequate for the business conducted at that facility. The facilities are suitable and adequate for their intended purpose and taking into account current and future needs. A portion of Aerojet’s property in California (approximately 3,900 acres of undeveloped land), and its Redmond, Washington facility are encumbered by a deed of trust or mortgage. In addition, we own and lease properties (primarily machinery and warehouse and office facilities) in various locations for use in the ordinary course of our business.

Item 3.     Legal Proceedings

      The following information pertains to legal proceedings, including proceedings relating to environmental matters, which are discussed in detail in Notes 13(b) and 13(c) to the Consolidated Financial Statements.

Groundwater Cases

     Sacramento Cases

      Aerojet-General Corporation, along with other industrial Potentially Responsible Parties (PRPs) and area water purveyors, was sued in three cases by approximately 500 individual plaintiffs residing in the vicinity of Aerojet’s facilities near Sacramento, California (the Sacramento cases). One of such cases was voluntarily dismissed by the named plaintiff. As discussed in detail in Notes 13(b) and 13(c) to the Consolidated Financial Statements, through dismissals, the number of plaintiffs has been reduced to 27. The remaining Sacramento cases are denominated as follows:

      Adams, Daphne, et al. v. Aerojet-General Corporation, et al., Case No. 98AS01025, Sacramento County Superior Court, served April 30, 1998.

      Allen, et al. v. Aerojet-General Corporation, et al., Case No. 97AS06295, Sacramento County Superior Court, served January 14, 1998.

      In the Sacramento cases, the plaintiffs allege that that industrial defendants contaminated groundwater provided by the water purveyors as drinking water, which plaintiffs consumed causing illness, death and economic injury. Plaintiffs seek judgment against defendants for unspecified general, special and punitive damages.

      As discussed in detail in Notes 13(b) and 13(c) to the Consolidated Financial Statements, the regulated water entities defendants were dismissed from the litigation, and following plaintiffs’ tentative settlement against McDonnell Douglas Corporation, Aerojet is the only remaining defendant in these cases. Discovery is ongoing and the first phase of the trial has been set for August 2005.

     San Gabriel Valley Cases

      Aerojet, along with numerous other defendants, was also sued in 14 cases by approximately 1,100 individual plaintiffs residing in the vicinity of Aerojet’s former facility in Azusa, California (the San Gabriel Valley cases). The number of plaintiffs involved in the San Gabriel Valley cases has been reduced to approximately 500. The San Gabriel cases are denominated as follows:

      Adams, Robert G., et al. v. Aerojet-General Corporation, et al., Case No. BC230185, Los Angeles County Superior Court, served July 26, 2000.

      Adler, Jeff, et al. v. Southern California Water Co. et al., Case No. BC169892, Los Angeles County Superior Court, served on or about April 22, 1998.

      Alexander, et al. v. Suburban Water Systems, et al., Case No. KC031130, Los Angeles County Superior Court, served June 22, 2000.

      Alvarado, et al. v. Suburban Water Systems, et al., Case No. KC034953, Los Angeles County Superior Court, served May 7, 2001.

      Anderson, Anthony et al. v. Suburban Water Systems, et al., Case No. KC02854, Los Angeles County Superior Court, served November 23, 1998.

      Arenas, et al. v. Suburban Water Systems, et al., Case No. KC037559, Los Angeles County Superior Court, served June 24, 2002.

      Boswell, et al. v. Suburban Water Systems, et al., Case No. KC027318, Los Angeles County Superior Court, served April 28, 1998.

      Bowers, et al. v. Aerojet-General Corporation, et al., Case No. BC250817, Los Angeles County Superior Court, served July 17, 2001.

      Brooks, et al. v. Suburban Water Systems et al., Case No. KC032915, Los Angeles County Superior Court, served October 17, 2000.

      Celi, et al. v. San Gabriel Valley Water Company, et al., Case No. GC020622, Los Angeles County Superior Court, served April 28, 1998.

      Criner, et al. v. San Gabriel Valley Water Company, et al., Case No. GC021658, Los Angeles County Superior Court, served September 16, 1998.

      Criner, et al. v. San Gabriel Valley Water Company, et al., Case No. GC021658, Los Angeles County Superior Court, served September 16, 1998.

      Dominguez, et al. v. Southern California Water Company, et al., Case No. GC021657, Los Angeles County Superior Court, served September 16, 1998.

      Santamaria, et al. v. Suburban Water Systems, et al., Case No. KC025995, Los Angeles County Superior Court, served February 24, 1998.

      In the San Gabriel Valley cases, the plaintiffs allege that that industrial defendants contaminated groundwater provided by the water purveyors as drinking water, which plaintiffs consumed causing illness, death and economic injury. Plaintiffs seek judgment against defendants for unspecified general, special and punitive damages.

      As discussed in detail in Notes 13(b) and 13(c) to the Consolidated Financial Statements, the San Gabriel Valley cases have been coordinated for trial in Los Angeles, California, and are proceeding under two master complaints. The regulated water entities defendants were dismissed from the litigation and numerous industrial defendants have settled with the plaintiffs. Currently, 162 of the remaining approximately 500 San Gabriel Valley plaintiffs are subject to early trial — most likely in fiscal 2005.

     SEMOU Related Cases

      In October 2002, Aerojet, along with approximately 65 other individual and corporate defendants, was served with four civil suits filed in the U.S. District Court for the Central District of California pursuant to which plaintiff water purveyors that seek recovery of costs allegedly incurred in response to the contamination present at the South El Monte Operable Unit (SEMOU) of the San Gabriel Valley Superfund site. The cases are denominated as follows:

      San Gabriel Valley Water Company v. Aerojet-General Corporation, et al.,Case No. CV-02-6346 ABC (RCx), U. S. District Court, Central District of CA, served October 30, 2002.

      San Gabriel Basin Water Quality Authority v. Aerojet-General Corporation, et al., Case No. CV-02-4565 ABC (RCx), U. S. District Court, Central District of CA, served October 30, 2002.

      Southern California Water Company v. Aerojet-General Corporation, et al.,Case No. CV-02-6340 ABC (RCx), U. S. District Court, Central District of CA, served October 30, 2002.

      The City of Monterey Park v. Aerojet-General Corporation, et al., Case No. CV-02-5909 ABC (RCx), U. S. District Court, Central District of CA, served October 30, 2002.

      The cases have been coordinated for ease of administration by the court. Plaintiffs allege that groundwater in the SEMOU is contaminated with chlorinated solvents and ammonium perchlorate that were released into the environment by Aerojet and other defendants, causing plaintiffs to incur unspecified response costs and other damages.

