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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes þ          No o

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o          No þ

      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 a large accelerated files, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one.

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

      The aggregate market value of the voting common equity held by nonaffiliates of the registrant as of May 31, 2005 was approximately $1.0 billion.

      As of January 31, 2006, there were 55,091,138 outstanding shares of the Company’s Common Stock, $0.10 par value.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the 2006 Proxy Statement of GenCorp Inc. relating to its annual meeting of shareholders scheduled to be held on March 29, 2006 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, 2005

Table of Contents

PART I

      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.

      Certain information contained in this Annual Report on Form 10-K should be considered “forward-looking statements” as defined by Section 21E of the Private Securities Litigation Reform Act of 1995. All statements in this report other than historical information may be deemed forward-looking statements. These statements present (without limitation) the expectations, beliefs, plans and objectives of management and future financial performance and assumptions underlying, or judgments concerning, the matters discussed in the statements. The words “believe,” “estimate,” “anticipate,” “project” and “expect,” and similar expressions, are intended to identify forward-looking statements. Forward-looking statements involve certain risks, estimates, assumptions and uncertainties, including with respect to future sales and activity levels, cash flows, contract performance, the outcome of litigation and contingencies, environmental remediation and anticipated costs of capital. A variety of factors could cause actual results or outcomes to differ materially from those expected and expressed in our forward-looking statements. Some important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements are described in the section “Risk Factors” in Item 1A of this Report.

      The list of factors that may affect future performance and the accuracy of forward-looking statements described in the section “Risk Factors” in Item 1A of this Report is illustrative, but by no means exhaustive. Additional risk factors may be described from time to time in our future filings with the U.S. Securities and Exchange Commission. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results and may be beyond our control.

      We are a technology-based aerospace and defense manufacturer operating in the United States with significant real estate assets. 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 propulsion systems in the United States and the only company that provides both Solid and Liquid propellant based systems. 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 re-zoning, entitlement, 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 on a portion of the Sacramento Land to optimize its value. We have filed applications with and submitted information to governmental and regulatory authorities for approvals necessary to re-zone over 6,400 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 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 has been received as of November 30, 2005.

      On October 15, 2004, we announced our strategic decision to sell our Fine Chemicals business, which, through Aerojet Fine Chemicals, was 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 segments. During the fourth quarter of fiscal 2005, we completed the sale of the Fine Chemicals to American Pacific Corporation (AMPAC) for $114 million, subject to adjustment, consisting of $88 million of cash, unsecured subordinated seller note of $26 million, and the assumption by the buyer of certain liabilities. Additionally, AMPAC may be required to pay us up to $5 million based on the Fine Chemicals business achieving specified earning targets in the twelve month period ending September 30, 2006.

      Our fiscal year ends on November 30 of each year. When we refer to a fiscal year, such as fiscal 2005, we are referring to the fiscal year ended on November 30 of that year.

      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 & Nominating; Finance; and Organization & Compensation. Our corporate governance guidelines and such charters are also available in print to any shareholder who requests them.

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, gels, 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 personal 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 made 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. Although the major propulsion industry consolidation is over, our business strategy contemplates continued expansion of our Aerospace and Defense operations including growth through acquisitions that make both strategic and economic sense.

      Aerojet has also expanded its Aerospace and Defense production capabilities, with the completion of two facility expansion projects in fiscal 2005. The first expansion in Socorro, New Mexico, is dedicated to the production of fire suppression systems for commercial and military vehicles and the second, in Camden, Arkansas, is dedicated to high rate explosive fills and warhead assemblies. These new manufacturing facilities will strengthen Aerojet’s competitive position in the fire safety and warhead markets respectively.

      While broad support continues for DoD and NASA budgets in the government Fiscal Year (FY) 2007 and beyond, the impact of the global war on terrorism, the cost of military support in Iraq and Afghanistan, the rising federal deficit, and the significant recovery costs of the 2005 hurricane season may impact these budgets in the near-term.

      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 national defense discretionary budget authority has risen to over $401 billion in FY 2005 from $319 billion since FY 2001. The DoD has requested $419 billion in discretionary budget authority for FY 2006, and there are proposals to increase it to $445 billion in FY 2007. 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 FY 2010. While the top line number continues to increase, the Pentagon has announced it favors reductions in the overall rate of growth. 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.

      In fiscal 2005, the Defense Department finalized work on the Quadrennial Defense Review, the once-in-four-year review of U.S. military strategy and force structure. Although the document is not expected to be published until early 2006, we believe the document may recommend, among other things, adaptation of current weapon systems to new kinds of threats, suggesting that a number of Aerojet’s existing product platforms in the tactical and missile defense areas may be headed for upgrades or new applications as opposed to being displaced downstream by new systems. Requirements for long-range precision strike capabilities and active protection of military satellites and in-space systems may also be contained in the document. These requirements, if they hold, suggest to us that maneuvering and in-space propulsion as well as hypersonics may see new development opportunities in the near future as the DoD adjusts its focus more substantively to confronting asymmetrical, non-traditional threats.

      The United States Congress continues to support the new Vision for Space Exploration, unveiled in 2004, which renews commitments to space and planetary exploration. The Bush Administration announced plans early in 2005 to increase NASA’s FY 2005 budget of $16 billion by an average of 3% over the next two years and by approximately 2% in the three subsequent years. More recently, congressional committees have been considering the authorization of additional appropriations for NASA in FY 2007 and FY 2008.

      The NASA Administrator has indicated that his primary objective will be to complete the Space Station and retire the Space Shuttle by 2010 and develop a new Crew Exploration Vehicle (CEV) before 2014. Additionally, it is anticipated that the Office of Management and Budgets (OMB) will recommend to Congress that NASA’s previously separate budgets for Exploration (e.g. CEV) and Space Operations (i.e. Space Shuttle) be consolidated in FY 2007. If approved by Congress, this would provide the NASA Administrator with unprecedented reprogramming flexibility to accelerate CEV transition. As the market leader of In-Space propulsion system products, CEV poses a significant opportunity to continue Aerojet’s legacy of providing mission-critical propulsion systems to NASA as it has since the inception of the U.S. manned space program.

      We believe Aerojet is well-positioned to provide propulsion solutions in NASA’s special interest areas — advanced propellant technology, reliable launch abort for crew survivability, attitude/ reaction control systems, and robotic exploration propulsion. Furthermore, as a result of NASA’s intention to retire the Space Shuttle from service as early as 2010, we believe that NASA will focus on maneuvering and long-duration propulsion systems that are currently available and flight-proven, which will present additional opportunities for existing Aerojet systems.

