Exhibit 99.1

Item 6. Selected Financial Data

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

(1)

On October 1, 1999, the Company spun off its Performance Chemicals and Decorative Building Products businesses to GenCorp shareholders as a separate, publicly traded company (OMNOVA Solutions Inc.).

(2)

Effective December 1, 1999, the Company changed its methods for determining the market-related value of plan assets used in determining the expected return-on-assets component of annual net pension costs and the amortization of gains and losses for both pension and postretirement benefit costs.

(3)

In October 2001, the Company sold it Electronics and Information Systems (EIS) business to Northrop Grumman for $315 million. The gain on the transaction was $206 million. EIS contributed net sales of $398 million, $323 million, and $325 million, respectively, for 2001, 2000, and 1999.

(4)

On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business. Also, in the third quarter of 2004, management committed to a plan to sell the Company’s Fine Chemicals business. The GDX and Fine Chemicals businesses are classified as discontinued operations in these Consolidated Financial Statements and Notes to Consolidated Financial Statements.

5

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear in Item 8 of this Report.

     As discussed under “Forward-Looking Statements”, the forward-looking statements contained herein 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. Some of the important factors that could cause the Company’s actual results or outcomes to differ from those discussed herein are listed under “Forward-Looking Statements.”

Overview

     The Company is a technology-based manufacturer operating primarily in North America. The Company’s continuing operations are organized into two segments: Aerospace and Defense and Real Estate. The Aerospace and Defense segment includes the operations of Aerojet-General Corporation (Aerojet), which develops and manufactures propulsion systems for space and defense applications, armament systems for precision tactical weapon systems and munitions applications, and advanced airframe structures. Primary customers served include major prime contractors to the U.S. government, the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA). The Real Estate segment includes activities related to the development, sale and leasing of the Company’s real estate assets.

     During the second quarter of 2004, the Company classified its GDX Automotive (GDX) operating segment as a discontinued operation as a result of the Company’s plans to sell the business. During the third quarter of 2004, the Company signed a definitive agreement to sell GDX, including substantially all of the assets of GenCorp Inc. that were used in the GDX business and substantially all of GenCorp Inc.’s worldwide subsidiaries that were engaged in the GDX business, to Cerberus Capital Management, L.P. (Cerberus) for $147 million, subject to adjustment, of which $140 million had been received as of August 31, 2004. The Company closed the transaction on August 31, 2004. During the third quarter of 2004, the Company classified the Fine Chemicals operating segment as a discontinued operation as a result of the Company’s plans to sell the business. See additional discussion in Note 15 in Notes to Consolidated Financial Statements. For all periods presented, the Company has classified the results of GDX and Fine Chemicals as discontinued operations in the Consolidated Statements of Income. The assets and liabilities of GDX and Fine Chemicals have been classified as Assets of Discontinued Operations and Liabilities of Discontinued Operations in the Consolidated Balance Sheets as of November 30, 2003 and 2002.

Results of Operations

     The following section pertains to activity included in the Company’s Consolidated Statements of Income, which are contained in Item 8 of this Report.

6

Net Sales

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

     Consolidated net sales for 2002 were $277 million compared to $640 million in 2001. The decline in net sales reflects the sale in 2001 of Aerojet’s EIS business which contributed sales of $398 million in 2001.

     During 2003, Lockheed Martin, Boeing, and Raytheon accounted for 28%, 15%, and 10%, respectively, of net sales for 2003. During 2002, Lockheed Martin, Boeing, Raytheon, and NASA accounted for 21%, 18%, 13%, and 13%, respectively, of net sales for 2002. During 2001, Lockheed Martin, United States Air Force, and United States Army accounted for 45% 13% and 11%, respectively, of net sales for 2001. Sales in 2003, 2002 and 2001 directly and indirectly to the U.S. government and its agencies (principally the DoD), including sales to the Company’s significant customers discussed above, totaled $258 million, $243 million and $573 million, respectively.

Income Before Income Taxes

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

•

The Company recognized improvements in segment performance for its Aerospace and Defense and Real Estate segments. See below for a more detailed discussion of segment performance.

•

Asset sales by the Real Estate segment resulted in gross profit of $19 million in 2003. There were no asset sales in 2002.

•

Employee retirement benefit income of $1 million in 2003 compared to income of $38 million in 2002. See discussion under “Employee Pension and Postretirement Plans,” below.

•

The Company recorded unusual charges of $5 million in 2003 versus $15 million in 2002. A discussion of unusual items is included under “Restructuring and Unusual Items” following the Company’s discussion of segment results.

•

Interest expense increased to $22 million in 2003 from $9 million in 2002 primarily due to the debt incurred to finance recent acquisitions by the Aerospace and Defense segment. Average debt balances during 2003 were $436 million compared to $285 million during 2002. The Company’s average interest rates increased to 6.3 percent during 2003 from 5.2 percent during 2002.

     The decrease of reported income from continuing operations before income taxes of $231 million during 2002 compared to 2001 is primarily due to the following:

•

There were no asset sales by the Real Estate segment in 2002. Asset sales in 2001 contributed gross profit of $25 million.

•

Employee retirement benefit income was $38 million in 2002 compared to income of $72 million in 2001. See discussion under “Employee Pension and Postretirement Plans” below discussion of segment results.

•

In October 2001, Aerojet sold its EIS business. The EIS business contributed $30 million to income before income taxes in 2001.

•

In 2001, the Company recorded a $46 million inventory write-down in cost of products sold related to Aerojet’s participation as a propulsion supplier to a commercial launch vehicle program and a $2 million accrual for outstanding obligations connected with this effort.

•

The Company recorded unusual charges of $15 million in 2002 versus income of $199 million in 2001. A discussion of unusual items is included under “Restructuring and Unusual Items” following the Company’s discussion of segment results.

•

Interest expense decreased to $9 million in 2002 from $26 million in 2001. The $17 million decrease in 2002 was due to lower average debt levels resulting from the proceeds from the sale of the EIS business in October 2001.

7

Income Tax (Benefit) Provision

     The Company recorded a net income tax benefit of $1 million in 2003 resulting from $5 million in domestic federal and state tax settlements. The Company’s tax provision in 2002 was favorably impacted by a reduction of $4 million for federal and state income tax settlements and $1 million for the tax benefit of a charitable gift of real property. The 2001 tax provision was reduced by $13 million due to the receipt of state income tax settlements.

