We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and operations, followed by a discussion of our business outlook and results of operations, including results of our operating segments, for the past two fiscal years. We then provide an analysis of our liquidity and capital resources, including discussions of our cash flows, debt arrangements, sources of capital, and financial commitments. In the next section, we discuss the critical accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

The following discussion should be read in conjunction with the other sections of this Report, including the Consolidated Financial Statements and Notes thereto appearing in Item 8. Consolidated Financial Statements and Supplementary Data of this Report, the risk factors appearing in Item 1A. Risk Factors of this Report and the disclaimer regarding forward-looking statements appearing at the beginning of Item 1. Business of this Report. Historical results set forth in Item 6. Selected Financial Data and Item 8. Consolidated Financial Statements and Supplementary Data of this Report should not be taken as indicative of our future operations.

Overview

We are a manufacturer of aerospace and defense systems with a real estate segment that includes activities related to the entitlement, sale, and leasing of our excess real estate assets. Our continuing operations are organized into two segments:

Aerospace and Defense - includes the operations of Aerojet-General Corporation, or Aerojet, which develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. We are one of the largest providers of such propulsion systems in the United States (U.S.) and the only U.S. company that provides both solid and liquid propellant based systems. 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).

Real Estate - includes activities related to the entitlement, sale, and leasing of our excess real estate assets. We own approximately 12,200 acres of land adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California, east of Sacramento (Sacramento Land). We are currently in the process of seeking zoning changes, removal of environmental restrictions and other governmental approvals on a portion of the Sacramento Land to optimize its value. We have filed applications with and submitted information to governmental and regulatory authorities for approvals necessary to re-zone approximately 6,000 acres of the Sacramento Land. We also own approximately 580 acres in Chino Hills, California. We are currently seeking removal of environmental restrictions on the Chino Hills property to optimize the value of such land.

On August 31, 2004, we completed the sale of our GDX business. On November 30, 2005, we completed the sale of our Fine Chemicals business. On November 17, 2006, we completed the sale of our Turbo product line. The GDX and Fine Chemicals businesses and the Turbo product line are classified as discontinued operations in the Consolidated Financial Statements and Notes to Consolidated Financial Statements (see Note 12 in Notes to Consolidated Financial Statements).

Results of Operations

                                                                   Year Ended November 30,
                                                                2008         2007         2006
                                                                        (In millions)

Net sales                                                     $  742.3      $ 745.4      $ 621.1
Costs and expenses
Cost of sales                                                    645.4        657.8        565.0
Selling, general and administrative                                1.9         14.4         28.8
Depreciation and amortization                                     28.3         28.4         27.2
Interest expense                                                  27.7         28.6         27.2
Interest income                                                   (4.2 )       (4.9 )       (3.6 )
Other expense (income), net                                        7.6         (2.6 )       11.7
Unusual items
Shareholder agreement and related costs                           16.8            -            -
Defined benefit pension plan amendment                            14.6            -            -
Legal settlements and estimated loss on legal matters              2.9          3.8          8.5
Customer reimbursement of tax matters                                -          2.3            -
Loss on repayment of debt                                            -          0.6            -
Gain on recoveries                                                (1.2 )       (6.0 )          -

Total costs and expenses                                         739.8        722.4        664.8
Income (loss) from continuing operations before income
taxes and cumulative effect of changes in accounting
principles                                                         2.5         23.0        (43.7 )
Income tax provision (benefit)                                     0.9        (18.1 )       (4.7 )

Income (loss) from continuing operations before cumulative
effect of changes in accounting principles                         1.6         41.1        (39.0 )
(Loss) income from discontinued operations, net of income
taxes                                                             (0.1 )       27.9          2.4

Income (loss) before cumulative effect of changes in
accounting principles                                              1.5         69.0        (36.6 )
Cumulative effect of changes in accounting principles, net
of income taxes                                                      -            -         (1.9 )

Net income (loss)                                             $    1.5      $  69.0      $ (38.5 )

Net Sales

Consolidated net sales decreased to $742.3 million in fiscal 2008 compared to $745.4 million in fiscal 2007. The decrease was primarily the result of the close-out activities of the Titan program in fiscal 2007 partially offset by the $10.0 million sale of 400 acres of our Sacramento Land in the second quarter of fiscal 2008. In addition, fiscal 2008 includes one additional week of net sales of $19.1 million from Aerojet compared to the comparable periods in fiscal 2007 (see Note 1 in Notes to Consolidated Financial Statements).