      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:

      United Technologies Corporation acquired the Rocketdyne division of Boeing in 2005, forming the largest liquid propulsion contractor in the U.S. domestic market and making Aerojet the number two provider. The domestic solid propulsion market remained unchanged in 2005 with Aerojet in the number two position behind Alliant Techsystems. As the only domestic supplier of both solid and liquid propulsion systems, Aerojet believes it is in a unique competitive position. The diversity of its technologies and synergy of its product lines offer Aerojet 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.

      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 2005, Lockheed Martin and Raytheon accounted for approximately 39% and 16%, respectively, of net 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 81% of Aerojet’s sales, or approximately $501 million, in fiscal 2005. The following are approximate percentages of Aerojet’s net sales by principal end user in fiscal 2005:

      Defense systems — Aerojet believes it is in a unique competitive position due to the diversity of its propulsion technologies (solid, liquid, gels, air-breathing and electric), its complete warhead capabilities and the synergy of its product lines to offer its defense customers the most innovative and advanced solutions available in the domestic market. In fiscal 2005, Aerojet expanded its defense systems footprint by reentering the strategic Inter-Continental Ballistic Missile (ICBM market) with the awarding of the Air Force’s Phase II Advanced Second Stage booster development program.

      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 market segment in fiscal 2005 with several successful space exploration missions and critical launches, including the Deep Impact Comet Encounter, launch of Mars Reconnaissance Orbiter and the continuation of the Discovery missions. The last Titan IV vehicle was successfully launched, using Aerojet’s liquid booster engines, completing a legacy of 100% mission success over the nearly 50 year history of the program. In addition, the first Atlas^® V vehicle using three Aerojet solid rocket boosters was launched in fiscal 2005. In-space propulsion highlights included the qualification of an advanced form of electric propulsion called a Hall Thruster which is being used on the first series of Advanced Extremely High Frequency (AEHF) military satellites. These successes, coupled with NASA’s plans to embark on the development of new manned and unmanned missions, provide opportunities to grow our legacy of supplying mission critical propulsion systems to the DoD and NASA as we have since the inception of 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 36% of fiscal 2005 net sales.

      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 2005, approximately 60% of Aerojet’s net sales were achieved on fixed-price contracts and 40% on cost-reimbursable contracts.

      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 two to five 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.

      As of November 30, 2005, contract backlog was $696 million compared to $879 million as of November 30, 2004. The decrease in the contract backlog is primarily a result of the renegotiated Atlas V contract. Excluding the impact of Atlas, other program contract backlog grew by $69 million. 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 $498 million as of November 30, 2005, compared to funded backlog of $538 million on November 30, 2004. Excluding the impact of Atlas, other program funded backlog grew by $27 million.

      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 efforts 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:

      Aerojet’s strong portfolio of advanced propulsion technologies, across the solid and liquid propulsion spectrum, has enabled our steady growth in research and development. The ARC acquisition in October 2003 contributed $30 million in customer-funded research and development expenditures in fiscal 2004 as compared to fiscal 2003. A ramp up of several motor development activities, including THAAD, PAC-3, and Standard Missile, contributed to increases in customer-funded research and development expenditures in fiscal 2005 compared to fiscal 2004.

      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.

      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. These disruptions of key raw materials almost always impact the entire propulsion industry and are not just Aerojet specific. For example, the supply of ammonium perchlorate, a principal raw material used in solid propellant, 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 production. The industry also presently relies on one primary supplier for graphite fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for the product. Although other sources of graphite fiber exist, the addition of a new supplier would require us to qualify the new source for use.

      We are also impacted, as is the rest of the industry, by increases in the prices and lead-times of raw materials used in production on fixed-price contracts. Most recently, we have seen an increase in the price and lead-times of commodity metals, primarily steel, titanium and aluminum. Aerojet monitors the price and supply of these materials and works closely with the suppliers to schedule purchases far enough in advance and in the most economical means possible to reduce program impact.

      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 in the Sacramento metropolitan area (Sacramento Land). The property is located 15 miles northeast of downtown Sacramento, along U.S. Highway 50, a key growth corridor in the region. We believe our land offers a number of valuable competitive business advantages, including one of the largest single-owner land tracts suitable for development in the Sacramento region, a very low cost basis in our land, and what we believe a desirable “in-fill” location surrounded by developing residential and business properties.

      The Sacramento Land was acquired by Aerojet in the early 1950s for the manufacture and testing of propulsion products. Most of the Sacramento Land was never used for production or testing purposes, rather it was used to provide safe buffer zones for propulsion products. In order to optimize the value of our real estate assets, our plan is to continue to reposition excess Sacramento land holdings for higher and better uses. Currently, we have formal entitlement applications pending for the re-zoning of approximately 5,800 acres of the Sacramento Land. In 2005, we initiated discussions for the re-zoning and annexation process for an approximate 625 acres in the City of Folsom Sphere of Influence. This land has been identified by the local authorities for future annexation into the City of Folsom and is expected to be a mix of uses including residential and commercial. Our efforts regarding entitlement re-zoning changes and annexation for this approximately 6,400 acres are expected to increase the value of this land over it current value.

      In conjunction with our entitlements efforts, we will continue to explore real estate structures (or transactions) that may enhance the value of our real estate assets, including outright sales, and/or joint ventures with real estate developers, residential builders or other third parties. We recently announced our exploration of a possible real estate transaction with one or more substantial residential builders. The focus of the exploratory discussions at this time concerns a possible joint venture relating to our Rio Del Oro project.

      The Sacramento Land is comprised of the following:

      Easton is the brand name that identifies the approximate 6,400 acres of Sacramento Land for which we are currently seeking entitlement. We expect Easton to become the region’s premier master-planned

community which will include a broad range of housing as well as office, industrial, retail, and recreational uses. The table below summarizes acreage for the various projects within Easton, and our best current estimates of when we believe approvals and/or entitlements may be achieved:

      The environmentally restricted acreage described above is subject to environmental restrictions imposed by state and/or federal regulatory agencies because of Aerojet’s historical propulsion activities, even though most of the land was never used for propulsion, production, and testing. We intend to retain such land until release of these restrictions. We are actively working with the various regulatory agencies that control the environmental restrictions to have them removed as early as practicable.

      Following is a discussion of the various projects within Easton and a description of the environmental restrictions on each of the projects:

      Rio Del Oro — In 2002, we filed an application with the County of Sacramento (County) for a general plan amendment and request for re-zoning of an approximate 2,700 acre project called Rio Del Oro. In 2003, this application was transferred to the newly incorporated City of Rancho Cordova (Rancho Cordova). 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. In 2001, we granted this regional homebuilder the right to purchase 400 acres of our Rio Del Oro property, for which the purchase price is fixed at $10 million. The homebuilder is obligated to pay costs associated with the entitlements for our portion of Rio Del Oro as well as its other land.