Income (Loss) from Discontinued Operations

     In 2004, the Company committed to a plan to sell the GDX Automotive and Fine Chemicals businesses. The decision to sell GDX occurred in the second quarter of 2004 and was a result of declining volumes and continued challenges in the automotive vehicle sealing system market environment including increased material costs, high development and start-up costs, anticipated working capital requirements as well as adverse customer pricing pressures. The decision to sell the Fine Chemicals business occurred in the third quarter of 2004 and resulted from management’s decision to focus the Company’s capital and resources on its Aerospace and Defense and Real Estate operating segments. In accordance with the Company’s plans to divest these businesses, the Company has classified the GDX Automotive and Fine Chemicals businesses as discontinued operations for all periods presented.

     In accordance with Emerging Issues Task Force (EITF) 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest to discontinued operations based on interest on debt that would be required to be repaid using estimated proceeds to be received from the anticipated sale of the GDX Automotive and Fine Chemicals businesses. This resulted in interest of approximately $4 million, $6 million and $6 million for 2003, 2002 and 2001, respectively.

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

     In 2001, the Company implemented restructuring plans which included the GDX Automotive and Fine Chemicals businesses. The GDX restructuring program and segment consolidation included the closure of the Marion, Indiana and Ballina, Ireland manufacturing facilities and resulted in the elimination of approximately 760 employee positions. The decision to close these facilities was precipitated by excess capacity and deterioration of performance and losses at these sites. The decision to close the Ballina, Ireland plant was also due to difficulty in retaining plant personnel in light of low unemployment levels in the region. Remaining programs from these facilities were transferred to other facilities. This restructuring program resulted in a pre-tax charge of $29 million and was substantially complete by the end of 2001. There was an additional restructuring program directed at the Draftex business, which resulted in the elimination of more than 500 employee positions, the cost of which was offset by an adjustment to goodwill. The restructuring plan implemented at Fine Chemicals during 2001 included the elimination of 50 employee positions and resulted in a charge of $1 million. This program increased operational efficiency without reducing production capabilities.

     In November 2003, the Company announced it was closing a GDX manufacturing facility in Chartres, France. The decision resulted primarily from declining sales volumes with French automobile manufacturers. In the fourth quarter of 2003, the Company recorded asset impairment charges in other income and expense of $6 million and also reduced net deferred tax assets by $3 million related to this plan. The Company accounted for these charges under SFAS 144 Accounting for the Impairment or Disposal of Long Lived Assets. In June 2004, the Company completed the legal process for closing the facility and establishing a social plan. As a result, the Company recorded pre-tax expense of approximately $11 million during the third quarter of 2004 primarily related to employee social costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges were included as a component of discontinued operations. The Company has not yet recorded certain expenses associated with the social plan due to the uncertainty of the benefit amount. These additional social costs are expected to result in additional pre-tax expense of $3 million to $6 million and are anticipated to be incurred over the next two years. In accordance with SFAS No. 146, the Company will recognize the related costs once they are certain.

8

Segment Results

     The Company evaluates its operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance represents net sales from continuing operations less applicable costs, expenses and provisions for restructuring and unusual items relating to operations. Segment performance excludes corporate income and expenses, provisions for unusual items not related to the operations, interest expense and income taxes.

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

(1)

See discussion of retirement benefit plan income (expense) under the caption “Employee Pension and Postretirement Benefit Plans” following the segment discussion. Discussions of the individual segments’ results below exclude these items.

(2)

See discussion of restructuring and unusual charges under the caption “Restructuring and Unusual Items” following the segment discussion. Discussions of the individual segments’ results below exclude these items.

9

Aerospace and Defense

Fiscal 2003

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

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

     In October 2003, Aerojet acquired the propulsion business of ARC for cash of $144 million, including estimated transaction costs and purchase price adjustments. Aerojet’s 2003 operating results include sales of $18 million and negligible earnings from this acquired business (as described more fully in Note 9 in Notes to Consolidated Financial Statements).

     As of November 30, 2003, Aerojet’s contract backlog was $830 million. The comparable amount for 2002 was $773 million. Funded backlog, which includes only the amount of those contracts for which money has been directly authorized by the U.S. Congress, or for which a firm purchase order has been received by a commercial customer, was $425 million as of November 30, 2003. The comparable 2002 amount was $416 million. Funding for the Titan Program was restructured in 2003, reducing Aerojet’s funded backlog by $58 million with total contract backlog remaining unchanged. Aerojet expects this funding to be incrementally restored in future years.

Fiscal 2002

     Net sales for the Aerospace and Defense segment totaled $271 million for 2002, compared to $604 million in 2001. The decrease reflects Aerojet’s sale of its EIS business in October 2001 (as described more fully in Note 9 in Notes to Consolidated Financial Statements), which contributed $398 million of net sales in 2001. Excluding the results of the EIS business, net sales for the segment increased $65 million in 2002 compared to the prior year. Approximately $54 million of the sales increase was generated from the delivery of a NASA X-38 DeOrbit Propulsion Stage, the COBRA booster engine program, other propulsion technologies for NASA’s second-generation reusable launch vehicle program, Titan IV launch vehicle propulsion systems, and increased activity on the liquid DACS system, offset by decreased sales on the Delta II upper stage pressure-fed liquid rocket engine. Additional sales increases of $7 million were attributable to ordnance programs and $8 million was attributable to the acquisition of the Redmond, Washington operations in October 2002. In 2002, Aerojet received notice that, due to funding constraints, the customer would not extend the COBRA contract beyond September 2002. The contract contributed $19 million in sales and $1 million in segment performance in 2002.

     Before unusual items and retirement benefit plan income, segment performance for the Aerospace and Defense segment was $32 million for 2002, compared to $9 million for 2001. Segment performance in 2001 included $30 million from the EIS business. Results in 2001 included a $46 million inventory write-down related to Aerojet’s participation as a propulsion supplier to a commercial launch vehicle program and a $2 million accrual for outstanding obligations connected with this effort. After these items, the resulting $5 million increase in 2002 compared to the prior year reflected higher sales volumes and improved contract profits as described above.

     In October 2002, Aerojet acquired the Redmond, Washington operations for cash of $93 million, including transaction costs. Aerojet’s 2002 results include sales of $8 million and negligible earnings from this acquired business. In conjunction with the acquisition, in-process research and development costs of $6 million were expensed as an unusual item (as described more fully in Note 9 in Notes to Consolidated Financial Statements).

     As of November 30, 2002, Aerojet’s contract backlog was $773 million. The comparable amount for 2001 was $603 million. Funded backlog, which includes only the amount of those contracts for which money has been directly authorized by the U.S. Congress, or for which a firm purchase order has been received by a commercial customer, was $416 million as of November 30, 2002. The comparable 2001 amount was $366 million.