      Aerojet has filed third-party complaints against several water entities on the basis that they introduced perchlorate-containing Colorado River water to the basin. Those water entities have filed motions to dismiss

Aerojet’s complaints. The motions as well as discovery have been stayed pending efforts to resolve the litigation through mediation. Aerojet has notified its insurers of these claims.

     Other Ground Water Case

      Orange County Water District v. Northrop Corporation, et al., Case No. O4CC00715, Orange County (CA) Superior Court, served December 29, 2004. Aerojet and other defendants were sued by the Orange County Water District, a public entity with jurisdiction over groundwater resources and water supplies in Orange County. The plaintiff alleges that groundwater in Orange County, California is contaminated with chlorinated solvents that were allegedly released to the environment by Aerojet and other industrial defendants causing it to incur unspecified response costs and other damages. The plaintiff seeks declaratory relief and recovery of past costs in connection with investigation and remediation of groundwater resources. Aerojet has filed its answer and discovery has commenced.

Air Pollution Cases

     Chino Hills Cases

      Aerojet and several other defendants have been sued by private residents living in the vicinity of Chino and Chino Hills, California. The cases have been consolidated and are pending in the U.S. District Court for the Central District of California. The cases are denominated as follows:

      Baier, et al. v. Aerojet-General Corporation, et al., Case No. EDCV 00 618VAP (RNBx) U.S. District Court, Central District, CA, served June 29, 2000.

      Kerr, et al. v. Aerojet-General Corporation, Case No. EDCV 01-19VAP (SGLx) U.S. District Court, Central District, CA, served June 29, 2000.

      Taylor, et al. v. Aerojet-General Corporation, et al., Case No. EDCV 01-106 VAP (RNBx) U.S. District Court, Central District, CA, served January 31, 2001.

      Yeh, et al. v. Aerojet-General Corporation, Case No. RCV 083065 San Bernardino County Superior Court (transferred to U.S. District Court, Central District, CA, served October 24, 2004 and renumbered Case No. EDCV 04-1354-VAP(SHx) and coordinated with Baier, Kerr and Taylor cases).

      Plaintiffs generally allege that Aerojet released hazardous chemicals into the air at its former manufacturing facility in Chino Hills, California, which allegedly caused illness, death, and economic injury. Various motions have reduced the number of plaintiffs from 80 to 48. Discovery is proceeding in the cases. Trial is likely to be scheduled for 2006.

Other Legal Proceedings

      GenCorp Inc. v. Olin Corporation, Case No. 5:93CV2269, U.S. District Court, N.D. Ohio, filed October 25, 1993. GenCorp initiated civil proceedings against Olin Corporation (Olin), the owner and operator of a former chemical manufacturing facility located on land formerly owned by the Company, seeking a declaratory judgment that the Company was not liable to Olin for remedial costs. In the same case, Olin filed a counterclaim against GenCorp alleging that GenCorp was jointly and severally liable under CERCLA for remediation costs estimated at $70 million due to its contractual relationship with Olin, operational activities and land ownership by GenCorp. The Company has filed a counterclaim based on Olin’s breach of contractual obligations to provide insurance protection for both the Company and Olin, as required by the contract between the two companies.

      The trial court ruled GenCorp liable based on theories of owner and arranger liability under CERCLA. The trial court found GenCorp 30% liable and Olin 70% liable for the Big D site, and GenCorp 40% liable and Olin 60% liable for another site, for CERCLA remediation costs. The Sixth Circuit Court of Appeals denied GenCorp’s appeal regarding its CERCLA contribution liability on the basis that it is not directly or indirectly liable as an arranger for Olin’s waste disposal at the Big D site and that GenCorp did not either actively control Olin’s waste disposal choices or operate the plant on a day-to-day basis. The Sixth Circuit Court of

Appeals also rejected GenCorp’s argument that the trial court’s decision did not constitute a “final judgment”. GenCorp had argued that the trial court failed to address GenCorp’s claims under the complaint, holding such claims in abeyance. The decision of the three judge panel of the Sixth Circuit Court of Appeals is that GenCorp is responsible to Olin for costs and prejudgment interest in an amount equal to approximately $29 million. GenCorp has filed a petition for rehearing with the Sixth Circuit Court of Appeals.

      Wotus, et al. v. GenCorp Inc. and OMNOVA Solutions Inc., Case No. 5:00-CV-2604, U.S. District Court, N.D. Ohio (Cleveland), served October 12, 2000. Plaintiffs are hourly retirees — six under the OMNOVA plan and three under the GenCorp plan. Plaintiffs allege GenCorp’s and OMNOVA’s adoption and administration of new retiree medical plans constitute a breach of labor contracts and violate alleged obligations to provide lifetime medical benefits without increased retiree contributions. Plaintiffs seek to reinstate benefits under prior GenCorp Retiree Medical Plans, as negotiated with their union at the time of retirement, as well as the right to participate in improvements in subsequent plans and the right to reimbursement of contributions paid in excess of those required under prior medical benefit plans.

      The trial court denied the plaintiffs’ motion for class certification on December 2, 2003. The plaintiffs filed a motion for reconsideration that was denied by the trial court. Plaintiffs petitioned the Sixth Circuit Court of Appeals (Court of Appeals) for the right to seek an interlocutory appeal of the trial court’s denial of class certification. The Court of Appeals denied that petition in August 2004. Following the Court of Appeals ruling on the interlocutory appeal, the trial court denied a pending motion filed on behalf of 241 members of the putative class who sought to intervene as individual plaintiffs. The case will move forward with the nine named plaintiffs or their estates. A trial in the Ohio federal court is not expected until sometime after the summer of 2005.

      A total of 294 individuals, including the 241 individuals who sought to intervene in the Wotus matter, filed a separate lawsuit against GenCorp and OMNOVA, also in the U.S. District Court for the Northern District of Ohio, seeking the same claims and relief (other than class certification) as in the Wotus matter. Baumgardner, et al. v. GenCorp Inc. et al., U.S.D.C., N.D. OH (Cleveland, OH), Case No. 1:04 CV 1278. The trial court dismissed their claims, ruling that the joinder of the 294 individuals was improper. The trial court ordered that the applicable statute of limitations would be tolled for any individuals who filed individual claims until February 28, 2005. On February 4, 2005, the former Baumgardner plaintiffs filed individual complaints against the Company and Omnova with the same allegations that were made in the Baumgardner case.

      Separately, on May 26, 2004, an arbitrator ruled that GenCorp is required to defend and indemnify OMNOVA in the Wotus matter. GenCorp has sought clarification, and possible modification, of the ruling in Ohio state court.