      The Draft Rio Del Oro Specific Plan, dated September 7, 2005 (Plan) includes our 2,700 acres and the homebuilder’s 1,100 acres. The plan calls for 22 different proposed land uses with estimated land areas for each use. The Plan combines these uses into four categories with estimated land acreage for each category as follows:

      The Plan does not separate our portion of the Plan from the homebuilder’s portion. Our estimate for our 2,700 acres is as follows: Residential 1,484 acres; Village Services & Employment, 184 acres; Education, 65 acres; and Open Space & Public, 983 acres.

      Rio Del Oro is subject to certain state environmental restrictions which we are working with state regulators to remove. We believe the first portions of the Rio Del Oro land should have environmental restrictions lifted within the same approximate time frame that Rancho Cordova approves our application for re-zoning. The project also has extensive wetland conservation areas and preserved habitat for certain species

on the Federal Endangered Species List. We are working on a conservation plan that will be a part of the approval of the land use application by Ranch Cordova.

      In accordance with the California Environmental Quality Act (CEQA), government and regulatory authorities are required to determine what, if any, impacts a project will have on the environment. Typically the preparation of an Environment Impact Report (EIR) is required, which Rancho Cordova is in the process completing as part of the entitlement process. In addition, in the case of Rio Del Oro, federal agencies, including the U.S. Army Corps of Engineers (Corps), must prepare an environmental impact study (EIS) in accordance with the National Environmental Policy Act (NEPA). Rancho Cordova staff and the applicants have been working to complete the EIR/ EIS since mid-2005. Delays in receiving information from the Corps and the U.S. Fish and Wildlife Service (USFWS) have postponed the release of the EIR/ EIS for public comment. Currently, Rancho Cordova expects the release by March 2006, approximately 6 months later than originally planned. Rancho Cordova’s approval of our land use application is not expected before late 2006.

      Glenborough and Easton Place — In 2004, we announced plans for an approximate 1,400 acre master planned community called Glenborough and Easton Place and filed applications with the County for a general plan amendment and changes in zoning. Easton Place will take full advantage of its location on the Highway 50 corridor, the new light rail station within Easton Place and the existing Aerojet employment base. The Glenborough and Easton Place projects have been well received by the County. The general categories of land use and their currently estimated acreage are as follows:

      Approximately 330 acres in Glenborough are subject to federal environmental restrictions, which must be lifted before those acres can be developed or sold. We have submitted proposals to the appropriate agencies regarding remedial activities necessary to have the restrictions lifted. We believe these restrictions will not delay the County’s approval for our application. Significant areas will remain subject to environmental restrictions for a period of time after receipt of County approval of our entitlements application. However, we do not expect any delays in the overall project schedule because the sale of those portions of the project is not expected to begin for several years. The County began preparation of the EIR for Glenborough and Easton Place in June 2005. The initial draft of the EIR is expected to be completed in the second half of 2006. This project has a considerable habitat for the Valley Elderberry Long-horned Beetle (VELB), a protected species on the Federal Endangered Species List. We are working with USFWS to develop a comprehensive mitigation plan that will provide suitable mitigation for the impact caused by the project. This mitigation plan will be part of the approval of the land use application by the County. We expect the County’s approval of this project to be granted in late 2007.

      Westborough — In 2004, we filed an application with Rancho Cordova for a general plan amendment for an approximate 1,650 acre project named Westborough. The Westborough application will be completed in two phases. In June 2005, we submitted an updated general plan amendment and a re-zoning application for approximately 1,100 acres as the initial phase of Westborough. Of the approximate 550 acres in the second phase of Westborough, a portion of the land is within the City of Rancho Cordova and a portion is in the County. Consequently, over the next few years, we will be working with the County and City to reach

agreement on the terms and conditions for annexation of the County land into Rancho Cordova. Once an agreement is achieved, we will file an application for the second phase. In 2005, we worked with Rancho Cordova to complete the information necessary to commence the EIR for the initial phase of Westborough. Rancho Cordova expects to start the EIR within the next few months. Since the EIR takes at least one year to prepare, we do not expect that Rancho Cordova will complete a first draft of the EIR for review until mid-2007. In 2004, we contracted with a regional homebuilder to sell 100 acres of Westborough, for which the purchase price is fixed at $3.1 million. As partial consideration for this purchase agreement, the regional homebuilder also agreed to remove a restriction on residential development of Westborough extending through 2009 that had been granted to such developer pursuant to a 2001 transaction.

      Approximately 280 acres of the second phase is subject to federal environmental clean-up restrictions which we do not expect to be removed for several years. We do not anticipate delays in our overall project schedule because those portions of the project are part of phase two that will not be entitled for several years. This project also has extensive habitat for the VELB. We are working with USFWS to develop a comprehensive mitigation plan that will provide suitable mitigation for the impact caused by the project. This mitigation plan will be part of the approval of the land use application by Rancho Cordova. We anticipate Rancho Cordova’s approval of the initial phase of this project during 2008.

      Folsom Sphere of Influence — Approximately 625 acres of the Sacramento Land is within a larger area designated as the City of Folsom Sphere of Influence (SOI). Aerojet, in cooperation with the other landowners in the SOI, is working with Folsom to satisfy the conditions of annexation of the entire SOI, including our 625 acres, to Folsom. The proposed land uses for the 625 acres include residential, office, and retail. The annexation process is expected to be lengthy and it is too early to estimate a completion date for the annexation.

      Office Park and Auto Mall — In March 2003, we entered into a joint venture with Panattoni Development Company to develop an office park. An office park is consistent with the existing zoning for the property. We are working with the County and the U.S. Army Corp of Engineers to obtain the necessary approvals.

      In 2004, we submitted an application to the County for a conditional use permit to allow the sale of new cars on approximately 30-acres of the Sacramento Land. The application has been approved by the County Planning Commission; however, opposition to the proposal has recently surfaced. The final County Board of Supervisor action on the application is expected in the first quarter 2006. We sold approximately 20 acres to two automobile dealers in fiscal 2003. The sales completed in 2003 will not be impacted if the conditional use permit is not approved.

      We believe it will be several years before any of the 1,003 acres of available land available will be processed for a change in entitlements. Some of this land is outside the current Urban Services Boundary established by the County and all of it is far from existing infrastructure, making it uneconomical to attempt to develop it at this time.

      We believe that the land currently available for the ongoing Aerojet operations is more than adequate for its long-term needs. As a result, additional land may become available for re-zoning in the future.