10

Real Estate

Fiscal 2003

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

Fiscal 2002

     Real Estate net sales and segment performance for 2002 were $6 million and $3 million, respectively, compared to $36 million and $26 million, respectively, for 2001. The 2002 net sales and segment performance decreases were driven by sales of real estate assets in 2001 while 2002 performance reflected only leasing activity. Results for 2001 included the sale of 1,115 acres of property in Sacramento County to a regional homebuilder.

Corporate and Other Expenses

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

     Corporate and other expenses increased in 2002 to $30 million from $20 million in 2001. The increase in 2002 was due to $6 million in costs for outside legal advisors and accounting consultants involved in the special review of prior year accounting matters at GDX. In addition, 2001 corporate and other expenses included a gain of $11 million related to the settlement of foreign currency forward contracts. Corporate and other expenses included amortization of debt financing costs of $4 million in 2002 and $3 million in 2001.

Employee Pension and Postretirement Benefit Plans

     GenCorp’s income (expense) from retirement benefit plans is as follows:

     The decrease in the income recognized for employee retirement benefit plans in 2003 is primarily due to the recognition of the underperformance of the U.S. pension plan assets resulting from lower market investment returns in 2002 and 2001, and a decrease in the discount rate used to determine benefit obligations as of November 30, 2003 due to lower market interest rates.

11

Restructuring and Unusual Items

     In 2001, the Company implemented a restructuring of its corporate headquarters. The restructuring included an early retirement program which was offered to certain eligible employees. The program resulted in a $10 million pre-tax charge to operations.

     Charges associated with unusual items are summarized as follows:

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

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

     In 2001, the Company recorded a gain of $206 million related to the sale of EIS to Northrop. The transaction is discussed above under the discussion of results of operations. Also in 2001, the Company settled outstanding claims with the Internal Revenue Service and the State of California. The benefit of the tax refunds, $13 million on an after-tax basis, was recorded in the income tax provision. The portion of the tax refunds that will be repaid over time to the Company’s defense customers is reflected as an unusual expense item of $9 million ($5 million after tax).

Environmental Matters

     The Company’s policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with environmental laws and regulations. The Company is involved in the remediation of environmental conditions that resulted from generally accepted manufacturing and disposal practices in the 1950’s and 1960’s followed at certain plants. In addition, the Company has been designated a PRP with other companies at third party sites undergoing investigation and remediation (see Note 11(b) in Notes to Consolidated Financial Statements).

     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 (SAB92), Accounting and Disclosure Relating to Loss Contingencies, the Company:

•

accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred, and when its proportionate share of the costs can be reasonably estimated. In some cases, only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimate is used when determinable and the minimum estimate is used when no single amount is more probable; and

12

•

records related estimated recoveries when such recoveries are deemed probable.

     Expenditures for recurring costs associated with managing hazardous substances or pollutants in ongoing operations was $11 million in 2003 compared to $12 million in 2002 and $11 million in 2001.

Reserves

     The Company continually reviews estimated future remediation costs that could be incurred by the Company, which take into consideration the investigative work and analysis of the Company’s engineers and the advice of its 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 the Company’s reserves, the most probable estimated amount is used when determinable and the minimum is used when no single amount is more probable. The timing of payment for estimated future environmental costs is subject to variability and depends on the timing of regulatory approvals for planned remedies and the construction and completion of the remedies.

     During 2003 and 2002, the Company completed a review of estimated future environmental costs which incorporated, but was not limited to, the following: (i) status of work completed since the last estimate; (ii) expected cost savings related to the substitution of new remediation technology and to information not available previously; (iii) obligations for reimbursement of regulatory agency service costs; (iv) updated BPOU cost estimates; (v) costs of complying with the Western Groundwater Administrative Order, including replacement water and remediation upgrades; (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. The Company’s review of estimated future remediation costs resulted in additions to the Company’s environmental reserves of $12 million in 2003 and $107 million in 2002.

     The effect of the final resolution of environmental matters and the Company’s 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. The Company believes, on the basis of presently available information, that the resolution of environmental matters and the Company’s obligations for environmental remediation and compliance will not have a material adverse effect on the Company’s results of operations, liquidity or financial condition. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.

     A summary of the Company’s environmental reserve activity is shown below:

     As of November 30, 2003, the Aerojet reserves include $180 million for the Sacramento site and $108 million for BPOU. The reserves for other sites include $9 million for the Lawrence, Massachusetts site.

Estimated Recoveries

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

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

13

     In conjunction with the sale of EIS, Aerojet entered into an agreement with Northrop whereby Aerojet will be reimbursed by Northrop for a portion of environmental expenditures eligible for recovery under the Global Settlement. Amounts reimbursed are subject to annual limitations, with excess amounts carrying over to subsequent periods, the total of which will not exceed $190 million over the term of the agreement, which ends in 2028. As of November 30, 2003, $168 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 therefore will be recovered through the establishment of prices for Aerojet’s products and services sold to the U.S. government. These costs will be allocable to all Aerojet operations (including the previously excluded Redmond, Washington) 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 the Company’s review of its environmental reserves discussed above, the Company revised its estimate of costs that will be recovered under the Global Settlement based on business expected to be conducted under contracts with the U.S. government and its agencies in the future. The adjustments to the environmental remediation reserves and estimated future cost recoveries did not affect operating results in 2002 as the impact of increases to the reserves of $107 million was offset by increased estimated future recoveries. In 2003, due to the Global Settlement and Memorandum of Understanding with the government, discussed above, which allow for costs to be allocated to all Aerojet operations beginning in 2005 and decrease the costs allocated to Northrop annually, Aerojet increased its environmental reserves by $12 million and estimated recoveries by $13 million, which resulted in a $1 million gain in the Company’s statement of operations.

     For additional discussion of environmental and related legal matters, see Note 11(c) in Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

     The Company broadly defines liquidity as its ability to generate sufficient operating cash flows, as well as its ability to obtain debt and equity financing and to convert to cash those assets that are no longer required to meet the Company’s strategic financial objectives. Changes in net cash provided by operating activities generally reflect earnings plus depreciation and amortization and other non-cash charges and the effect of changes in working capital. Changes in working capital generally are the result of timing differences between the collection of customer receivables and payment for materials and operating expenses.

     Cash and cash equivalents increased by $16 million during the year ended November 30, 2003. The change in cash and cash equivalents is as follows:

14

Net Cash Provided By (Used In) Operating Activities

     Net cash provided by operating activities was $44 million for 2003. Net cash used in operating activities was $17 million in 2002 and $69 million in 2001. The operating cash flow from continuing operations in 2003 reflects improved operating results for the Real Estate and Aerospace and Defense (after adjusting for the non-cash impact of employee retirement benefit plans) and increased corporate and interest costs. Operating cash flows in 2003 also reflect a reduction in working capital usage, primarily in the Aerospace and Defense segment, as compared to the same period in 2002.