      Tolwin et al. v. GenCorp Inc. et al., Case No. 04AS04580, Superior Court of the State of California, County of Sacramento, served December 10, 2004. Plaintiff, an alleged shareholder of GenCorp, alleges that the directors of Company and one executive officer of the Company breached their fiduciary duties by failing to give adequate consideration to reasonable acquisition offers. Plaintiff seeks class action status and on behalf of herself and other similarly situated individuals and plaintiff seeks damages and injunctive relief.

      Vinyl Chloride Cases. The following table sets forth information related to our historical product liability costs associated with our vinyl chloride litigation cases.

Vinyl Chloride Cases

      Legal and administrative fees for the vinyl chloride cases for fiscal 2004, fiscal 2003 and fiscal 2002 were approximately $0.4 million, $0.4 million and $0.3 million, respectively.

      Asbestos Cases. The following table sets forth information related to our historical product liability costs associated with our asbestos litigation cases.

Asbestos Cases

      Legal and administrative fees for the asbestos cases for fiscal 2004, fiscal 2003, and fiscal 2002 were approximately $1.0 million, $1.4 million, and $0.7 million, respectively.

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

position and available financial resources, and the amount and timing of the resolution of such matters. In addition, it is possible that amounts incurred could be significant in any particular reporting period.

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

      No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended November 30, 2004.

PART II

      Our common stock is quoted on the New York Stock Exchange under the trading symbol “GY.” The following table lists, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the New York Stock Exchange:

      As of January 31, 2005, there were 9,979 holders of record of the common stock. On January 31, 2005, the last reported sale price of our common stock on the New York Stock Exchange was $18.58 per share.

      During each quarter of fiscal 2002 and fiscal 2003 and during the first two quarters of fiscal 2004, we paid a quarterly cash dividend on our common stock of $0.03 per share. Our Board of Directors has eliminated the payment of quarterly dividends effective the third quarter of fiscal 2004. In December 2004, the Company closed a new $180 million credit facility which restricts the payment of dividends.

      Information concerning long-term debt, including material restrictions relating to payment of dividends on the our common stock appears in Part II, Item 7 under the caption “Liquidity and Capital Resources” and at Note 10 in Notes to Consolidated Financial Statements, which is incorporated herein by reference. Information concerning securities authorized for issuance under the our equity compensation plans appears in Part III, Item 12 under the caption “Equity Compensation Plan Information” which is incorporated herein by reference.

      On November 23, 2004, we used the net proceeds from the offering of our 2¹/4% Convertible Subordinated Debentures due 2024, (2¹/4% Debentures), to repurchase $70 million of our outstanding 5³/4% Convertible Subordinated Notes due 2007 (5³/4% Notes) and which are convertible into our common stock. At the time of repurchase, the 5³/4% Notes were convertible, at the option of the holder, into the Company’s common stock at a conversion price of $18.42 per share, for a total of 3.8 million shares of common stock.

      In connection with the offering of the 2¹/4% Debentures, we granted one of the initial purchasers an option to purchase up to an additional $80 million aggregate principal amount of the 2¹/4% Debentures. A portion of this option was exercised during the first quarter of fiscal 2005.

Item 6.     Selected Financial Data

      The following selected financial data of the Company is qualified by reference to and should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

      We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and operations. This is followed by a discussion of our results of operations, including results for our operating segments, for the past two fiscal years. We then provide, beginning on page 37, an analysis of our liquidity and capital resources, including discussions of our cash flows, debt arrangements, sources of capital and financial commitments. In the next section, beginning on page 41, we discuss the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Finally, on page 47, we discuss our use of certain forward looking statements that present our expectations, beliefs, plans and objectives.

      The following discussion should be read in conjunction with the other sections of this Report, including the consolidated financial statements and notes thereto appearing in Item 8 of this Report, the Risk Factors appearing in Item 1 of this Report and the subsection captioned “Forward-Looking Statements” below. Historical results set forth in Item 6 and Item 8 of this Report should not be taken as indicative of our future operations.

Overview

      We are a technology-based manufacturer operating primarily in the United States. Our continuing operations are organized into two operating segments: Aerospace and Defense and Real Estate. The Aerospace and Defense segment includes the operations of Aerojet, which develops and manufactures propulsion systems for space and defense applications, armament systems for precision tactical weapon systems and munitions applications, and advanced airframe structures. Primary customers served include major prime contractors to the U.S. government, the DoD and NASA. The Real Estate segment includes activities related to the development, sale and leasing of our real estate assets.

      During the second quarter of fiscal 2004, we announced plans to sell our GDX business, which developed and manufactured vehicle sealing systems for automotive original equipment manufacturers. This decision was a result of declining volumes and continued challenges in this market environment including adverse customer pricing pressures, increased material costs, high development and start-up costs and increased working capital requirements. In accordance with our plan to sell the GDX business, we classified our GDX business as a discontinued operation during the second quarter of fiscal 2004. During the third quarter of fiscal 2004, we completed the sale of GDX to Cerberus Capital Management, L.P. for $147 million, subject to adjustment, of which $140 million had been received as of November 30, 2004. In addition, on October 15, 2004, we announced our strategic decision to sell our Fine Chemicals business, which, through Aerojet Fine Chemicals, is a custom manufacturer of active pharmaceutical ingredients and registered intermediates for pharmaceutical and biotechnology companies. This plan was a result of management’s decision to focus our capital and resources on our Aerospace and Defense and Real Estate businesses. We will continue to operate our Fine Chemicals business in the ordinary course of business pending any sale. We classified our Fine Chemicals business segment as a discontinued operation as of the third quarter of fiscal 2004. See additional discussion in Note 17 in Notes to Consolidated Financial Statements. For all periods presented, we have classified the results of operations of GDX and Fine Chemicals as discontinued operations in the Consolidated Statements of Income. The assets and liabilities of GDX have been classified as Assets of Discontinued Operations and Liabilities of Discontinued Operations in the Condensed Consolidated Balance Sheets as of November 30, 2003. The assets and liabilities of Fine Chemicals have been classified as Assets of Discontinued Operations and Liabilities of Discontinued Operations in the Consolidated Balance Sheets as of November 30, 2004 and 2003.

Results of Operations

      Consolidated net sales increased to $499 million in fiscal 2004 compared to $348 million in fiscal 2003. The increase in sales was primarily due to $156 million of sales contributed by the propulsion business of ARC, which was acquired in October 2003.

      Consolidated net sales increased to $348 million in fiscal 2003 compared to $277 million in fiscal 2002. The increase is primarily the effect of acquisitions at Aerojet and increased real estate asset sales. The acquisition of the Redmond, Washington operations in October 2002 and the ARC acquisition in October 2003 contributed an additional $68 million in net sales in fiscal 2003 as compared to fiscal 2002.