Consolidated net sales increased to $745.4 million in fiscal 2007 compared to $621.1 million in fiscal 2006. The increase was the result of higher sales on numerous space and defense programs, including the Standard Missile, Orion, and Titan programs. The increase in the Standard Missile program was primarily due to deliveries associated with awards received in fiscal 2006 and the award of a new contract in fiscal 2007 to develop and qualify the Throttling Divert Attitude Control Systems for the Standard Missile 3 program. Capturing the Orion award in fiscal 2006 is another factor driving the fiscal 2007 increase in net sales. The increase in Titan sales during fiscal 2007 was the result of the final close-out activities of the program.

Customers that represented more than 10% of net sales for the fiscal years presented are as follows:

                                          Year Ended November 30,
                                      2008          2007         2006

                   Raytheon               27 %          28 %        19 %
                   Lockheed Martin        26            28          39
                   Boeing                    *             *        10

* Less than 10% of net sales

Effective December 1, 2006, Lockheed Martin and Boeing formed the joint venture United Launch Alliance (ULA). ULA operates the space launch systems using the Atlas V, Delta II, and Delta IV. The formation of ULA impacts the comparability of the net sales in fiscal 2008 and fiscal 2007 to fiscal 2006 for Lockheed Martin and Boeing.

Sales in fiscal 2008, 2007, and 2006 directly and indirectly to the U.S. government and its agencies, including sales to the Company's significant customers discussed above, totaled $641.7 million, $665.9 million, and $523.5 million, respectively. The demand for certain of the Company's services and products is directly related to the level of funding of government programs.

During fiscal 2008, approximately 46% of our net sales were from fixed-price contracts and 41% from cost reimbursable contracts.

Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Changes in Accounting Principles

For fiscal 2008, we reported income from continuing operations before income taxes and cumulative effect of changes in accounting principles of $2.5 million compared to $23.0 million for fiscal 2007. The lower operating results were primarily due to the following:

• Increase of $32.4 million in unusual charges. See discussion of "Unusual Items" below.

• Decline of $12.2 million in segment performance, including environmental provision adjustments, of our Aerospace and Defense segment. See discussion of "Segment Performance" below.

• Decrease of $0.7 million in interest income. The decrease was primarily due to lower average cash levels and rates in fiscal 2008 compared to fiscal 2007.

The factors discussed above were partially offset by the following:

• Decrease of $13.6 million related to employee retirement benefit expense. See discussion of "Retirement Benefit Plans" below.

• Improvement of $6.8 million in segment performance of our Real Estate segment. See discussion of "Segment Performance" below.

• Decrease of $3.5 million related to corporate and other expenses. See discussion of "Corporate and Other Expenses" below.

• Decrease of $0.9 million in interest expense. The decline was primarily due to lower average interest rates on variable rate debt in fiscal 2008.

For fiscal 2007, we reported income from continuing operations before income taxes and cumulative effect of changes in accounting principles of $23.0 million compared to a loss of $43.7 million for fiscal 2006. The improved operating results were primarily due to the following:

• Improvement of $50.8 million in segment performance of our Aerospace and Defense segment. See discussion of "Segment Performance" below.

• Decrease of $21.9 million related to employee retirement benefit expense. See discussion of "Retirement Benefit Plans" below.

• Decrease of $7.8 million in unusual charges. See discussion of "Unusual Items" below.

• Decrease of $4.5 million related to corporate and other expenses. See discussion of "Corporate and Other Expenses" below.

• Increase of $1.3 million in interest income. The increase was primarily due to higher average cash levels and rates during fiscal 2007 compared to fiscal 2006.

The factors discussed above were partially offset by the following:

• Increased interest expense of $1.4 million. The increase was primarily due to higher rates and letter of credit levels during fiscal 2007 compared to fiscal 2006.

Segment Results

We evaluate our operating segments based on several factors, of which the primary financial measure is segment performance. Segment performance, which is a non-GAAP financial measure, represents net sales from continuing operations less applicable costs, expenses and provisions for unusual items relating to the segment. Excluded from segment performance are: corporate income and expenses, interest expense, interest income, income taxes, income or expenses related to divested businesses, and provisions for unusual items not related to the segment. We believe that segment performance provides information useful to investors in understanding our underlying operational performance. Specifically, we believe the exclusion of the items listed above permits an evaluation and a comparison of results for ongoing business operations, and it is on this basis that management internally assesses operational performance.