      During the second half of 2005 the rate of new home sales for the Sacramento region has slowed from historically high levels, which has resulted in homebuilders approaching inventory as they did in less exuberant market periods. We expect that this healthy marketplace adjustment will slow the rate of home price and entitled land appreciation. However, we believe a return to more normal market absorption rates and appreciation in land and home prices does not change the long-term prospects for the Sacramento region,

which still remains an attractive and affordable alternative to the San Francisco Bay area and other large metropolitan areas of California. The Sacramento Land is positioned in one of the strongest growth corridors of the region, and it commands a unique location advantage. We believe the compelling Sacramento area demographic and real estate fundamentals support our objective of creating value by re-zoning a substantial portion of the Sacramento Land.

      In California, all applications for a change in land use must include a source of water to serve the proposed project. We addressed this critical issue with our 2003 water settlement agreement with the County. Pursuant to that agreement, Aerojet transferred all of the remediated groundwater to the County. Subject to conditions and limitations in the agreement, including all required approvals under CEQA, the County assumed the responsibility for providing replacement water to those water purveyors who have lost wells as a result of groundwater contamination. If the amount of Aerojet’s transferred remediated groundwater is in excess of the replacement water actually provided to the impacted water purveyors, the County has committed to make such excess water available to Aerojet to satisfy the requirements for the Easton project.

      Aerojet owns approximately 400 acres of land in Chino Hills, California. This property was used for the manufacture and testing of ordnance. With the sale of its ordnance business in the mid-1990’s, Aerojet closed this facility and commenced clean-up of the site. At this time, Aerojet continues to work with state regulators and the City of Chino Hills to complete those efforts. Once the remediation is complete and based on the certification of use from the State, Aerojet will work with the City of Chino Hills to maximize the value of the site.

      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 $7 million in revenue in fiscal 2005.

      Although we are actively working with various governmental and regulatory agencies to obtain the necessary entitlements and to lift environmental restrictions, we may not be able to obtain these required approvals in the time periods described in the prior paragraphs, or at all. For a discussions of the risks related to our real estate activities, please see Item 1A, Risk Factors.

Environmental Matters

      Our current and legacy business 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 business 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, 2005, 17% of our 3,101 employees were covered by collective bargaining or similar agreements all of which are due to expire within two years. 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.

Item 1A.     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 at the beginning of Item 1 of this Report.

      Sales, directly and indirectly, to the U.S. government and its agencies accounted for approximately 80% of our total net sales in fiscal 2005. 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.

      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 a 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. Although the DoD currently forecasts continued defense budget increases through its fiscal year 2010, 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 contract, which was recently renegotiated, was a fixed-price contract that was historically unprofitable, in part, due to cost overruns. We are also transitioning a fixed-price fire suppression system for the Ford Crown Victoria police vehicle from development to full rate production. Future profitability is subject to risks including the ability of suppliers to deliver components of acceptable quality on schedule and the successful implementation of automated tooling in production processes.

      During fiscal 2005, approximately 60% of Aerojet’s net sales were achieved on fixed-price contracts and 40% on cost reimbursable contracts.

      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 sales.

      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.

      One of our plants produces large volumes of propellants used in automobile airbags sold to a single customer. These products are subject to extreme cost competition from other potential domestic and foreign suppliers. The loss of significant volume could affect fixed cost absorption in the plant and negatively impact profitability on other products.

      We are subject to federal, state, and local 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 relating to the operation of our existing and formerly owned businesses, 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.

      For additional discussion of environmental and legal matters, please see the environmental discussion in Note 14 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.

      As of November 30, 2005, we had established reserves of $268 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 14 to Consolidated Financial Statements.

      The operations of our business involve the handling and production of potentially explosive materials and other dangerous chemicals, including materials used in rocket propulsion and explosive devices. 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 meet rigorous customer and/or government specifications. In addition, as business conditions, DoD budgets, and Congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low-volume items from their product lines, which may require us to qualify new suppliers for raw materials on key programs.

      Current suppliers of some insulation materials used in rocket motors have announced plans to close manufacturing plants and discontinue certain product lines. These materials, which include a neoprene compound and silica phenolic used as an insulator, are used industry-wide in the production of rocket motors and, therefore, are key to many of our solid booster/ motor programs. We have qualified new suppliers and materials for this insulation and we expect that such new materials can be available in time to meet our future production needs.

      Another supplier has announced it will stop production of a primary binder compound (R45) used industry-wide in all solid propellants. The U.S. Government and companies operating in the propulsion industry worked together to resolve the availability issue of the R45 primary binder material. In our case, Aerojet entered into a new supply contract which includes a “surcharge” as a price adjustment. We were able accomplish this with the assistance of our customers through similar price adjustment clauses on many of our existing contracts.

      The supply of ammonium perchlorate, a principal raw material used in solid propellant, 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 production. The industry also currently relies on one primary supplier for graphite fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for such material. Although other sources of graphite fiber exist, the addition of a new supplier would require us to qualify the new source for use. As of year end 2005, neither of these key materials has had any indication that their availability is in jeopardy.

      We are also impacted, as is the rest of the industry, by increases in the prices and lead-times of raw materials used in production on various fixed-price contracts. Most recently, we have seen an increase in the price and lead-times of commodity metals, primarily steel, titanium and aluminum. Aerojet monitors the price and supply of these materials and works closely with suppliers to schedule purchases far enough in advance and in the most economical means possible to reduce program impact. Additionally, we have negotiated

economic and/or price adjustment clauses tied to commodity indices, whenever possible with our customers. Our past success in negotiating these terms is no indication of our ability to continue to do so.

      Prolonged disruptions in the supply of any of our key raw materials, difficulty qualifying new sources of supply, implementing use of replacement materials or new sources of supply, and/or a continuing increase in the prices of raw materials could have an adverse effect on our operating results, financial condition and/or our 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 business plan could be adversely affected.

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

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

      Additionally, the time frame required for approval of our plans 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 4.25%. 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, 2005, we had $444 million of debt. 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:

      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 may include continued expansion of our Aerospace and Defense operations through future acquisitions that make both strategic and economic sense. 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 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.

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

      As of November 30, 2005, 17% of our 3,101 employees were covered by collective bargaining or similar agreements all of which are due to expire within two years. 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 our executive officers that allow those officers to terminate their employment under particular circumstances, such as a change of control affecting us. 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 identified a material weakness in the Information and Communication component of internal control due to: (i) insufficient processes and controls to identify, capture and accurately communicate information in sufficient detail concerning complex, non-routine transactions in a timely manner to appropriate members of our finance and accounting organization that possess the necessary skills, knowledge and authority to determine that such transactions are properly accounted for in accordance with U.S. generally accepted accounting principles, and (ii) the lack of specificity in the existing processes regarding the degree and extent of procedures that should be performed by key finance and accounting personnel in their review of accounting for complex, non-routine transactions to determine that the objective of the review has been achieved. As a result of this material weakness, errors occurred in several significant accounts in fiscal 2005 interim consolidated financial statements that were not detected. The areas most affected by this deficiency include revenue recognition and foreign currency translation. This material weakness impacts our ability to properly

account for complex, non-routine transactions in the financial statements. Due to this material weakness, management believes that as of November 30, 2005, our internal control over financial reporting was not effective based on the Committee of Sponsoring Organizations of the Treadway Commission criteria. We have and continue to implement various initiatives in fiscal 2006 to improve our internal controls over financial reporting and address the matters discussed in Management’s Report on Internal Control over Financial Reporting. The implementation of the initiatives and the consideration of additional necessary improvements are among our highest priorities. The Board of Directors, under the direction of the Audit Committee, will continually assess the progress of the initiatives and the improvements, and take further actions as deemed necessary. Until the identified material weakness is eliminated, there is a risk of an adverse effect on our operations or financial results.