     During 2002, both discontinued operations, GDX Automotive and Fine Chemicals, had improved operating results compared to 2001 and generated positive cash flows from operations. Improvements in these discontinued operations were offset by increased working capital requirements for the Aerospace and Defense segment and an increase in corporate and other expenses.

Net Cash (Used In) Provided By Investing Activities

     Net cash used in investing activities for 2003 was $180 million and $141 million in 2002, compared to net cash provided in 2001 of $94 million.

     Investing activities included capital expenditures of $11 million, $14 million and $20 million for 2003, 2002 and 2001, respectively. Capital expenditures directly support the Company’s contracts and customer requirements and are primarily made for asset replacement, capacity expansion, development of new projects, cost reduction initiatives and safety and productivity improvements. Capital expenditures for 2001 included $6 million related to Aerojet’s EIS business, which was sold in October 2001.

     Investing activities for 2003 included cash outflows of $138 million for the acquisition of the ARC propulsion business including transaction costs paid during the year.

     Investing activities for 2002 included cash outflows of $93 million paid for the purchase of the Redmond, Washington operations, $8 million related to the Company’s reacquisition of the minority ownership interest in Fine Chemicals and $6 million related to a purchase price adjustment for the sale of EIS.

     Investing activities for 2001 included proceeds of $315 million from the sale of the EIS business.

     Net cash used in discontinued operations for investing activities was $31 million, $20 million and $26 million for 2003, 2002 and 2001, respectively.

Net Cash Provided by Financing Activities

     Net cash provided by financing activities for 2003 was $144 million compared with $159 million for 2002, and $2 million for 2001. Cash flows from financing activities relate primarily to activities involving the Company’s borrowings, net of repayments.

     The Company has a senior credit facility (Restated Credit Facility) which provides for a revolving credit facility, expiring December 28, 2005, and Term Loans. In 2003, the Company issued 9.50% Senior Subordinated Notes and in 2002, the Company issued a new Term Loan B and 5.75% Convertible Subordinated Notes. See Note 8 in Notes to Consolidated Financial Statements for more information regarding the Company’s borrowings. The Company paid dividends on common stock of $5 million in all periods presented.

     The Company’s borrowing activity in 2003 was as follows:

15

     As of November 30, 2003, the borrowing limit under the revolving credit facility was $137 million against which the Company had $30 million of borrowings outstanding and had letters of credit outstanding of $55 million. As of November 30, 2003, the Company also had borrowing limits totaling $38 million on additional credit facilities in Europe and Canada, of which $27 million was outstanding and is included in foreign credit facilities and other debt in the table above. Availability under the Company’s various credit facilities totaled $63 million as of November 30, 2003.

     The Restated Credit Facility contains restrictive covenants that require the Company to meet specific financial ratios, including an interest coverage ratio, a leverage ratio, a fixed charge coverage ratio and a consolidated net worth test; and also subjects the Company and its subsidiaries to restrictions on capital expenditures, the ability to incur additional debt, and the disposition of assets, including real estate; and prohibits specified other types of transactions. The Restated Credit Facility permits dividend payments as long as there is no event of default. In addition, the indenture governing the 9.50% Senior Subordinated Notes contains customary covenants including limits on the Company and its subsidiaries’ ability to incur additional indebtedness, make restricted payments, pay dividends or make distributions on, or redeem or repurchase, capital stock, make investments, or issue or sell capital stock of restricted subsidiaries, create liens on assets to secure indebtedness, enter into transactions with affiliates and consolidate, merge or transfer all or substantially all of the assets of the Company. These covenants could restrict the Company’s ability to secure additional debt and equity financing were it to need additional capital in the future. Also, in order to maintain compliance with these covenants, the Company could be required to curtail some of its operations and growth plans in the future.

     The outstanding debt had effective interest rates ranging from 3.94 percent to 9.50 percent as of November 30, 2003, with maturities as follows:

     In January 2004, the Company issued 4% Contingent Convertible Subordinated Notes (4% Notes) for aggregate principal amount of $125 million (see Note 19 in Notes to Consolidated Financial Statements). The net proceeds of approximately $119 million were used to repay outstanding borrowings under the Revolving Credit Facility and to pre-pay the next 12 months of scheduled maturities under the Term Loan A. The remaining net proceeds of $60 million was used for general corporate purposes.

     On June 20, 2002, the Company filed a shelf registration statement with the SEC under which the Company may, on a delayed basis, issue debt securities, shares of common stock or preferred stock. Net proceeds, terms and pricing of offerings, if any, of securities issued under the shelf registration statement will be determined at the time of any such offering.

Outlook

     As disclosed in Notes 11(b) and 11(c) in Notes to Consolidated Financial Statements, the Company has exposure for certain legal matters. The Company believes that it is currently not possible to estimate the impact, if any, that the ultimate resolution of these matters will have on the Company’s financial position or cash flows.

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

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

16

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

Other Information

Key Accounting Policies and Estimates

     The Company prepares its financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP). GAAP offers acceptable alternative methods for accounting for certain items affecting the Company’s financial results, such as determining inventory cost, depreciating long-lived assets and recognizing revenues.

     The preparation of financial statements in accordance with GAAP 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 the Company’s management. Management discusses those areas that require significant judgments with the audit committee of the Company’s board of directors. The audit committee has reviewed all financial disclosures in the Company’s filings with the SEC. Although management believes that the positions the Company has taken with regard to uncertainties are reasonable, others might reach different conclusions and the Company’s 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 Company’s accounting policies and estimates are revenue recognition/long-term contracts, goodwill and intangible assets, employee pension and postretirement benefit obligations, litigation, environmental remediation costs and income taxes. Except for income taxes, which are not allocated to the Company’s business segments, these areas affect the financial results of the Company’s business segments.

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

Revenue Recognition/Long-Term Contracts

     In the Aerospace and Defense segment, recognition of profit on long-term contracts requires the use of assumptions and estimates related to the contract value or total contract revenue, the total cost at completion and the measurement of progress towards completion. Due to the nature of the programs, developing the estimated total cost at completion requires the use of significant judgment. Estimates are continually evaluated as work progresses and are revised as necessary. Factors that must be considered in estimating the work to be completed include labor productivity, the nature and technical complexity of the work to be performed, availability and cost volatility of materials, subcontractor and vendor performance, warranty costs, volume assumptions, anticipated labor agreements and inflationary trends, schedule and performance delays, availability of funding from the customer, and the recoverability of costs incurred outside the original contract included in any estimates to complete. Aerojet reviews contract performance and cost estimates for 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 by the Company for net sales and segment performance.