                                                                   Year Ended November 30,
                                                                2008         2007         2006
                                                                        (In millions)

Net Sales:
Aerospace and Defense                                         $  725.5      $ 739.1      $ 614.6
Real Estate                                                       16.8          6.3          6.5

Total                                                         $  742.3      $ 745.4      $ 621.1

Segment Performance:
Aerospace and Defense                                         $   78.0      $  84.8      $  61.2
Environmental remediation provision adjustments(1)                (5.0 )        0.4         (7.4 )
Retirement benefit plan expense(2)                               (15.7 )      (23.8 )      (34.8 )
Unusual items(3)                                                 (16.5 )       (0.1 )       (8.5 )

Aerospace and Defense Total                                       40.8         61.3         10.5

Real Estate                                                       10.3          3.5          2.3

Total                                                         $   51.1      $  64.8      $  12.8

Reconciliation of segment performance to income (loss) from
continuing operations before income taxes and cumulative
effect of changes in accounting principles:
Segment Performance                                           $   51.1      $  64.8      $  12.8
Interest expense                                                 (27.7 )      (28.6 )      (27.2 )
Interest income                                                    4.2          4.9          3.6
Corporate retirement benefit plan income (expense)(2)              7.7          2.2         (8.7 )
Corporate and other expenses                                     (16.2 )      (19.7 )      (24.2 )
Corporate unusual items(3)                                       (16.6 )       (0.6 )          -

Income (loss) from continuing operations before income
taxes and cumulative effect of changes in accounting
principles                                                    $    2.5      $  23.0      $ (43.7 )

(1) See discussion of environmental remediation provision adjustments under the caption "Environmental Matters" below.

(2) See discussion of retirement benefit plan expense under the caption "Retirement Benefit Plans" below.

(3) See discussion of unusual items under the caption "Unusual Items" below.

Aerospace and Defense

Fiscal 2008

Aerojet reports its fiscal year sales and income under a 52/53 week accounting convention. Fiscal 2008 is a 53 week year with the extra week accounted for in the first quarter of fiscal 2008, or one more week than as reported in fiscal 2007. Sales of $725.5 million for fiscal 2008 decreased from $739.1 million in fiscal 2007, reflecting decreases in various programs, including the Titan program, partially offset by the additional week of net sales of $19.1 million in fiscal 2008.

Segment performance was income of $40.8 million in fiscal 2008 compared to income of $61.3 million in fiscal 2007. The decrease in segment performance is primarily the result of: (i) the favorable performance on the close-out of the Titan program in fiscal 2007; (ii) an unusual charge in fiscal 2008 related to the freeze of the defined benefit pension plan; and (iii) higher estimated environmental remediation costs in fiscal 2008; partially offset by decreased retirement benefit plan expense in fiscal 2008.

Fiscal 2007

Sales for fiscal 2007 were $739.1 million compared to $614.6 million for fiscal 2006, representing a 20% increase. Higher sales volume on numerous space and defense system programs generated the improvement in fiscal 2007. Individual programs with sales increases of greater than $20.0 million during fiscal 2007 compared to fiscal 2006 were Standard Missile, Orion, and Titan.

The $50.8 million improvement in segment performance during fiscal 2007 compared to fiscal 2006 is the result of the following: (i) significantly improved margin on the Titan program as the result of favorable performance on close-out activities; (ii) higher sales volume; (iii) lower retirement benefit plan expense; (iv) lower estimated environmental remediation costs in fiscal 2007; and (v) higher expenses in fiscal 2006 related to legal matters.

Real Estate

Fiscal 2008

Sales for fiscal 2008 were $16.8 million compared to $6.3 million for fiscal 2007. Segment performance was $10.3 million and $3.5 million for fiscal 2008 and 2007, respectively. The increases in sales and segment performance are primarily due to the sale of 400 acres of the Sacramento Land to Elliott Homes Inc. (Elliott) for $10.0 million in cash during the second quarter of fiscal 2008.

Fiscal 2007

Real Estate sales and segment performance for fiscal 2007 were $6.3 million and $3.5 million, respectively, compared to $6.5 million and $2.3 million, respectively, for fiscal 2006. Results for fiscal 2007 and 2006 consist of rental property operations and there were no significant sales of real estate assets. During the third quarter of fiscal 2007, we began recognizing nominal royalty income on a mining agreement with Granite Construction Company.

Corporate and Other Expenses

Corporate and other expenses decreased to $16.2 million for fiscal 2008 compared to $19.7 million for fiscal 2007. The decrease primarily related to the reversal of previously recognized stock-based compensation due to the lower fair value of the stock appreciation rights, partially offset by higher charges for estimated future environmental remediation obligations in fiscal 2008.

Corporate and other expenses decreased to $19.7 million in fiscal 2007 compared to $24.2 million in fiscal 2006. The decrease was primarily due to higher expenses related to the election of the Company's directors in fiscal 2006 and lower costs in fiscal 2007 associated with workers' compensation matters, partially offset by higher charges for estimated future environmental remediation obligations in fiscal 2007.

Corporate and other expenses include costs associated with divested businesses, including legal and environmental costs.