      In the event pension liabilities (based on the accumulated benefit obligation) exceed pension assets on the annual measurement date as a result of the investment returns on such assets and/or the discount rate used to measure pension liabilities, we would record a material charge which will cause an increase to our shareholders’ deficit.

      None.

      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.

      The following information pertains to legal proceedings, including proceedings relating to environmental matters, which are discussed in detail in Notes 14(b) and 14(c) to the Consolidated Financial Statements.

Groundwater 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 14(b) and 14(c) to the Consolidated Financial Statements, through dismissals and settlements, the number of plaintiffs has been reduced to 18. The remaining Sacramento cases are denominated as follows:

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

      Smith v. Aerojet-General Corporation, et al., Case No. 05AS01500, Sacramento County Superior Court, served August 14, 2005.

      In the Sacramento cases, the plaintiffs allege 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 14(b) and 14(c) to the Consolidated Financial Statements, the regulated water entities defendants were dismissed from the litigation. As a result of the plaintiffs’ settlement with McDonnell Douglas Corporation, Aerojet is the only remaining defendant in these cases. Discovery is complete and trial has been set for February 2006.

      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 is ongoing.

Water Entity 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 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.

Olin Case

      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 counterclaimed against GenCorp, alleging that the Company 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. As a defense to Olin’s counterclaim, the Company asserted that under the terms of a 1962 manufacturing agreement with Olin (the 1962 Agreement), Olin had a contractual obligation to insure against environmental and other risks and that its failure to protect such insurance payments under these policies precluded Olin from recovery against the Company for these remediation costs. Further, the Company asserted that any failure on Olin’s part to comply with the terms of such insurance policies would result in the Company being entitled to breach of contract remedies resulting in a reduction in any CERCLA liability amounts determined to be owed to Olin that would have otherwise been recovered from Olin’s insurance carriers (the Reduction Claims).

      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. Notwithstanding such ruling, the trial court has not ruled on the Company’s Reduction Claims; rather, the trial court ruled that the Company’s Reduction Claims are held in abeyance pending the resolution of Olin’s litigation against its insurance carriers.

      On November 21, 2005, after losing its appeal with the Sixth Circuit Court of Appeals and after its petition to the United States Supreme Court for a writ of certiorari was denied, the Company paid the full amount of the judgment plus interest to Olin in the amount of $30 million which resulted in a $28 million unusual charge in the fourth quarter of fiscal 2005.

      In summary, the Reduction Claims portion of the case is on hold pending final resolution in New York federal court (the New York Court) in a case involving Olin and its insurance carriers as to whether Olin’s notice to its insurance carriers was or was not timely. If Olin prevails in the NY Court action against its excess insurance carriers, it is expected that the Company will ultimately benefit from available insurance proceeds as part of the Company’s Reduction Claims. If the NY Court decides Olin’s notice to its insurers was untimely, the Ohio Court could rule in GenCorp Inc. v. Olin Corporation that Olin’s late notice constituted a breach of Olin’s obligation under the 1962 Agreement to protect the insurance; or it could conclude that Olin’s conduct does not support the Company’s Reduction Claims. If the Ohio Court rules that Olin’s late notice is a breach of the 1962 Agreement, then it must determine the damages suffered by the Company as a result of the breach. The Company has argued that the proper measure of damages is the coverage limits of the policies that Olin forfeited — an amount in this case that is more than the judgment paid by the Company to Olin.

      In November 2005, Olin filed a new lawsuit against the Company seeking recovery from the Company of $1 million for certain remediation costs Olin allegedly incurred between January 1, 2000 and December 31, 2004 relating to the sites at issue in the first litigation which was recorded as an unusual charge in the fourth quarter of fiscal 2005.

Vinyl Chloride Litigation

      The following table sets forth information related to our vinyl chloride litigation:

      Legal and administrative fees for the vinyl chloride cases were approximately $0.4 million in each of fiscal years 2005, 2004 and 2003.

Asbestos Litigation

      The following table sets forth information related to our asbestos litigation:

      Legal and administrative fees for the asbestos cases for fiscal 2005, fiscal 2004, and fiscal 2003 were approximately $0.5 million, $1.0 million, and $1.4 million, respectively.

Other Legal Proceedings

      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.

      None.

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, 2006, there were 9,545 holders of record of the common stock. On January 31, 2006, the last reported sale price of our common stock on the New York Stock Exchange was $20.03 per share.

      During each quarter of 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. Beginning in December 2004, the senior credit facility restricted the payment of dividends.

      Information concerning long-term debt, including material restrictions relating to payment of dividends on our common stock appears in Part II, Item 7 under the caption “Liquidity and Capital Resources” and at Note 11 in Notes to Consolidated Financial Statements, which is incorporated herein by reference. Information concerning securities authorized for issuance under our equity compensation plans appears in Part III, Item 12 under the caption “Equity Compensation Plan Information” which is incorporated herein by reference.

      The following selected financial data is qualified by reference to and should be read in conjunction with the consolidated financial statements, 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 of our operating segments, for the past two fiscal years. We then provide 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, we discuss the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

      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 1A of this Report and the disclaimer regarding forward-looking statements appearing at the beginning of Item 1 of this Report. 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 aerospace and defense manufacturer operating primarily in the United States with significant real estate assets. 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 propulsion systems in the United States and the only company that provides both Solid and Liquid propellant based systems. 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 re-zoning, entitlement, 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 on a portion of the Sacramento Land to optimize its value. We have filed applications with and submitted information to governmental and regulatory authorities for approvals necessary to re-zone over 6,400 acres of the Sacramento Land.

      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 has been received as of November 30, 2005.