     The Company’s aerospace and defense business is derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (AICPA) audit and accounting guide, Audits of Federal Government Contracts and the AICPA’s Statement of Position No. 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and Certain Production Type Contacts. The Company considers 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. The Company typically accounts for these contracts using the percentage-of-completion method, and progress is measured on a cost-to-cost or units-of-delivery basis. Sales under cost-reimbursement contracts and relatively short-term fixed-price contracts are measured 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. Sales under other long-term fixed-price contracts are measured as deliveries are made and computed on the basis of the unit costs plus profit. For certain other long-term fixed-price contracts, sales are recorded when the Company achieves performance milestones as contractually defined by the customer. Sales include estimated earned fees or profits calculated on the relationship between contract milestones and the estimate at completion. Revenue on service or time and material contracts is recognized when performed. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately.

17

     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 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 transactions, typically revenues from the Company’s discontinued operations, is generally recognized after products are shipped, all other significant customer obligations have been met and collection is reasonably assured. Sales are recorded net of provisions for customer pricing allowances.

Goodwill and Intangible Assets

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

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

     At November 30, 2003, the Company’s total assets included $100 million of goodwill which relates to the Aerospace and Defense segment.

Employee Pension and Postretirement Benefit Plans

     Employee pension and postretirement benefit plans are a significant cost of doing business and represent obligations that will be ultimately settled far in the future and therefore are subject to estimates. The Company’s pension and postretirement benefit obligations and related costs are calculated using actuarial concepts in accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87), Employer’s Accounting for Pensions, and Statement of Financial Accounting Standards No. 106 (SFAS 106), Employer’s Accounting for Postretirement Benefits Other Than Pensions, respectively. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by the Company. The Company is 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.

     Employee retirement benefit plan income or expense is a non-cash item and is reflected as either cost of goods sold or general and administrative expenses. The tax effect related to this income or expense recognition is also non-cash and is reflected in the deferred tax liabilities account.

     The discount rate is determined at the annual measurement date of August 31 for the Company’s pension plans, and is subject to

18

change each year based on changes in the overall market interest rates. The assumed rate reflects the market rate for high-quality fixed income debt instruments on the measurement date. This rate is used to discount the future cash flows of benefit obligations back to the measurement date. A 25 basis point change in the discount rate of 7.25 percent used to determine pension benefit obligations as of the measurement date would have changed 2003 pension expense by $5 million, including the expense related to discontinued operations. The discount rate used to determine benefit obligations for both continuing and discontinued operations decreased from 7.25 percent for 2002 to 6.50 percent for 2003. 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, 2003 and will be a component of the expected increase in pension expense for 2004.

     The expected long-term rate of return on plan assets is also determined at the annual measurement date of August 31 for the Company’s pension plans. The expected long-term rate of return used to determine benefit obligations was 8.75 percent for both 2003 and 2002. The Company and its advisors 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 and expected investment performance. The Company’s asset managers regularly review actual asset allocations and periodically rebalance investments to targeted allocations when considered appropriate. At November 30, 2003, 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 as prescribed by GAAP and will make adjustments to the assumptions as appropriate. A 25 basis point change in the expected long-term rate of return on plan assets would have changed 2003 pension expense by $2.6 million, including the expense related to discontinued operations.

     Market conditions and interest rates significantly affect assets and liabilities of the Company’s 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 utilized by the Company recognizes gains and losses in the market value of pension assets and changes in the discount rate used to calculate benefit costs over a period of five years. Investment gains or losses for this purpose are the difference between the expected return and the actual return on the market-related value of assets. Although the smoothing period mitigates some volatility in the calculation of annual pension costs, future pension costs are impacted by changes in the market value of pension plan assets and changes in interest rates.

     In addition, the Company maintains postretirement benefit plans other than pensions that are not funded. A one percentage point increase in the assumed trend rate for healthcare costs would have increased the postretirement accumulated benefit obligation recorded as of November 30, 2003 by $6 million and the effect on the service and interest cost components of expense for 2003 would not have been significant. A one percentage point decrease in the assumed trend rate for healthcare costs would have decreased the postretirement accumulated benefit obligation recorded as of November 30, 2003 by $5 million and the effect on the service and interest cost components of expense for 2003 would not have been significant.

     The Company’s U.S. pension plans remain overfunded, and the Company does not expect to make any net cash contributions in 2004. Cash payments for unfunded benefit obligations, primarily retiree medical benefits, are reflected in operating cash flows.

Contingencies and Litigation

     The Company is currently involved in certain legal proceedings and, as required, has accrued its estimate of the probable costs for resolution of these claims. These estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions or the effectiveness of strategies related to these proceedings. See Note 11(b) in Notes to Consolidated Financial Statements for more detailed information on litigation exposure.

Reserves for Environmental Remediation and Recoverable from the U.S. Government and Other Third Parties for Environmental Remediation Costs

     For a discussion of the Company’s accounting for environmental remediation obligations and costs and related legal matters, see “Environmental Matters” above and Note 11 in Notes to Consolidated Financial Statements.

     The Company accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred, and when its proportionate share of the costs can be reasonably estimated. Management has a well-established process in place to identify and monitor the Company’s environmental exposures. In most cases only a range of reasonably possible costs can be estimated. In establishing the Company’s reserves, the most probable estimated amount is used when determinable, and the minimum amount is used when no single amount in the range is more probable. The Company’s environmental reserves include the costs of completing remedial investigation and feasibility studies, remedial and corrective actions, regulatory oversight costs, the cost of operation and maintenance of the remedial action plan, and employee compensation costs for employees

19

who are expected to devote a significant amount of time to remediation efforts. Measurement of environmental reserves is based on the evaluation of currently available information with respect to each individual environmental site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Such estimates are based on the expected costs of investigation and remediation and the likelihood that other potentially responsible parties will be able to fulfill their commitments at sites where the Company may be jointly or severally liable.

     As of November 30, 2003, the Company had accrued environmental remediation liabilities of $315 million. Environmental remediation cost estimation involves significant uncertainties, including the extent of the remediation required, changing governmental regulations and legal standards regarding liability, evolving technologies and the long periods of time over which most remediation efforts take place. A number of factors could substantially change environmental remediation cost estimates, examples of which include: regulatory changes reducing the allowable levels of contaminants such as perchlorate, nitrosodimethylamine or others; enhanced monitoring and testing technology or protocols which could result in the discovery of previously undetected contaminants; and the implementation of new remediation technologies which could reduce future remediation costs.

     Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, the Company can recover up to 88 percent of environmental remediation costs allocable to government contracts. Environmental recoveries for these sites are recorded as an asset and reflect recoveries permissible through the establishment of prices for Aerojet’s products and services sold to the U.S. government. Aerojet’s mix of contracts can affect the actual reimbursement. Because these costs are recovered through forward pricing arrangements, the ability of Aerojet to continue recovering these costs depends on Aerojet’s sustained business volume under U.S. government contracts and programs and the relative size of Aerojet’s commercial business (environmental remediation costs allocable to commercial contracts are expensed).

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

     As part of the acquisition of the ARC propulsion business, Aerojet entered into an agreement with ARC pursuant to which Aerojet is responsible for up to $20 million of costs (Pre-Close Environmental Costs) associated with environmental issues that arose prior to Aerojet’s acquisition of the propulsion business. Pursuant to a separate agreement with the U.S. government which was entered into prior to closing of the ARC acquisition, these Pre-Close Environmental Costs will be treated as allowable overhead cost combined with Aerojet environmental costs under the Global Settlement, and will be recovered through the established prices for Aerojet products produced and services performed by Aerojet. In addition, Aerojet and the U.S. government have agreed that Aerojet’s allowable site restoration costs subject to the sharing ratio of the Global Settlement plus ARC site restoration costs will continue to be treated as general and administrative costs and will be allocated to all Aerojet operations beginning in 2005.

     Based on Aerojet’s projected business volume and the proportion of its business expected to be covered by the Global Settlement, Aerojet currently believes that, as of November 30, 2003, approximately $220 million of its estimated future environmental costs will be recoverable. Significant estimates and assumptions that could affect the future recovery of environmental remediation costs include: the proportion of Aerojet’s future business base and total business volume which will be subject to the Global Settlement; limitations on the amount of recoveries available under the Northrop agreement; the ability of Aerojet to competitively bid and win future contracts if estimated environmental costs significantly increase; the timing of environmental expenditures; and uncertainties inherent in long-term cost projections of environmental remediation projects.

Income Taxes

     The Company files a consolidated U.S. income tax return for the Company and its wholly-owned consolidated subsidiaries. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. The deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date of the change.

     The carrying value of the Company’s deferred tax assets is dependent upon its ability to generate sufficient future taxable income in certain tax jurisdictions. The Company has established valuation allowances against certain of its deferred tax assets with respect to discontinued operations only, due to uncertainties related to the ability to utilize these assets. The valuation allowances are based on estimates of taxable income by each jurisdiction in which the Company operates and the period over which the assets will be recoverable. In the event that actual results differ from these estimates, or that the Company adjusts these estimates in future periods, the valuation allowance would change and

20

could impact the Company’s financial position and results of operations.

     Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how and when cash is repatriated to the U.S., combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with the Company’s tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. The Company establishes tax reserves when, despite its belief that its tax return positions are fully supportable, it believes that certain positions are likely to be challenged and that the Company may not succeed. The Company adjusts these reserves in light of changing facts and circumstances, such as the progress of a tax audit. The Company believes it has adequately provided for any reasonably foreseeable outcome related to these matters, and it does not anticipate any material earnings impact from their ultimate resolutions.

     At November 30, 2003, the Company had tax basis net operating loss (NOL) carry-forwards worldwide of approximately $328 million available to reduce future taxable income which are primarily related to discontinued operations. The majority of these NOLs are related to state operations, expire beginning in 2004, and are fully reserved with a valuation allowance. The remaining portion relates to foreign operations, most of which have indefinite carry-forward periods. The Company also has foreign tax credit carry-forwards of $4 million, which are primarily related to discontinued operations, which expire beginning in 2005 as well as research credit carry-forwards of $2 million which expire beginning in 2011. These tax carry-forwards are subject to examination by the tax authorities.

Recently Issued Accounting Standards

     In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after March 15, 2004 except for companies with special purpose entities which must apply for provisions of FIN 46 to those special purpose entities, no later than the first reporting period after December 15, 2003. The adoption of FIN 46 did not have a material effect on the Company’s results of operations, liquidity, or financial condition.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to Statement 133 in its entirely, or as hybrid instruments with debt host contracts and embedded derivative features. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the Company’s results of operations, liquidity, or financial condition.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments previously were classified as equity or temporary equity and, as such, SFAS 150 represents a significant change in practice in the accounting for a number of mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material effect on the Company’s results of operations, liquidity, or financial condition.

     In December 2003, the FASB issued a revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The revision requires additional annual disclosures relating to the types of plan assets, investment strategy, measurement dates, plan obligations and cash flows, and interim disclosures of the components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans, as well as estimated cash flows if materially different from previously discussed amounts. The disclosure requirements were effective beginning in the second quarter of 2004.

     In August 2004, the FASB issued Staff Position No. 106-2 (FSP 106-2), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. When adopted, FSP 106-2 will supersede FSP 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was issued in January 2004 and permitted a sponsor of a post-retirement health care plan that provides a prescription drug benefit to make a one-

21

time election to defer accounting for the effects of the Act until more authoritative guidance on the accounting for the federal subsidy was issued. The Company elected the one-time deferral allowed under FSP 106-1 and as a result any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on postretirement health care benefit plans. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. FSP 106-2 is effective for the Company’s fourth quarter of 2004. The Company anticipates that the adoption of FSP 106-2 will reduce the Company’s accumulated plan benefit obligation by $3 million related to the Act.

     In September 2004, Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 04-08 (EITF 04-08), The Effect of Contingently Convertible Debt on Diluted Earnings per Share. Under current interpretations of FASB No. 128, Earnings per Share, issuers of contingently convertible debt instruments (Co-Cos) generally exclude the potential common shares underlying the Co-Cos from the calculation of diluted earnings per share until the underlying common stock achieves a specified price target, or other contingency is met. EITF 04-08 requires that Co-Cos should be included in diluted earnings per share computations, if dilutive, regardless of whether the market price trigger has been met. The Company will adopt the requirements of EITF 04-08 beginning with the quarter ending February 28, 2005. The application of EITF 04-08 will require the Company to include the Company’s 4% Contingent Convertible Subordinated Notes due 2024 (4% Notes) which were issued in January 2004 in its calculation of diluted earnings per share, if dilutive.