      During fiscal 2004, Lockheed Martin and Raytheon accounted for 32% and 15%, respectively, of net sales. During fiscal 2003, Lockheed Martin, Boeing, and Raytheon accounted for 28%, 15%, and 10%, respectively, of net sales. During fiscal 2002, Lockheed Martin, Boeing, Raytheon, and NASA accounted for 21%, 18%, 13%, and 13%, respectively, of net sales. Sales in fiscal 2004, fiscal 2003 and fiscal 2002 directly and indirectly to the U.S. government and its agencies (principally the DoD), including sales to our significant customers discussed above, totaled $420 million, $263 million and $243 million, respectively.

      We reported a loss from continuing operations before income taxes of $57 million during fiscal 2004 compared to $11 million of income from continuing operations in fiscal 2003. This decrease is primarily due to the following:

      The decrease in income from continuing operations before income taxes of $8 million during fiscal 2003 compared to fiscal 2002 is primarily due to the following:

      In fiscal 2004, a net income tax provision for continuing operations of $29 million was recorded consisting of $34 million primarily to reflect the uncertainty of realizing tax benefits, given historical losses, offset by $5 million benefit primarily related to research tax credit refund claims. We recorded a net income tax benefit of $1 million in fiscal 2003 resulting from $5 million in domestic federal and state tax settlements. Our tax provision in fiscal 2002 was favorably impacted by a reduction of $4 million for federal and state income tax settlements and $1 million for the tax benefit of a charitable gift of real property.

      During the second quarter of fiscal 2004, the GDX business net assets were adjusted to management’s estimate of proceeds to be received on disposition less costs to sell. During the third quarter of fiscal 2004, we signed a definitive agreement to sell GDX, including substantially all of the assets of GenCorp Inc. that were used in the GDX business and substantially all of GenCorp Inc.’s worldwide subsidiaries that were engaged in the GDX business, to Cerberus for $147 million, subject to adjustment, of which $140 million has been received as of November 30, 2004. We closed the transaction on August 31, 2004. The loss on the sale of the GDX business during fiscal 2004 was $279 million. During the third quarter of fiscal 2004, we classified the Fine Chemicals business as a discontinued operation as a result of our plans to sell the business. This plan was a result of management’s decision to focus our capital and resources on our Aerospace and Defense and Real Estate operating segments.

      In November 2003, we announced we were closing a GDX manufacturing facility in Chartres, France. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In June 2004, we completed the legal process for closing the facility and establishing a social plan. As a result, we recorded a pre-tax expense of approximately $14 million during fiscal 2004 primarily related to employee social costs. The charge is included as a component of discontinued operations. We have not yet recorded expenses associated with certain social benefits due to the uncertainty of the benefit amount. These additional social costs are expected to result in an additional pre-tax expense of $1 million to $3 million and are anticipated to be incurred over the next two years. We will recognize the related costs once they are certain in accordance with accounting principles generally accepted in the United States.

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

Segment Results

      We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance, which is a non-GAAP financial measure, represents net sales from continuing operations less applicable costs, expenses and provisions for unusual items relating to operations. Segment performance excludes corporate income and expenses, provisions for unusual items not related to the operations, interest expense and income taxes.

      A reconciliation of segment performance to income from continuing operations before income taxes is shown below:

Aerospace and Defense

      Net sales for the Aerospace and Defense segment totaled $492 million for fiscal 2004, an increase of 53% compared with sales of $321 million for fiscal 2003. The ARC business acquired in October 2003 contributed $156 million of the increase. Excluding sales increases attributable to the ARC acquisition, programs contributing higher sales were as follows: increased deliveries to Boeing on the F-22/ A program, volume on the recently acquired THAAD program and higher sales on programs utilizing electric and liquid thrusters for orbit and attitude maintenance. The sales increases were offset by lower volume on a variety of defense and armament programs.

      Segment performance before unusual items and benefit plan expense was $57 million and $45 million for fiscal 2004 and fiscal 2003, respectively. Operating income for fiscal 2004 increased over fiscal 2003 performance from higher sales volume, and a $16 million favorable environmental reserve adjustment. Segment performance for fiscal 2004 included an inventory write down of $16 million on a contract to design, develop, and produce solid rocket motors for Lockheed Martin’s Atlas V Program. The write-down relates to unanticipated transition costs from the development phase to the production phase of the contract and the value of materials rendered obsolete by a decision to proceed with qualification and production of an enhanced motor configuration. In management’s judgment, these costs will not be recoverable on the contract. The current Atlas V contract provides for production of 44 motors over a number of years and for the order of an additional 52 motors at Lockheed Martin’s option. At November 30, 2004, Aerojet’s Atlas V inventory balance was $126 million. Full recovery of this investment is subject to uncertainties, including: (i) Aerojet’s ability to produce motors at its estimated average unit price, (ii) final pricing of the enhanced motor configuration, and (iii) a satisfactory renegotiation of contract terms with Lockheed Martin. Aerojet believes its Atlas V contract will be restructured during 2005 when launch services contracts between launch vehicle manufacturers and the U.S. government are modified to reflect cost pressures resulting from continued low commercial launch activity. Details of the form and terms of the anticipated changes are unknown at this time. Aerojet management believes that continued improvements in operational efficiency and renegotiation of contract terms will permit recovery of inventoried development and production costs. However, if management’s efforts are unsuccessful, Aerojet may be required to recognize additional material losses.

      Contract backlog was $879 million at November 30, 2004 as compared to $830 million as of November 30, 2003. Funded backlog, which includes only those contracts for which money has been directly authorized by the U.S. Congress, or for which a purchase order has been received by a commercial customer, was $538 million at November 2004 compared to $425 million as of November 30, 2003. Overall, backlog growth reflects contract awards in excess of sales on both production and development programs.

      Net sales for the Aerospace and Defense segment totaled $321 million for fiscal 2003, an increase of 18% compared with fiscal 2002 sales of $271 million. The acquisition of the Redmond, Washington operations in October 2002 and the ARC acquisition in October 2003 contributed an additional $68 million in net sales in fiscal 2003 as compared to fiscal 2002. In addition to sales increases from recent acquisitions, programs contributing higher sales were as follows: Missile and Defense application programs, Boeing’s HyFly program, deliveries of Atlas V solid rocket motors, greater Titan IV volume, ordnance programs and increased volumes on various technology programs. These increases were offset by completion of the NASA X-38 De-Orbit Propulsion Stage in 2002, cancellation of the COBRA booster engine program in 2002 and lower volumes on other programs.

      Before unusual items and benefit plan income, segment performance for the Aerospace and Defense segment was $45 million for fiscal 2003 as compared to $32 million in fiscal 2002, an improvement of $13 million. Increased segment performance reflects higher sales due to recent acquisitions, improved profit margins on the Delta program, and the effects of overall operational improvements.