      During the fourth quarter of fiscal 2004, we announced our strategic decision to sell our Fine Chemicals business, which, through Aerojet Fine Chemicals, was 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 segments. During the fourth quarter of fiscal 2005, we completed the sale of the Fine Chemicals to American Pacific Corporation (AMPAC) for $114 million, subject to adjustment, consisting of $88 million of cash, unsecured subordinated seller note of $26 million, and the assumption by the buyer of certain liabilities. Additionally, AMPAC will be required to pay us up to $5 million if the Fine Chemical business achieves specified earning targets in the twelve month period ending September 30, 2006. See additional discussion in Note 18 in Notes to Condensed 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 Operations. 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.

Business Outlook

      Aerospace and Defense — With the recent completion of deliveries on the Titan program and restructure of the Atlas V contract, sales for these two programs in fiscal 2006 are expected to decline by approximately $70 million from fiscal 2005 sales. Titan sales are expected to rebound in fiscal 2007 and fiscal 2008 when final facilities conversion and other related close-out activities are funded by the U.S. Air Force.

      Real Estate — We expect to actively work with governmental authorities to affect entitlement changes and to lift environmental restrictions for approximately 6,400 acres of the Sacramento Land as soon as practicable. In conjunction with these efforts, we will continue to explore real estate structures (or transactions) that may enhance the value of our real estate assets, including outright sales, and/or joint ventures with real estate developers, residential builders or other third parties. We recently announced our exploration of a possible real estate transaction with one or more substantial residential builders. The focus of the exploratory discussions at this time concerns a possible joint venture relating to our Rio Del Oro project.

Results of Operations

      Consolidated net sales increased to $624 million in fiscal 2005 compared to $499 million in fiscal 2004. The increase in sales in fiscal 2005 is primarily due to the following programs: Atlas V, Standard Missile, and Terminal High-Altitude Area Defense.

      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.

      During fiscal 2005, Lockheed Martin and Raytheon accounted for 39% and 16%, respectively, of net sales. 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. Sales in fiscal 2005, fiscal 2004 and fiscal 2003 directly and indirectly to the U.S. government and its agencies (principally the DoD), including sales to our significant customers discussed above, totaled $501 million, $420 million and $263 million, respectively. 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.

      For fiscal 2005, we reported a loss from continuing operations before income taxes of $235 million compared to a loss from continuing operations of $57 million for fiscal 2004. The increased loss was primarily due to the following:

      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:

      Our tax provision in fiscal 2005 reflects $29 million benefit from continuing operations for the carryback of current and prior year losses resulting in refunds of previously paid taxes. 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.

      At November 30, 2005, we had a federal net operating loss carryforward of approximately $226 million of which $61 million expires in 2024 and $165 million expires in 2025, if not utilized. Approximately $8 million of the net operating loss carryforward relates to the exercise of stock options, the benefit of which will be credited to equity when realized. In addition, we also have federal and state capital loss carryforwards of approximately $153 million and $62 million, respectively, most of which expire in 2009. For state tax purposes, we have approximately $215 million in net operating loss carryforwards of which $3 million expire in 2023, $32 million expire in 2024, and $180 million expire in 2025, if not utilized.

      We also have a federal research credit carryforward of $6 million which begins expiring in 2021; and a California manufacturing investment credit carryforward of $3 million which begins expiring in 2009; and a foreign tax credit carryforward of $6 million which begins expiring in 2010, if not utilized. These tax carryforwards are subject to examination by the tax authorities.

      On August 31, 2004, we completed the sale of 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, 2005. 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. On November 30, 2005, we completed the sale of the Fine Chemicals to American Pacific Corporation (AMPAC) for $114 million, subject to adjustment, consisting of $88 million of cash, unsecured subordinated seller note of $26 million, and the assumption by the buyer of certain liabilities. Additionally, AMPAC will be required to pay us up to $5 million based on the Fine Chemical business achieving specified earnings targets in the twelve month period ending September 30, 2006. Income will be recorded in the future on the seller note of $26 million and any contingent payment when realized. The loss on the sale of the Fine Chemicals business during fiscal 2005 was $29 million.

      In November 2003, we announced the closing of 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. In fiscal 2004, an expense of approximately $14 million related to employee social costs was recorded in accordance with SFAS 146, Accounting for Costs Associated with Exit of Disposal Activities. An expense of $1 million was recorded during the fiscal 2005 primarily related to employee social costs that became estimable in fiscal 2005 and 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 may result in an additional pre-tax expense of up to $2 million and are anticipated to be incurred over the next 12 months.

      Summarized financial information for the discontinued operations is set forth below:

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, commercial legacy income or expenses, provisions for unusual items not related to the operations, interest expense, and income taxes. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. Specifically, we believe the exclusion of the items listed above permits an evaluation and a comparison of results for ongoing business operations, and it is on this basis that management internally assesses operational performance.

Aerospace and Defense

      Sales for fiscal 2005 increased 25% to $617 million compared to $492 million last year. Included in these amounts were Atlas sales of $84 million in fiscal 2005 and $13 million in fiscal 2004. Excluding Atlas sales, fiscal 2005 sales increased 11% to $533 million compared to $479 million last year. The fiscal 2005 sales improvements excluding Atlas include net increases in most of Aerojet’s product areas with individual program increases of greater than $10 million related to Standard Missile, Terminal High-Altitude Area Defense (THAAD), and Tomahawk.

      Segment performance was a loss of $137 million in fiscal 2005 compared to income of $30 million in fiscal 2004. Excluding the effect of employee retirement benefit plan expense and unusual items, segment performance was a loss of $113 million in fiscal 2005 compared to income of $57 million in fiscal 2004. Significant factors impacting the change in segment performance compared to prior year were: (i) $169 million and $16 million write-down of inventory associated with the Atlas V program in fiscal 2005 and fiscal 2004, respectively, which resulted in increases in costs of products sold; (ii) environmental reserve and recovery adjustments that resulted in a $16 million favorable impact to fiscal 2004 segment performance compared to $4 million expense in fiscal 2005; and (iii) changes in product mix that resulted in lower margins during fiscal 2005.

      As previously reported, recovery of the Atlas V inventory had been subject to several uncertainties. Upon learning that U.S. government funding would not be available to recover past costs, we concluded that renegotiation of our contract with Lockheed Martin Corporation was in our best interest, curtailing future investments and cash outflows. An agreement on revised terms with Lockheed Martin was signed on December 22, 2005. Among other provisions, the revised terms include an increase in unit pricing for 14 motors to be delivered in fiscal 2006 and fiscal 2007. We anticipate negotiating terms for an additional 21 motors, for delivery in fiscal 2008 and beyond, in fiscal 2006. In connection with the renegotiation, we wrote-off $169 million of inventory costs for the design and production of the motors produced under the original contract.

      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. Segment performance 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 related to the Atlas V Program.