Retirement Benefit Plans

Expense (income) from our retirement benefit plans are as follows:


                                                         Year Ended
                                                        November 30,
                                                 2008       2007       2006
                                                       (In millions)

              Aerospace and Defense             $ 15.7     $ 23.8     $ 34.8
              Corporate                           (7.7 )     (2.2 )      8.7

              Retirement benefit plan expense   $  8.0     $ 21.6     $ 43.5

These decreases are primarily related to an increase in the discount rate used to determine benefit obligations and a reduction in the impact of amortizing prior years' actuarial losses.

Unusual Items


                                                                   Year Ended
                                                                  November 30,
                                                            2008       2007      2006
                                                                  (In millions)

   Aerospace and Defense:
   Legal settlements and estimated loss on legal matters   $  2.9     $  3.8     $ 8.5
   Customer reimbursements of tax recoveries                    -        2.3         -
   Defined benefit pension plan amendment                    13.6          -         -
   Gain on recoveries                                           -       (6.0 )       -

   Aerospace and defense unusual items                       16.5        0.1       8.5

   Corporate:
   Replacement of the previous credit facility                  -        0.6         -
   Gain on settlement                                        (1.2 )        -         -
   Defined benefit pension plan amendment                     1.0          -         -
   Shareholder agreement and related costs                   16.8          -         -

   Corporate unusual items                                   16.6        0.6         -

   Total unusual items                                     $ 33.1     $  0.7     $ 8.5

On November 25, 2008, we decided to amend our defined benefit pension and benefits restoration plans to freeze future accruals under such plans. Effective February 1, 2009, we discontinued future benefit accruals for current salaried employees. No employees lost their previously earned pension benefit. As a result of the amendment and freeze, we incurred a curtailment charge of $14.6 million in the fourth quarter of fiscal 2008 primarily due to the immediate recognition of unrecognized prior service costs.

On March 5, 2008, we entered into a second amended and restated shareholder agreement (Shareholder Agreement) with Steel Partners II L.P. with respect to the election of Directors for the 2008 Annual Meeting and certain other related matters which resulted in a charge of $13.8 million in the first half of fiscal 2008. Additionally,

during the fourth quarter of fiscal 2008, we incurred a charge of $3.0 million associated with two executive severance agreements. The charges were comprised of the following (in millions):

Increases in pension benefits primarily for certain of the Company's officers   $  5.3
Executive severance charges                                                        7.1
Accelerated vesting of stock appreciation rights                                   1.1
Accelerated vesting of restricted stock, service based                             0.6
Accelerated vesting of restricted stock, performance based                         0.7
Professional fees and other                                                        2.0

                                                                                $ 16.8

As a result of the Shareholder Agreement, we were required to fund into a grantor trust on March 12, 2008, from cash on hand, an amount equal to $34.8 million, which represents liabilities associated with the Benefits Restoration Plan (BRP) and amounts payable to certain officers party to executive severance agreements in the event of qualifying terminations of employment following a change of control (as defined in the BRP and the executive severance agreements) of GenCorp. In addition, as a result of the resignation of three additional Board members on May 16, 2008, we were required to fund $0.4 million into a grantor trust on May 22, 2008, which primarily represents the amount payable to an officer party to an executive severance agreement in the event of a qualifying termination of employment following a change of control.

In fiscal 2008, we recorded a charge of $2.9 million related to the estimated unrecoverable costs of legal matters, including $1.7 million associated with the failure to register with the SEC the issuance of certain of our common shares under our defined contribution 401(k) employee benefit plan and $1.2 million related to a legal settlement and other legal matters. We also recorded a $1.2 million gain related to an insurance settlement for an environmental claim.

In fiscal 2007, we recorded $3.8 million related to estimated costs associated with environmental toxic tort legal matters. We recorded an expense of $2.3 million for tax refunds that will be repaid to our defense customers. We also recorded a gain of $6.0 million related to an adjustment of reserves for the allocation of pension benefit costs to U.S. government contracts. We incurred a charge of $0.6 million associated with the replacement of the previous credit facility.

In fiscal 2006, Aerojet recorded a charge of $8.5 million related to a $25 million settlement of a group of environmental toxic tort cases that had been pending in Sacramento Superior Court since 1997.

Environmental Matters

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

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

• accrue for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and when our proportionate share of the costs can be reasonably estimated. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most

probable estimate is used when determinable and the minimum estimate is used when no single amount is more probable; and

• record related estimated recoveries when such recoveries are deemed probable.

In addition to the costs associated with environmental remediation discussed above, we incur expenditures for recurring costs associated with managing hazardous substances or pollutants in ongoing operations which totaled $13.5 million in fiscal 2008, $6.3 million in fiscal 2007, and $7.1 million in fiscal 2006.

Reserves

We review on a quarterly basis estimated future remediation costs that could be incurred over the contractual term or next fifteen years of the expected remediation. We have an established practice of estimating environmental . . .