      In October 2003, Aerojet acquired the propulsion business of ARC for $144 million, including estimated transaction costs and purchase price adjustments. Aerojet’s 2003 operating results include sales of $18 million and negligible earnings from this acquired business (as described more fully in Note 11 in Notes to Consolidated Financial Statements).

Real Estate

      Real Estate sales and segment performance for fiscal 2004 were $15 million and $12 million, respectively, compared to $32 million and $23 million, respectively, for fiscal 2003. The fiscal 2003 results included sales of several real estate assets. Results for fiscal 2004 do not include any sales of real estate assets, but do include a property usage agreement with the Sacramento Regional Transit for construction of a Light Rail station adjacent to property we intend to develop. We also finalized an agreement with Granite Construction Company for the exclusive rights to mine excess aggregates from certain portions of our Sacramento property.

      Real Estate net sales and segment performance for fiscal 2003 were $32 million and $23 million, respectively, compared to $6 million and $3 million, respectively, for fiscal 2002. The fiscal 2003 net sales and segment performance increases were driven by sales of real estate assets while fiscal 2002 performance reflected only leasing activities. Asset sales for fiscal 2003 included a 96,000 square foot office complex on 11 acres in Sacramento County for $15 million, 20 acres of undeveloped land for $6 million, and other smaller property sales.

Corporate and Other Expenses

      Corporate and other expenses increased to $38 million in fiscal 2004 compared to $31 million in fiscal 2003. The increase in spending was primarily due to the following: (i) increases in professional accounting fees primarily related to Sarbanes-Oxley compliance, (ii) a $2 million environmental remediation charge related to a former operating site, and (iii) increases in insurance costs.

      Corporate and other expenses increased to $31 million in fiscal 2003 compared to $30 million in fiscal 2002. Expenses for fiscal 2002 included $6 million in costs for outside legal advisors and accounting consultants involved in the special review of prior year accounting matters at GDX. Corporate and other expenses included amortization of debt financing costs of $5 million in fiscal 2003 and $4 million in fiscal 2002.

Employee Pension and Postretirement Benefit Plans

      Income (expense) from benefit plans is as follows:

      Benefit plan expense recognized in fiscal 2004 increased by $45 million as compared to fiscal 2003, and benefit plan income recognized in fiscal 2003 decreased by $37 million as compared to fiscal 2002. The increased cost of benefit plans is primarily due to the recognition of the underperformance of the U.S. pension plan assets in prior years and is also affected by our decision in fiscal 2003 and fiscal 2004 to decrease the discount rate used to determine benefit obligations, due to lower market interest rates.

Unusual Items

      Charges associated with unusual items are summarized as follows:

      In fiscal 2004, we incurred a $9 million charge as a result of the repayment of $70 million of principal of the 5³/4% Convertible Subordinated Notes.

      In fiscal 2003, Aerojet recorded an unusual charge of $5 million representing the unrecoverable portion of an estimated legal settlement with a local water company related to contaminated wells.

      In fiscal 2002, Aerojet charged $6 million to expense for acquired in-process research and development resulting from the acquisition of the Redmond, Washington operations. In fiscal 2002, Aerojet reached an agreement on the purchase price adjustments related to the sale of its EIS business whereby Aerojet reduced the purchase price by $6 million. Also in fiscal 2002, we reacquired the minority ownership interest in our AFC subsidiary and certain agreements between AFC and NextPharma were terminated, resulting in an expense of $2 million.

Environmental Matters

      Our policy is to conduct our businesses with due regard for the preservation and protection of the environment. We devote a significant amount of resources and management attention to environmental matters and actively manage our ongoing processes to comply with environmental laws and regulations. We are involved in the remediation of environmental conditions that resulted from generally accepted manufacturing and disposal practices in the 1950s and 1960s followed at certain plants. In addition, we have been designated a PRP with other companies at third party sites undergoing investigation and remediation.

      Estimating environmental remediation costs is difficult due to the significant uncertainties inherent in these activities, including the extent of the remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long periods of time over which most remediation efforts take place. In accordance with the American Institute of Certified Public Accountants’ Statement of Position 96-1 (SOP 96-1), Environmental Remediation Liabilities and Staff Accounting Bulletin No. 92 (SAB 92), Accounting and Disclosure Relating to Loss Contingencies, we:

      Expenditures for recurring costs associated with managing hazardous substances or pollutants in ongoing operations was $13 million in fiscal 2004 compared to $7 million in fiscal 2003 and $8 million in fiscal 2002.

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

      Quarterly, we complete a review of estimated future environmental costs which incorporates, but is not limited to, the following: (i) status of work completed since the last estimate; (ii) expected cost savings related to the substitution of new remediation technology and to information not available previously; (iii) obligations for reimbursement of regulatory agency service costs; (iv) updated cost estimates; (v) costs of complying with the Western Groundwater Administrative Order, including replacement water and remediation upgrades; (vi) estimated costs related to the Inactive Rancho Cordova Test Site (IRCTS) and Aerojet’s Sacramento site; (vii) new information related to the extent and location of previously unidentified contamination; and (viii) additional construction costs. Our review of estimated future remediation costs resulted in additions to our environmental reserves of $25 million in fiscal 2004, $12 million in fiscal 2003 and $107 million in fiscal 2002.

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

      A summary of our environmental reserve activity is shown below:

      As of November 30, 2004, the Aerojet reserves include $170 million for the Sacramento site, $99 million for BPOU, and $18 million for other Aerojet sites. The reserves for Other Sites include $7 million for the Lawrence, Massachusetts site.

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

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

      In conjunction with the sale of EIS, Aerojet entered into an agreement with Northrop whereby Aerojet will be reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement. Amounts reimbursed are subject to annual limitations, with excess amounts carrying over to subsequent periods, the total of which will not exceed $190 million over the term of the agreement, which ends in 2028. As of November 30, 2004, $158 million in potential future reimbursements were available over the remaining life of the agreement.

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

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

      In conjunction with our review of our environmental reserves discussed above, we revise our estimate quarterly of costs that will be recovered under the Global Settlement based on business expected to be conducted under contracts with the U.S. government and our agencies in the future. The adjustments to the

environmental remediation reserves and estimated future cost recoveries did not affect operating results in 2002 as the impact of increases to the reserves of $107 million was offset by increased estimated future recoveries. In fiscal 2003, due to the Global Settlement and Memorandum of Understanding with the U.S. government, discussed above, which allows for costs to be allocated to all Aerojet operations beginning in 2005 and decreases the costs allocated to Northrop annually, Aerojet increased its environmental reserves by $12 million and estimated recoveries by $13 million, which resulted in other income of $1 million in our statement of operations. The recovery of costs under the Global Settlement is based, in part on the relative size of Aerojet’s commercial business base, which has historically included the Fine Chemicals’ operating segment because it was previously a division of Aerojet. As a result of our plan to sell Fine Chemicals, Aerojet revised its estimated recovery of costs under the Global Settlement during fiscal 2004. As a result, Aerojet increased its estimated recoveries by $38 million and recorded $16 million of other income (expense), net in fiscal 2004.