Real Estate

      Real Estate sales and segment performance for fiscal 2005 were $7 million and $4 million, respectively, compared to $15 million and $12 million, respectively, for fiscal 2004. The fiscal 2004 results included revenue from a property usage agreement and an exclusive mining rights agreement. Results for fiscal 2005 consist of rental property operations and there were no significant sales of real estate assets.

      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 real estate assets. Results for fiscal 2004 do not include any sales of real estate assets, but do include revenue from 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 Land.

Corporate and Other Expenses

      Corporate and other expenses decreased to $17 million in fiscal 2005 compared to $38 million in fiscal 2004. The decrease in spending was primarily due to lower corporate costs as a result of personnel reductions and resource redeployment to Aerojet to adjust for the reduction in operations as a result of the divesture of GDX in August 2004.

      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 include costs associated with commercial legacy business matters, including legal and environmental costs.

Retirement Benefit Plans

      Income (expense) from pension and medical and life retirement benefit plans is as follows:

      The increased cost of benefit plans over the past two fiscal years is primarily due to the deferred recognition of the underperformance of the U.S. pension plan assets in prior years and decreases in the discount rate used to determine benefit obligations, due to lower market interest rates.

Unusual Items

      Charges and gains associated with unusual items are summarized as follows:

      In fiscal 2005, we recorded a charge of $2 million related to an estimated legal settlement of the San Gabriel Valley and Chino Hills toxic tort cases. In addition, we recorded an unusual gain of $12 million, $3 million of which related to a settlement with its insurance providers and $9 million of which related to an adjustment of reserves we had established in fiscal 2001 for customer reimbursements of tax recoveries that has been settled. We recorded a charge of $29 million related to the Olin legal matter (see additional discussion in Note 14 in Notes to Condensed Consolidated Financial Statements). We recorded a charge of $18 million as a result of the redemption of $52 million of principal of the 9¹/2% Senior Subordinated Notes (9¹/2% Notes), repayment of $60 million of principal of the 5³/4% Convertible Subordinated Notes (5³/4% Notes), and the termination of the Restated Credit Facility.

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

      In fiscal 2003, we 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.

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 at certain plants in the 1950s and 1960s. 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:

      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 $14 million in fiscal 2005, $25 million in fiscal 2004 and $12 million in fiscal 2003.

      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, that on the basis of presently available information, 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, where available, 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, 2005, the Aerojet reserves include $151 million for the Sacramento site, $88 million for Baldwin Park Operable Unit (BPOU), and $17 million for other Aerojet sites.

      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, we 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, Aerojet’s ability 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 Grumman Corporation (Northrop) whereby Aerojet is 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, 2005, $148 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 are 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 environmental reserves discussed above, quarterly we review our estimate of costs that will be recovered under the Global Settlement based on business expected to be conducted under contracts with the U.S. government and our agencies in the future. In fiscal 2005, the increase to the reserve of $14 million resulted in a corresponding increase to the receivable, resulting in a net impact of $5 million in net loss. In fiscal 2004, Aerojet increased its estimated recoveries by $38 million, resulting in a net impact of $16 million of other income in fiscal 2004 primarily as a result of our plan to sell the Fine Chemicals business in fiscal 2004.

Liquidity and Capital Resources

      Short-term liquidity requirements consist primarily of normal recurring operating expenses; costs associated with legacy business matters, including costs related to our retirement benefit plans; capital expenditures and debt service requirements. We expect to meet these requirements through available cash and our revolving credit facility.

      As of November 30, 2005, long-term liquidity requirements consist primarily of obligations under our long-term debt obligations. We expect to meet long-term liquidity requirements through cash provided from operations, and if necessary, with long-term secured and unsecured borrowings and other debt and equity financing alternatives. The availability and terms of any such financing will depend upon market and other conditions at the time.

      Cash and cash equivalents increased by $23 million during the year ended November 30, 2005. The change in cash and cash equivalents is summarized as follows:

      Fiscal 2005 versus 2004 — Continuing operations used cash of $82 million in fiscal 2005 compared to generating cash of $5 million in fiscal 2004. The year over year change consists of: (i) timing of payables and receivables and working capital increases reflecting sales growth in our Aerospace and Defense segment; (ii) no real estate asset sales in fiscal 2005 versus collection of a $20 million note receivable and real estate sales in fiscal 2004; (iii) a payment in fiscal 2005 of $30 million for the Olin judgment; partially offset by lower interest and corporate costs.

      Fiscal 2004 versus 2003 — Continuing operations generated cash of $5 million in fiscal 2004 compared to cash usage of $12 million in fiscal 2003. The year over year change consists of: (i) improved Aerospace and Defense segment performance before the non-cash impact of retirement benefit plans, including cash flow from the ARC business acquired in October 2003, partially offset by working capital requirements for certain programs including Atlas V; (ii) real estate asset sales in fiscal 2004 and collection of a $20 million note receivable; partially offset by increased interest costs as a result of higher debt levels and increased corporate expenses.

      Discontinued operations used cash of $2 million in fiscal 2005 as compared to $35 million in fiscal 2004, and generated cash of $56 million in fiscal 2003.

      Restricted Cash — As of November 30, 2004, we designated $201 million as restricted cash, consisting of a portion of the proceeds from the GDX Automotive sale and the proceeds from the Equity Offering completed in fiscal 2004. This restricted cash was used to repay debt in early fiscal 2005.

      Fiscal 2005 — Continuing operations provided cash of $289 million consisting of $108 million of proceeds from sale of the Fine Chemicals business, $201 million of restricted cash; offset by $20 million in capital

expenditures. The proceeds of $108 million from the sale of the Fine Chemicals business consist of the $88 million of cash upon closing and $20 million for reimbursement for capital expenditures and working capital, which is subject to adjustment.

      Fiscal 2004 — Continuing operations used cash of $78 million consisting of $140 million of proceeds from sale of GDX business, $4 million of proceeds from the sale of certain assets acquired with the ARC acquisition; offset by $201 million designated as restricted cash as of fiscal year end 2004, and $21 million in capital expenditures.

      Fiscal 2003 — Continuing operations used cash of $149 million consisting of $138 million paid for the ARC acquisition and $11 million in capital expenditures.

      Discontinued operations used cash of $38 million in fiscal 2005 for capital expenditures in the Fine Chemicals business, of which $17 million was reimbursed pursuant to the amended Fine Chemicals purchase agreement. Cash of $41 million and $31 million in fiscal 2004 and fiscal 2003, respectively, was used for capital expenditures in both the GDX and Fine Chemicals businesses.

      Fiscal 2005 — Cash of $144 million was used primarily reflecting the completion of our recapitalization initiated in November 2004. We redeemed $265 million of outstanding debt including redemption costs, offset by $66 million from the issuance of our additional 2¹/4% Debentures and $56 million from the issuance of Term Loans under our New Credit Facility. In addition, we incurred $6 million in debt issuance costs and received $5 million in other equity transactions.