     In October 2004, the FASB concluded that Statement 123R, Share-Based Payment, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. The Company could adopt the new standard in one of two ways - the modified prospective transition method or the modified retrospective transition method. The Company will adopt Statement 123R in the fourth quarter of 2005, and it is currently evaluating the effect that the adoption of Statement 123R will have on its financial position and results of operations.

22

Forward-Looking Statements

     Certain information contained in this report 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 the Company’s forward-looking statements. Some important risk factors that could cause actual results or outcomes to differ from those expressed in the forward-looking statements include, but are not limited to, the following:

•		legal and regulatory developments that may have an adverse impact on the Company or its segments or businesses. For example: 1) the Company’s operations and financial condition could be adversely impacted if the judgment order in the amount of approximately $29 million entered November 21, 2002 against GenCorp in GenCorp Inc. v. Olin Corporation (U.S. District Court for the Northern District of Ohio, Eastern Division), which is described in more detail in Note 11(b) in Notes to Consolidated Financial Statements, is upheld on appeal and the offsets to which the Company believes it is entitled are not realized; 2) restrictions on real estate development that could delay the Company’s proposed real estate development activities; 3) a change in toxic tort or asbestos litigation trends that is adverse to the Company; and 4) a change in international tax laws or currency controls that is unfavorable to the Company;
•		changes in Company-wide or business segment strategies, such as the Company’s recent decisions to divest the GDX and Fine Chemicals businesses, which result in changes in the types or mix of business in which the Company is involved or chooses to invest;
•		changes in U.S., global or regional economic conditions that may affect, among other things: 1) customer funding for the purchase of aerospace and defense products, which may impact the Aerospace and Defense segment’s business base and, as a result, impact its ability to recover environmental costs; 2) healthcare spending and demand for the pharmaceutical ingredients produced by the Company’s Fine Chemicals discontinued operations; 3) the Company’s ability to successfully complete its real estate activities; and 4) the funded status and costs related to the Company’s employee retirement benefit plans;
•		risks associated with the Company’s Aerospace and Defense segment’s role as a defense contractor including: 1) the right of the U.S. government to terminate any contract for convenience; 2) modification or termination of U.S. government contracts due to lack of congressional funding; and 3) the lack of assurance that bids for new programs will be successful, or that customers will exercise contract options or seek or follow-on contracts with the Company due to the competitive marketplace in which the Company competes;
•		changes in U.S. and global financial and equity markets, including market disruptions and significant currency or interest rate fluctuations, that may impede the Company’s access to, or increase the cost of, external financing for the Company’s operations and investments or materially affect the Company’s results of operations and cash flows;
•		increased competitive pressures, which may, among other things, affect the performance of the Company’s Aerospace and Defense segment and/or the Fine Chemicals discontinued operations;
•		labor disputes, which may lead to increased costs or disruption of operations in the Company’s Aerospace and Defense segment and/or the Fine Chemicals discontinued operations;
•		technological developments or patent infringement claims, which may impact the use of critical technologies in the Company’s Aerospace and Defense segment and/or the Fine Chemicals discontinued operations, leading to reduced sales or increased costs;
•		an unexpected adverse result or required cash outlay in the toxic tort cases, environmental proceedings or other litigation, or change in proceedings or investigations pending against the Company; and

23

•

risks attendant to the sale of the Fine Chemicals discontinued operations, including the Company’s ability to identify a buyer for the business as well as the timing and terms of any proposed sale and its ultimate consummation.

     This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Additional risk factors may be described from time to time in the Company’s 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 the Company’s control.

24

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Policies and Procedures

     As an element of the Company’s normal business practice, it has established policies and procedures for managing its exposure to changes in interest rates and foreign currencies.

     The objective in managing exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flow and to make overall borrowing costs more predictable. To achieve this objective, the Company may use interest rate hedge transactions (Swaps) or other interest rate hedge instruments to manage the net exposure to interest rate changes related to the Company’s portfolio of borrowings and to balance its fixed rate compared to floating rate debt.

     The objective in managing exposure to foreign currency fluctuations is to reduce volatility in earnings and cash flow. To achieve this objective, the Company may use various hedge contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets, liabilities and commitments.

     It is the Company’s policy to enter into foreign currency and interest rate transactions only to the extent considered necessary to meet its stated objectives. The Company does not enter into these transactions for speculative purposes.

Interest Rate Risk

     The Company is exposed to market risk principally due to changes in domestic interest rates. Debt with interest rate risk includes borrowings under the Company’s credit facilities. Other than pension assets, the Company does not have any significant exposure to interest rate risk related to its investments.

     The Company uses interest rate swaps and a combination of fixed and variable rate debt to reduce its exposure to interest rate risk. As of November 30, 2003, the Company’s long-term debt totaled $538 million. $430 million, or 80 percent was at an average fixed rate of 7.11 percent; and $108 million, or 20 percent was at an average variable rate of 4.19 percent.

     In December 2002, the Company entered into Swaps on $100 million of Term Loan variable rate debt for a two-year period as required by the Restated Credit Facility. The Company’s fixed interest rate under these Swaps including the Eurocurrency margin is 6.02 percent for the two-year period (see Note 1(l) in Notes to Consolidated Financial Statements).

     The estimated fair value of the Company’s long-term debt was $536 million as of November 30, 2003 compared to a carrying value of $538 million. The fair value of the 5.75% Notes and 9.50% Notes were determined based on quoted market prices as of November 28, 2003. The fair value of the remaining long-term debt was determined to approximate carrying value as the interest rates are generally variable based on market interest rates and reflect current market rates available to the Company.

Foreign Currency Exchange Rate Risk

     Foreign currency exchange rate risk is associated with the Company’s GDX Automotive business which was divested subsequent to November 30, 2003 (see Note 19 in Notes to Consolidated Financial Statements). The Company had operations in Canada, Germany, France, Spain, Czech Republic, China and the United Kingdom. As a result, the Company’s financial position, results of operations, and cash flows could have been impacted by fluctuations in foreign currency exchange rates (primarily the Euro and the Canadian dollar). The Company may choose to selectively hedge exposures to foreign currency rate changes through the use of foreign currency forward and option contracts. There were no foreign currency forward or option contracts outstanding at November 30, 2003.

     As of November 30, 2003, the Company did not have material exposure to unhedged monetary assets, receivables, liabilities or commitments denominated in currencies other than the operations’ functional currencies.