      For additional discussion of environmental and related legal matters, see Note 13 in Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

      Cash and cash equivalents increased by $4 million during the year ended November 30, 2004. The change in cash and cash equivalents is summarized as follows:

      Net cash provided by continuing operations was $5 million in fiscal 2004, compared to net cash used of $12 million in fiscal 2003, and $54 million in fiscal 2002.

      Cash flow from continuing operations in fiscal 2004 as compared to fiscal 2003 reflects: (i) improved cash flow from the Aerospace and Defense segment as a result of increased segment performance before the non-cash impact of retirement benefit plans, including positive cash flow from the ARC business acquired in October 2003, partially offset by working capital requirements for certain programs, primarily Atlas V; (ii) cash flow from the Real Estate segment as a result of real estate asset sales completed in fiscal 2004 plus the full payment of a note receivable of $20 million; partially offset by; (iii) increased interest costs as a result of higher debt levels; and (iv) increased corporate expenses.

      Cash flow from continuing operations in fiscal 2003 as compared to fiscal 2002 reflects: (i) improved cash flow for the Aerospace and Defense segment as a result of increased segment performance before the non-cash impact of retirement benefit plans and a reduction in working capital usage; (ii) improved cash flows for the

Real Estate segment as a result of the real estate asset sales completed in 2003 as compared to no asset sales in 2002; partially offset by; (iii) increased interest costs as a result of higher debt levels primarily related to the Aerospace and Defense segment acquisitions.

      Net cash used in discontinued operations was $35 million in fiscal 2004, compared to net cash provided of $56 million in fiscal 2003, and $37 million in fiscal 2002.

      Net cash used in investing activities for continuing operations was $78 million in fiscal 2004, $149 million for fiscal 2003, and $121 million for fiscal 2002.

      Investing activities for continuing operations included capital expenditures of $21 million for fiscal 2004, $11 million for fiscal 2003, and $14 million for fiscal 2002. Capital expenditures directly support the Company’s contracts and customer requirements and are primarily made for asset replacement, capacity expansion, development of new projects, cost reduction initiatives and safety and productivity improvements. The increase in capital expenditures in fiscal 2004 as compared to fiscal 2003 is primarily due to consolidation efforts associated with the ARC acquisition, including capital investment for equipment and facilities.

      Investing activities for continuing operations in 2004 also include $140 million in proceeds received from the sale of GDX business in August 2004, $4 million in proceeds from the sale of the certain assets acquired with the ARC acquisition; offset by $70 million of GDX proceeds and $131 million of the equity proceeds received in November 2004 designated as restricted cash in accordance with agreements reached with the senior lenders under our senior credit facility (see Note 10 in Notes to Consolidated Financial Statements).

      Investing activities for continuing operations in fiscal 2003 include $138 million paid for the acquisition of the ARC propulsion business, including transaction costs. Investing activities for continuing operations in fiscal 2002 include $93 million paid for the purchase of the Redmond, Washington operations, $8 million related to our reacquisition of the minority ownership interest in Fine Chemicals, and $6 million related to a purchase price adjustment for the sale of EIS.

      Net cash used in investing activities for discontinued operations was $41 million in fiscal 2004, $31 million in fiscal 2003, and $20 million in fiscal 2002.

      Net cash provided by financing activities for fiscal 2004 was $157 million compared with $144 million for fiscal 2003, and $159 million for fiscal 2002. Cash flows from financing activities in fiscal 2004 reflect the proceeds of the equity offering (see Note 14 in Notes to Consolidated Financial Statements) and our borrowings, net of repayments. Cash flows from financing activities in 2003 and 2002 relate primarily to activities involving our borrowings, net of repayments.

      In November 2004, we initiated three financing transactions to reduce net debt, extend debt maturities, improve financial flexibility, and reduce interest costs going forward:

      In fiscal 2004, we recorded a $9 million charge consisting of the write-off of deferred financing fees and the premium associated with the repurchase of the 5³/4% Notes. In the first quarter of fiscal 2005, we will record an additional loss of approximately $19 million from the write-off of deferred fees associated with the termination of the Restated Credit Facility, the redemption of the 9¹/2% Notes, and the write-off of deferred financing fees and the premium associated with the repurchase of additional 5³/4% Notes.

      In fiscal 2004, we issued $80 million of 2¹/4% Debentures and repaid $79 million of our 5³/4% Notes including premium (see discussion above). We also issued $125 million of 4% Convertible Subordinated Notes (4% Notes) in January 2004, with net proceeds of approximately $120 million used to repay outstanding borrowings under the Restated Credit Facility, to pre-pay the next 12 months of scheduled maturities under the Term Loan A, and for general corporate purposes. With the sale of GDX Automotive effective August 31, 2004, the foreign credit facilities in Europe and Canada, as well as other bank loans and capitalized leases relating to the GDX Automotive business, were paid in full.

      In fiscal 2003, we issued $150 million of 9¹/2% Senior Subordinated Notes (9¹/2% Notes), generating net proceeds of $145 million used to finance, in part, the ARC acquisition.

      We paid dividends on common stock of $3 million in fiscal 2004 and $5 million in both fiscal 2003 and fiscal 2002. The payment of quarterly dividends was suspended after the second quarter of fiscal 2004.

      Our borrowing activity in fiscal 2004 was as follows:

      As of November 30, 2004, the borrowing limit under the revolving credit facility was $137 million, subject to certain restrictions described in Note 10 in Notes to Consolidated Financial Statements. We had letters of credit outstanding of $58 million and had no borrowings outstanding under that facility as of November 30, 2004. We were in compliance with all debt covenants as of November 30, 2004.

      As a result of the termination of the Restated Credit Facility and the repayment of the outstanding term loans effective in December 2004, subsequent to our fiscal year end, we are no longer subject to the restrictive

covenants and the financial ratios contained in that facility. Under the New Credit Facility, which replaced the Restated Credit Facility, we are subject to certain limitations including the ability to: incur additional debt or sell assets, with restrictions on the use of proceeds; make certain investments and acquisitions; grant liens; and make restricted payments. We also are subject to financial covenants effective for the period ending February 28, 2005, which include an interest coverage ratio, a leverage ratio, a senior leverage ratio, and a fixed charge coverage ratio (as described more fully in Note 21 in Notes to Consolidated Financial Statements). We meet the initial financial ratios under the New Credit Facility effective November 30, 2004. In addition, the indenture governing the 9¹/2% Notes contains customary covenants including limits on our ability to incur additional indebtedness; make restricted payments; pay dividends or make distributions on, or redeem or repurchase, capital stock; make investments, or issue or sell capital stock of restricted subsidiaries; create liens on assets to secure indebtedness; enter into transactions with affiliates; and consolidate, merge or transfer all or substantially all of our assets. These covenants could restrict our ability to secure additional debt and equity financing were we to need additional capital in the future. Also, in order to maintain compliance with these covenants, we could be required to curtail some of our operations and growth plans in the future.

      The outstanding debt had effective interest rates ranging from 2.25% to 9.50% as of November 30, 2004, with maturities as follows:

      With the completion of the transactions in November 2004 and the first quarter of fiscal 2005 discussed above, we have reduced debt and interest costs going forward and extended debt maturities (as described more fully in Notes 10 and 21 in Notes to Consolidated Financial Statements). The following table reflects total debt as of November 30, 2004, adjusted on a proforma basis to give effect to the financing transactions completed in the first quarter of fiscal 2005, including the partial redemption of the 9¹/2% Notes, the closing of the New Credit Facility and termination of the Restated Credit Facility, the issuance of additional 2¹/4% Notes, and the repurchase of additional 5³/4% Notes:

      As disclosed in Notes 13(b) and 13(c) in Notes to Consolidated Financial Statements, we have exposure for certain legal matters. We believe that it is currently not possible to estimate the impact, if any, that the ultimate resolution of these matters will have on our financial position or cash flows.

      We currently believe that our existing cash and cash equivalents, existing credit facilities, forecasted operating cash flows, anticipated proceeds from the sale of our Fine Chemicals business, and our ability to access capital markets for debt or equity financing will provide sufficient funds to meet our operating plan for the next twelve months. The operating plan for this period provides for full operation of our businesses, including the Fine Chemicals business until it is sold, and interest and principal payments on our debt. We may also access capital markets to raise debt or equity financing to fund strategic acquisitions. The timing, terms, size and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing.

      If we experience adverse economic developments and are not able to raise debt or equity financing in the capital markets or to obtain bank borrowings, we believe that we can generate additional funds to meet our liquidity requirements for the next twelve months by reducing working capital requirements, deferring capital expenditures, implementing cost reduction initiatives in addition to those already included in our operating plan, selling assets or through a combination of these means.

      Major factors that could adversely impact our forecasted operating cash and our financial condition are described in the “Risk Factors.” In addition, our liquidity and financial condition will continue to be affected by changes in prevailing interest rates on the portion of debt that bears interest at variable interest rates.

Other Information

      Our financial statements are prepared in accordance with accounting principles generally accepted in the United States that offers acceptable alternative methods for accounting for certain items affecting our financial results, such as determining inventory cost, depreciating long-lived assets and recognizing revenues.

      The preparation of financial statements requires the use of estimates, assumptions, judgments and interpretations that can affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures. The development of accounting estimates is the responsibility of our management. Management discusses those areas that require significant judgments with the audit committee of our board of directors. The audit committee has reviewed all financial disclosures in our filings with the SEC. Although we believe that the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively.

      The areas most affected by our accounting policies and estimates are revenue recognition for long-term contracts, goodwill and other long-lived assets, employee pension and postretirement benefit obligations, litigation, environmental remediation costs and recoveries, and income taxes. Except for income taxes, which are not allocated to our operating segments, these areas affect the financial results of our business segment.

      For a discussion of all of our accounting policies, including the accounting policies discussed below, see Note 1 in Notes to Consolidated Financial Statements.

      In the Aerospace and Defense segment, recognition of profit on long-term contracts requires the use of assumptions and estimates related to the contract value or total contract revenue, the total cost at completion and the measurement of progress towards completion. Due to the nature of the programs, developing the estimated total cost at completion requires the use of significant judgment. Estimates are continually evaluated as work progresses and are revised as necessary. Factors that must be considered in estimating the work to be completed include labor productivity, the nature and technical complexity of the work to be performed, availability and cost volatility of materials, subcontractor and vendor performance, warranty costs, volume assumptions, anticipated labor agreements and inflationary trends, schedule and performance delays, availability of funding from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. Aerojet reviews contract performance and cost estimates for some contracts at least monthly and for others at least quarterly and more frequently when circumstances significantly change. When a change in estimate is determined to have an impact on contract earnings, Aerojet records a positive or negative adjustment to earnings when identified. Changes in estimates and assumptions related to the status of certain long-term contracts may have a material effect on the amounts reported for net sales and segment performance.

      Our aerospace and defense business is derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (AICPA) audit and accounting guide, Audits of Federal Government Contracts and the AICPA’s Statement of Position No. 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and Certain Production Type Contacts. We consider the nature of the individual underlying contract and the type of products and services provided in determining the proper accounting for a particular contract. Each method is applied consistently to all contracts having similar characteristics, as described below. We typically account for these contracts using the percentage-of-completion method, and progress is measured on a cost-to-cost or units-of-delivery basis. Sales are recognized using various measures of progress, as allowed by SOP 81-1, depending on the contractual terms and scope of work of the contract. We recognize revenue on a units-of-delivery basis when contracts require unit deliveries on a frequent and routine basis. Sales using this measure of progress are recognized at the contractually agreed upon unit price. Where the scope of work on contracts principally relates to research and/or development efforts, or the contract is predominantly a development effort with few deliverable units, we recognize revenue on a cost-to-cost basis. In this case, sales are recognized as costs are incurred and include estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs at completion. Revenue on service or time and material contracts is recognized when performed. 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.

      Certain government contracts contain cost or performance incentive provisions that provide for increased or decreased fees or profits based upon actual performance against established targets or other criteria. Aerojet continually evaluates its performance and incorporates any anticipated penalties and cost incentives into its revenue and earnings calculations. Performance incentives, which increase or decrease earnings based solely on a single significant event, generally are not recognized until an event occurs.

      Revenue from real estate asset sales is recognized when a sufficient down-payment has been received, financing has been arranged and title, possession and other attributes of ownership have been transferred to the buyer.

      Revenue that is not derived from long-term development and production contracts, or real estate asset transactions, is generally recognized after products are shipped, all other significant customer obligations have been met and collection is reasonably assured. Sales are recorded net of provisions for customer pricing allowances.

      All acquired long-term assets, including goodwill, are subject to tests for impairment. Under Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, all business combinations

initiated after June 30, 2001 are accounted for using the purchase method of accounting. SFAS 141 provides criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill. The purchase price of acquired companies is allocated to tangible and intangible assets acquired and liabilities assumed, as well as to in-process research and development based on their estimated fair values. Consultants with expertise in performing appraisals assist in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Subsequent to the initial recognition, goodwill is accounted for under Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with the requirements of this standard, goodwill must be tested for impairment at least annually, or more frequently if indications of possible impairment exist, by comparing the net assets of each “reporting unit” (an organizational grouping) with the current fair value of the reporting unit. If the current fair value of the reporting unit is less than its carrying amount, then a second test must be performed. Under the second test, the current fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit, including an amount for any “implied” goodwill. If implied goodwill exceeds the net carrying amount of goodwill, no impairment loss is recorded. Otherwise, an impairment loss is recognized for the difference.

      The evaluation of goodwill under SFAS 142 requires a valuation of the underlying business. These valuations can be significantly affected by estimates of future performance and discount rates over a relatively long period of time, market price valuation multiples and marketplace transactions in related markets. These estimates will likely change over time. Our businesses operate in cyclical industries and the valuation of these businesses can be expected to fluctuate as a result. If the annual review under SFAS 142 indicates impairment of goodwill balances, that entire impairment must be recorded immediately and reported as a component of current operations.

      At November 30, 2004, our total assets included $103 million of goodwill which relates to the Aerospace and Defense segment.

      Employee pension and postretirement benefit plans are a significant cost of doing business and represent obligations that will be ultimately settled far in the future and therefore are subject to estimates. Our pension and postretirement benefit obligations and related costs are calculated using actuarial concepts in accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87), Employer’s Accounting for Pensions, and Statement of Financial Accounting Standards No. 106 (SFAS 106), Employer’s Accounting for Postretirement Benefits Other Than Pensions, respectively. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by us. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year.

      The discount rate is determined at the annual measurement date of August 31 for our pension plans, and is subject to change each year based on changes in the overall market interest rates. The assumed rate reflects the market rate for high-quality fixed income debt instruments on the measurement date. This rate is used to discount the future cash flows of benefit obligations back to the measurement date. The discount rate used to determine benefit obligations for both continuing and discontinued operations decreased from 6.50% for fiscal 2003 to 6.25% for fiscal 2004. This 25 basis point decline in the discount rate resulted in an increase in the present value of pension benefit obligations as of November 30, 2004 and is a component of pension expense for fiscal 2005.

      The expected long-term rate of return on plan assets is also determined at the annual measurement date of August 31 for our pension plans. The expected long-term rate of return used to determine benefit obligations was 8.75% for both fiscal 2004 and fiscal 2003. We have analyzed the expected rates of return on assets and determined that these rates are reasonable based on the current and expected asset allocations and on the plans’ historical investment performance and best estimates for future investment performance. Our

asset managers regularly review actual asset allocations and periodically rebalance investments to targeted allocations when considered appropriate. At November 30, 2004, the actual asset allocation was consistent with the asset allocation assumptions used in determining the expected long-term rate of return. Management will continue to assess the expected long-term rate of return on assets for each plan based on relevant market conditions and will make adjustments to the assumptions as appropriate.

      Market conditions and interest rates significantly affect assets and liabilities of our pension plans. Pension accounting requires that market gains and losses be deferred and recognized over a period of years. This “smoothing” results in the creation of assets or liabilities which will be amortized to pension costs in future years. The accounting method we utilize recognizes gains and losses in the market value of pension assets and changes in the discount rate used to calculate benefit costs over a period of five years. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets. Although the smoothing period mitigates some volatility in the calculation of annual pension costs, future pension costs are impacted by changes in the market value of pension plan assets and changes in interest rates.

      In addition, we maintain postretirement benefit plans other than pensions that are not funded. A one percentage point increase in the assumed trend rate for healthcare costs would have increased the postretirement accumulated benefit obligation recorded as of November 30, 2004 by $3 million and the effect on the service and interest cost components of expense for fiscal 2004 would not have been significant. A one percentage point decrease in the assumed trend rate for healthcare costs would have decreased the postretirement accumulated benefit obligation recorded as of November 30, 2004 by $2 million and the effect on the service and interest cost components of expense for fiscal 2004 would not have been significant.

      We are currently involved in certain legal proceedings and, as required, have accrued our estimate of the probable costs for resolution of these claims. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions or the effectiveness of strategies related to these proceedings. See Note 13 in Notes to Consolidated Financial Statements for more detailed information on litigation exposure.

      For a discussion of our accounting for environmental remediation obligations and costs and related legal matters, see “Environmental Matters” above and Note 13 in Notes to Consolidated Financial Statements.

      We accrue for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred, and when its proportionate share of the costs can be reasonably estimated. Management has a well-established process in place to identify and monitor our environmental exposures. In most cases only a range of reasonably possible costs can be estimated. In establishing the reserves, the most probable estimated amount is used when determinable, and the minimum amount is used when no single amount in the range is more probable. Environmental reserves include the costs of completing remedial investigation and feasibility studies, remedial and corrective actions, regulatory oversight costs, the cost of operation and maintenance of the remedial action plan, and employee compensation costs for employees who are expected to devote a significant amount of time to remediation efforts. Measurement of environmental reserves is based on the evaluation of currently available information with respect to each individual environmental site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Such estimates are based on the expected costs of investigation and remediation and the likelihood that other potentially responsible parties will be able to fulfill their commitments at sites where we may be jointly or severally liable.

      As of November 30, 2004, we had accrued environmental remediation liabilities of $304 million. Environmental remediation cost estimation involves significant uncertainties, including the extent of the

remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long periods of time over which most remediation efforts take place. A number of factors could substantially change environmental remediation cost estimates, examples of which include: regulatory changes reducing the allowable levels of contaminants such as perchlorate, nitrosodimethylamine or others; enhanced monitoring and testing technology or protocols which could result in the discovery of previously undetected contaminants; and the implementation of new remediation technologies which could reduce future remediation costs.

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

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

      Based on Aerojet’s projected business volume and the proportion of its business expected to be covered by the Global Settlement, Aerojet currently believes that, as of November 30, 2004, approximately $233 million of its estimated future environmental costs will be recoverable. Significant estimates and assumptions that could affect the future recovery of environmental remediation costs include: the proportion of Aerojet’s future business base and total business volume which will be subject to the Global Settlement; limitations on the amount of recoveries available under the Northrop agreement; the ability of Aerojet to competitively bid and win future contracts if estimated environmental costs significantly increase; the relative size of Aerojet’s commercial business base; the timing of environmental expenditures; and uncertainties inherent in long-term cost projections of environmental remediation projects.