      Fiscal 2004 — Cash of $157 million was generated reflecting the recapitalization completed in fiscal 2005, and other borrowings and debt repayments. We generated net cash proceeds of $131 million from the issuance of 8.6 million shares of common stock for $16 per share (Equity Offering), and $80 million from the issuance of our 2¹/4% Debentures with net proceeds used to repurchase $79 million of the outstanding 5³/4% Notes including redemption costs. We also issued $125 million of 4% Convertible Subordinated Notes (4% Notes) and had net debt repayments of $96 million. We paid $9 million in debt issuance costs, received $8 million in other equity transactions, and paid $3 million in dividends on our common stock.

      Fiscal 2003 — Cash of $144 million was generated. 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 also paid $2 million in net repayments of debt, received $6 million in other equity transactions, and paid $5 million in dividends on our common stock.

      Our Board of Directors eliminated the payment of quarterly dividends effective the third quarter of fiscal 2004. Beginning in December 2004, the senior credit facility restricted the payment of dividends.

      Our borrowing activity in fiscal 2005 and our debt balances as of November 30, 2004 and 2005 were as follows:

      The outstanding debt as of November 30, 2005 had effective interest rates ranging from 2.25% to 9.50%, with maturities as follows:

      The New Credit Facility provides for an $80 million revolving credit facility (Revolver) maturing in December 2009, and a credit-linked facility maturing in December 2010, subject to early maturity in January 2007 if the 5³/4% Notes remain outstanding or have not been cash collateralized by then. As of November 30, 2005, the credit-linked facility consisted of a $55 million term loan subfacility, and a $44 million letter of credit subfacility. Interest rates are based on LIBOR borrowings or Alternate Base Rate borrowings, as defined in the Credit Agreement. The interest rate on the Revolver is LIBOR plus 225 basis points, or Alternate Base Rate plus 125 basis points, subject to adjustment based on our senior leverage ratio to a maximum of LIBOR plus 300 basis points, or Alternate Base Rate plus 200 basis points. The interest rate on the term loan for fiscal 2006 has been amended to LIBOR plus 325 basis points, or Alternate Base Rate plus 225 basis points, subject to a 50 basis point increase in the event that our senior secured debt ratings are lowered to certain levels. The fees on the letter of credit subfacility for 2006 have also been amended to 325 basis points plus any shortfall from LIBOR earned on the credit-linked deposits. The Revolver commitment fee is .5% per annum on the unused balance of the Revolver. As of November 30, 2005, the borrowing limit under the Revolver was $80 million of which we had zero outstanding borrowings. We had $55 million outstanding on the term loan and $27 million outstanding letters of credit as of November 30, 2005.

      The New Credit Facility is secured by substantially all of our assets, including the stock and assets of our material domestic subsidiaries that are guarantors of this 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 are also subject to financial covenants, as amended and are as follows:

      We were in compliance with our financial covenants as of November 30, 2005. In January 2006, we entered into an Amendment to increase the maximum leverage covenant to 8.00 to 1.00 for fiscal 2006 and increase the interest rate on the credit-linked facility as discussed above. In August 2005, we entered into an Amendment and Waiver to the Credit Agreement, which permitted us to provide seller financing in connection with the sale of the Fine Chemicals business and waived compliance with the Fixed Charge Coverage Ratio covenant for the period calculated as of August 31, 2005 due to the non-recurring investment for the Fine Chemicals business.

      Pursuant to the indenture for our 9¹/2% Notes, if the net cash proceeds from sale of the Fine Chemicals business are not used to repay debt senior to the 9¹/2% Notes or reinvested in our business on or before November 30, 2006, we will be required to make an offer to purchase an aggregate principal amount of the 9¹/2% Notes equal to the amount of such unused net sale proceeds at par plus accrued and unpaid interest in the first quarter of fiscal 2007.

      In June 2002, we filed a $300 million shelf registration statement with the Securities and Exchange Commission of which $162 million remains available for issuance. We may use the shelf to issue debt securities, shares of common stock, or preferred stock

      As disclosed in Notes 14(b) and 14(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 certain of these matters will have on our financial position or cash flows.

      We believe that our existing cash and cash equivalents, existing credit facilities and forecasted operating cash flows 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, interest and principal payments on our debt. We estimate $10 million to $14 million will be paid by us in fiscal 2006 related to Fine Chemicals business purchase price adjustments, including working capital and transaction costs. We may also access capital markets to raise debt or equity financing to fund required debt payments and for acquisitions that make both strategic and economic sense. 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.

      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.

      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, retirement benefit plan 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 our 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 substantially 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 Contracts. 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. 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 recognized when persuasive evidence of a final agreement exists, delivery has occurred, the selling price is fixed or determinable and payment from the customer is reasonably assured. Sales are recorded net of provisions for customer pricing allowances.

      We test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

      The determination as to whether a write down of goodwill is necessary involves significant judgment based on the short-term and long-term projections of the future performance of the reporting unit to which the goodwill is attributed. The assumptions supporting the estimated future cash flows of the reporting unit, including the discount rate used and estimated terminal value reflect our best estimates.

      Retirement Benefit Plans include defined benefit pension plans and postretirement benefit plans (medical and life benefits). Retirement benefits 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 medical and life 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 represents the current market interest rate to determine the present value of future cash flows currently expected to be required to settle pension obligations. 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 yield for high-quality fixed income debt instruments on the measurement date with maturities matched to the expected future cash flows of benefit obligations. The discount rate used to determine benefit obligations for both continuing and discontinued operations decreased to 5.50% for fiscal 2005 from 6.25% for fiscal 2004. This 75 basis point decline in the discount rate resulted in an increase in the present value of pension benefit obligations as of November 30, 2005 and is a component of pension expense for fiscal 2006.

      The expected long-term rate of return on plan assets represents the rate of earnings expected in the funds invested to provide for anticipated benefit payments. 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 2005 and fiscal 2004. With input from our investment advisors and actuaries, 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, 2005, 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 one-fifth of the unamortized gains and losses in the market-related value of pension assets and all other gains and losses including changes in the discount rate used to calculate benefit costs each year. 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 which smoothes asset values over three years. 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 (medical and life benefits) other than pensions that are not funded. A one percentage point increase in the assumed trend rate for healthcare costs would have increased the medical and life accumulated benefit obligation recorded as of November 30, 2005 by $2 million and the effect on the service and interest cost components of expense for fiscal 2005 would not have been significant. A one percentage point decrease in the assumed trend rate for healthcare costs would have decreased the medical and life accumulated benefit obligation recorded as of November 30, 2005 by $2 million and the effect on the service and interest cost components of expense for fiscal 2005 would not have been significant.