Commodity Price Risk

     Commodity price risk is associated with the Company’s GDX Automotive business which was divested subsequent to November 30, 2003 (see Note 19 in Notes to Consolidated Financial Statements). The operations of the GDX Automotive business are dependent on the availability of rubber and related raw materials. Because of this dependence, significant increases in the price of these raw materials could have a material adverse impact on the Company’s results of operations and financial condition. GDX employs a diversified supplier base as part of its efforts to mitigate the risk of a supply interruption. In 2003 and 2002, rubber and

25

rubber-related raw materials accounted for 12 percent and 11 percent, respectively, of GDX’s cost of goods sold. Based on 2003 activity levels, a ten percent increase in the average annual cost of these raw materials would increase GDX’s cost of goods sold by $8 million.

Financing Obligations and Other Commitments

     The Company’s financing obligations and other commitments include primarily outstanding notes, senior credit facilities and operating leases. The following table summarizes these obligations as of November 30, 2003 and their expected effect on the Company’s liquidity and cash flow in future periods:

     The Company’s discontinued operations had operating lease commitments in the aggregate of $53 million. The Company also issues purchase orders and makes other commitments to suppliers for equipment, materials and supplies in the normal course of business. These purchase commitments are generally for volumes consistent with anticipated requirements to fulfill purchase orders or contracts for product deliveries received, or expected to be received, from customers.

26

Item 8. Consolidated Financial Statements and Supplementary Data

     Information called for by this item is set forth beginning on page 28 of this report.

27

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of GenCorp Inc.

     We have audited the accompanying consolidated balance sheets of GenCorp Inc. as of November 30, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended November 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GenCorp Inc. at November 30, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Sacramento, California
January 28, 2004
except for Notes 15 and 19e, as to which the date is
November 3, 2004

28

GENCORP INC.

Consolidated Statements of Income

See Notes to Consolidated Financial Statements.

29

GENCORP INC.

Consolidated Balance Sheets

See Notes to Consolidated Financial Statements.

30

GENCORP INC.

Consolidated Statements of Shareholders’ Equity

See Notes to Consolidated Financial Statements.

31

GENCORP INC.

Consolidated Statements of Cash Flows

See Notes to Consolidated Financial Statements.

32

GENCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a. Basis of Presentation and Nature of Operations

     The consolidated financial statements of GenCorp Inc. (GenCorp or the Company) include the accounts of the parent company and its wholly owned and majority-owned subsidiaries. See Note 9 for a discussion of the Company’s recent business acquisitions and divestitures. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to financial information for prior years to conform to the current year’s presentation.

     The Company is a technology-based manufacturer operating primarily in North America. The Company’s continuing operations are organized into two segments: Aerospace and Defense and Real Estate. The Aerospace and Defense segment includes the operations of Aerojet-General Corporation (Aerojet), which develops and manufactures propulsion systems for space and defense applications, armament systems for precision tactical weapon systems and munitions applications, and advanced airframe structures. Primary customers served include major prime contractors to the U.S. government, the Department of Defense (DoD) and the National Aeronautics and Space Administration (NASA). The Real Estate segment includes activities related to the development, sale and leasing of the Company’s real estate assets. Information on the Company’s operations by segment and geographic area is provided in Note 13.

     On August 31, 2004, the Company completed the sale of its GDX Automotive (GDX) business. Also in 2004, management committed to a plan to sell the Company’s Fine Chemicals business. The GDX and Fine Chemicals businesses are classified as discontinued operations in these Consolidated Financial Statements and Notes to Consolidated Financial Statements.

     The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

b. Workforce

     As of November 30, 2003, excluding employees of the Company’s discontinued operations, approximately 18 percent of the Company’s 2,548 employees were covered by collective bargaining or similar agreements. Of the covered employees, 17 percent were covered by collective bargaining agreements that are due to expire within one year.

c. Cash Equivalents

     All highly liquid debt instruments purchased with a remaining maturity at the date of purchase of three months or less are considered to be cash equivalents. The Company classifies securities underlying its cash equivalents as “available-for-sale” in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short duration of the underlying securities.

d. Inventories

     Inventories are stated at the lower of cost or market value (see Note 3). The Aerospace and Defense segment uses the average cost method. The Fine Chemicals business, which is included in discontinued operations, also uses the average cost method. The GDX Automotive business, which is also included in discontinued operations, uses the first-in, first-out (FIFO) method for accounting for inventory costs for all non-U.S. GDX facilities and the last-in, first-out (LIFO) method for all other GDX locations.

e. Property, Plant and Equipment

     Property, plant and equipment are recorded at cost. Refurbishment costs are capitalized in the property accounts, whereas ordinary maintenance and repair costs are expensed as incurred. Depreciation is computed principally by accelerated methods for the Aerospace and Defense, and Real Estate segments. The calculation of deprecation within the discontinued operation segments (GDX and Fine Chemicals) is computed using the straight-line method. Depreciable lives on buildings and improvements, and machinery and equipment, range from five years to 45 years, and three years to 15 years, respectively.

33

     Impairment of long-lived assets is recognized when events or circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Under SFAS No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, a long-lived asset classified as “held for sale” is initially measured at the lower of its carrying amount or fair value less costs to sell. In the period that the “held for sale” criteria are met, the Company recognizes an impairment charge for any initial adjustment of the long-lived asset amount. Gains or losses not previously recognized resulting from the sale of a long-lived asset is recognized on the date of sale. During 2003, the Company’s GDX Automotive business recognized impairment charges of $6 million to write-down assets at one of its plants in France to their estimated net realizable value upon plant closure (see Note 15). The charge is included as a component of discontinued operations. The impaired assets included buildings and machinery and equipment with a net book value prior to impairment of $10 million and an estimated net realizable value of $4 million.

f. Goodwill and Other Intangible Assets

     Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair values of the identifiable assets acquired and liabilities assumed. Commencing December 1, 2001, the Company no longer amortizes goodwill, but tests for impairment of goodwill 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. The Company performed the annual impairment tests for goodwill as of September 1, 2003 and 2002 and determined that goodwill was not impaired as of those dates.

     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; and results of testing for recoverability of a significant asset group within a reporting unit.

     If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures including: amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties; using present value techniques of estimated future cash flows; or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.

     Identifiable intangible assets, such as patents, trademarks and licenses, are recorded at cost or when acquired as part of a business combination at estimated fair value. Identifiable intangible assets are amortized based on when they provide the Company economic benefit, or using the straight-line method, over their estimated useful life. Amortization periods for identifiable intangible assets range from two to 27 years.

     The Company’s goodwill balance at November 30, 2003 and 2002 relates to the Company’s Aerospace and Defense segment. The changes in the carrying amount of goodwill for the year ended November 30, 2003 were as follows:

34

     A summary of the Company’s other intangible assets subject to amortization as of November 30, 2003 is as follows: