ITEM 1.    BUSINESS

        Alliant Techsystems Inc. (ATK), which is sometimes called the Company or the Registrant in this report, is a supplier of aerospace and defense products to the U.S. government, America's allies, and major prime contractors. ATK is also a supplier of ammunition to federal and local law enforcement agencies and commercial markets.

        The Company was incorporated as a Delaware corporation as a wholly-owned subsidiary of Honeywell Inc. in May 1990 in connection with Honeywell's plan to spin-off to its stockholders its Defense and Marine Systems Business, its Test Instruments Division and its Signal Analysis Center. The spin-off became effective in September 1990, when Honeywell transferred to the Company substantially all of the assets and liabilities of those businesses. Honeywell subsequently distributed to its stockholders in October 1990 all of the Company's outstanding common stock on a pro rata basis.

        In December 1992, the Company sold its Test Instruments Division. In October 1993, the Company acquired Accudyne Corporation, which manufactured fuzes, and Kilgore Corporation, which primarily manufactured infrared counter-measure flares, and, in November 1993, the Company acquired Ferrulmatic, Inc., which primarily manufactured metal parts for tank ammunition programs. In March 1995, the Company acquired the assets and operations of the Hercules Aerospace Company division of Hercules Incorporated, which was involved in the development and supply of solid rocket propulsion systems, munitions propellants, commercial gun powders, defense electronics systems, self-directed weapons systems and composite structures. In March 1996, after evaluating the Company's strategic plans for the future, the Company elected to discontinue its role as an owner of foreign demilitarization businesses located in the former Soviet republics of Ukraine and Belarus. In February 1997, the Company sold its Marine Systems Group. In February 2001, the Company sold the Kilgore operations, which it had renamed Alliant Kilgore Flares Company LLC.

        On April 20, 2001, the Company purchased from Alcoa Inc., for $708.3 million in cash, all of the issued and outstanding shares of common stock of Cordant Technologies, Inc. (Cordant) following the transfer to and assumption by Alcoa of all of Cordant's assets and liabilities other than those related to its Thiokol propulsion business. On December 7, 2001, the Company purchased the ammunition and related products business, including Federal Cartridge Company, known as the Sporting Equipment Group or SEG, of Blount International, Inc. for 3,048,780 shares of the Company's common stock, with a fair value of $247.8 million, plus $10,000.

        In May 2002, the Company acquired assets and liabilities of the ordnance business of The Boeing Company, a leading producer of medium-caliber gun systems for ground, sea, and air platforms.

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        The following table summarizes the Company's significant acquisitions and divestitures:

        The Company conducts its business through a number of separate legal entities that are listed on Exhibit 21 to this report. These legal entities are grouped under holding companies that correspond to the Company's operating segments. On April 1, 2001, the Company realigned its business operations, combining the Conventional Munitions and Defense Systems operating segments, resulting in two operating segments, Aerospace and Defense. Within these two segments, there are four business lanes: Propulsion and Composites, which are the two business lanes that compose the Aerospace segment; and Conventional Munitions and Precision Capabilities, which are the two lanes that compose the Defense segment. The business lanes represent the Company's core competencies and its focus. The Aerospace segment designs, develops, and manufactures solid rocket propulsion systems for space, strategic, and tactical applications and composite structures for military and commercial aircraft, space launch vehicles, satellites, spacecraft, and weapons systems. The Defense segment designs, develops, and manufactures small-, medium-, and large-caliber ammunition, munitions propellants, commercial gunpowder, anti-tank systems, tactical barrier systems, precision-guided munitions, electronic warfare systems, infantry weapon systems, electro-mechanical and electronic fuzes and proximity sensors, lithium batteries for military and aerospace applications, reloading equipment and other gun care products and accessories.

        Revenues, income from continuing operations, total assets, and other financial data for each of the Company's business segments for the three years ended March 31, 2002, are set forth in Note 15 to the consolidated financial statements, included in Item 8 of this report.

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        On April 1, 2002, subsequent to the end of fiscal 2002, the Company further realigned its business operations. Following the realignment, the Company has three operating segments: Aerospace, Precision Systems, and Ammunition. The diagrams below reflect this realignment. The April 1, 2002 realignment is not reflected in the information contained in this report.

        Many of the Company's products and programs are customarily referred to by customers or in the marketplace by acronyms. Many of these acronyms are included in this report (in parenthesis following the product or program name) for the convenience of subsequent reference, and for the benefit of readers who may be more familiar with the acronyms than with the actual product or program names.

Aerospace

        Propulsion.     ATK designs, develops and produces solid rocket propulsion systems for a variety of U.S. Government and commercial applications. The Company is the leading supplier of solid propulsion rocket motors for space launch vehicles with a broad product portfolio encompassing all vehicle payload classes, from small to heavy-lift. The Company is presently producing solid propulsion systems and related products for NASA's Space Shuttle, Titan IVB, Delta II, Delta III, Delta IV, Atlas IIAS, Athena, Maxus, H-IIA, Pegasus®, Taurus® and Minotaur® launch vehicles. The Company also produces solid rocket propulsion systems for strategic missiles, including Minuteman, Trident II, missile defense systems, and tactical missiles.

        The following table summarizes ATK's principal solid rocket propulsion programs, including identification of the customer and the ultimate end-user:

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Programs and products currently in development.

        Civil Manned Space Launch Vehicles.     The Company is the sole supplier of the reusable solid rocket motors used on NASA's Space Shuttle since its inception. A set of two reusable solid rocket motors provides stage propulsion, in tandem with a liquid propulsion system, for the Space Shuttle. The reusable solid rocket motor uses a metal case that is recovered from the ocean after being released from the Space Shuttle core. The case is then cleaned and refurbished so that it can be filled with propellant and used again.

        The Company's present contract with NASA, under which the Company began making deliveries in 1999, runs through early 2007 and provides for the delivery of 34 flight sets. Negotiations are ongoing to extend the timing of deliveries under the contract through early 2008. According to NASA's current launch manifest, there are currently 33 Space Shuttle launches scheduled through 2007. In addition, NASA has cancelled the X-33 program, the purpose of which was to develop an alternative to the Space Shuttle. With the cancellation of the X-33 program, there is currently no viable domestic alternative to the Space Shuttle or the Company's solid rocket motors that propel it. As a result, the Company believes that the current Space Shuttle fleet will remain the mainstay of the U.S. space program until at least 2012. As the only supplier of the solid rocket motors used for the Space Shuttle, the Company is well positioned to receive another multi-year contract after the completion of the present one. A total of 168 of these motors have been used successfully, and Thiokol has twice been recognized for exceptional safety and quality performance by NASA with the George M. Low award, NASA's highest award for quality, in 1991 and again in 1999.

        Unmanned Space Launch Vehicles.     The Company produces propulsion systems for some of the most significant space launch vehicle programs in the United States, including the Titan, Delta and Atlas programs.

        Titan Solid Rocket Motor Upgrades.     The solid rocket motor upgrade that provides the initial stage propulsion for Lockheed Martin's Titan IVB heavy-lift launch vehicle is used by the U.S. Air Force. The Company completed production on this program in early calendar year 2002. Two motors are used per launch. These motors have three composite case segments. The Company also has a contract for Titan launch operations support through September 2003 for inspection and oversight of solid rocket motor processing operations at the launch sites.

        The Titan launch vehicle family was built for the U.S. Air Force to meet medium-lift requirements in the 1960s. Recently, it has been used primarily to launch unmanned military spacecraft such as heavy photo reconnaissance platforms in low-Earth orbit and geosynchronous communications, missile launch detection and ELINT satellites, which gather electronic information.

        Graphite Epoxy Motors, or GEM.     The GEM series of propulsion systems are used as solid strap-on boosters for Boeing's Delta launch vehicle family, which consists of the Delta II, Delta III and Delta IV vehicles. The Delta II is a medium-lift expendable launch vehicle developed for both government and commercial applications. The Delta II employs the GEM-40, a graphite epoxy motor measuring 40 inches in diameter. The Company also produces, under contract to Boeing, a larger strap-on GEM-46 booster for the enhanced medium-lift Delta III expendable launch vehicle. Boeing also awarded the Company a contract to develop and produce a new, even larger GEM-60 booster to be used with versions of the new Delta IV expendable launch vehicle. Delta II uses either three, four or nine motors per launch, Delta III uses nine motors per launch, and the Company expects the Delta IV Medium Plus vehicles to use either two or four motors per launch.

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        With a 40-year history, the Delta family of expendable launch vehicles has what is perhaps the most successful flight record of any rocket currently in service. Delta II has had 49 consecutive successful launches since January 1997. The Delta family has also launched into orbit the first passive communications satellite, ECHO, the first European satellite, Ariel 1, and the first communications satellite to reach geosynchronous orbit, Syncom 2.

        CASTOR® Motors.     The CASTOR® family of solid rocket motors are used in the first and second stages of a number of small payload expendable launch vehicles and as strap-on boosters. CASTOR 120® is used as the first stage on the Taurus® launch vehicle, the first stage on Athena I, and the first and second stage on Athena II launch vehicles. CASTOR® IV is used as strap-on thrust augmentation on the Atlas IIAS, with four motors used per launch. CASTOR IVA-XL motors are used as strap-on boosters on the Japanese H-IIA launch vehicles, with two or four motors used per launch. Taurus and Athena I and II are small payload launch vehicles, and Atlas IIAS and Japanese H-IIA are medium-lift vehicles. CASTOR® IVB is also used on the Maxus sounding rocket.

        STAR™ Motors and Stages.     The STAR™ family of motors are used as the upper stages for a variety of launch vehicles, for final positioning of satellites, or to propel a spacecraft beyond earth's orbit. These motors come in a wide variety of sizes (3-in. to 92-in. diameter) to meet a range of payload applications. STAR™ motors have a 40-year history with more than 3,600 successful tests and flights with a 99.9% success rate. Integrated STAR™ stages combine proven STAR™ motors with attachment structures and a common avionics module to provide advanced upper stages that are ELV and Shuttle compatible.

        Orion Motors.     Orion motors are used on the Pegasus®, Taurus® and Minotaur® launch vehicles. Pegasus® is a small-lift air-launched vehicle initially lifted by a conventional aircraft. Minotaur® is a ground-launched vehicle for small payloads. Taurus® is a ground-launched vehicle for payloads larger than those that can be carried by Pegasus® and Minotaur®. Pegasus® and Taurus® carry U.S. Government, foreign government and commercial payloads. Minotaur® carries only U.S. Government payloads. Each Pegasus® vehicle contains three solid propulsion stages, all of which the Company produces. The three Pegasus® motors are also used in upper stages on Taurus® and two of the motors are used in upper stages on Minotaur®. Minotaur® also uses two refurbished motors from old Minuteman strategic missiles.

        Strategic.     The Company provides propulsion systems for strategic missiles such as the Trident II and Minuteman, as well as those being proposed for Ground-based Midcourse Defense.

        Intercontinental Ballistic Missiles.     Trident II is a submarine-launched intercontinental ballistic missile composed of three solid propulsion stages. The Company produces each of the three solid propulsion stages of this missile under a contract with Lockheed Martin. In addition to the Trident II production contract, the Company has contracts with Lockheed Martin to provide operational support services for the U.S. Navy's existing fleet of both Trident I and Trident II missiles.

        Through a joint venture with the Pratt & Whitney Space and Missile Propulsion (formerly Chemical Systems Division) of United Technologies, the Company produces replacement solid rocket motors for all three stages of Minuteman III, which is a silo-launched intercontinental ballistic missile. The Company also refurbishes excess Minuteman solid rocket motors for use as U.S. Air Force target vehicles. The Company developed and produced all first stage motors for the Peacekeeper and Minuteman I, II, and III missiles, and third stages for both the Peacekeeper and Minuteman II missiles for the U.S. Air Force and provides continuing aging studies and some operational support services for these missile systems.

        Ground-based Midcourse Defense.     The Company is currently working as a motor supplier and subcontractor for the development and testing phase for multiple boost vehicle configurations of the

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U.S. Government's Ground-based Midcourse Defense ground-based interceptor for incoming ballistic missiles. The Company is developing a vectorable nozzle version of the Delta II GEM-40 booster for use as the first stage in one vehicle configuration and is under contract to Orbital Sciences for derivatives of the three Pegasus motors in a second boost vehicle configuration. Evaluation is on-going which may add or change boost vehicle configurations in the program. The Company is well positioned to participate in all evolving configurations. No final decision has yet been made regarding future deployment and production of this system.

        Tactical.     The Company designs, develops and supplies solid propulsion systems and advanced warheads for various U.S. Department of Defense tactical weapons used by the U.S. Army, Navy and Air Force. These include air-to-air missiles, air-to-ground missiles, ground-to-ground missiles, and gun-launched projectiles.

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Air-to-Air—the AIM-9X Sidewinder and the AIM-7 Sparrow air intercept missiles, as well as the AIM-120 Advanced Medium-Range Air-to-Air Missile, or AMRAAM, for which the Company is the sole producer of its rocket motor;



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Air-to-Ground—the Hellfire II/Longbow, an anti-armor missile generally fired from a helicopter, the Sensor Fuzed Weapon, which is used to neutralize moving and stationary land combat vehicles, the Brimstone, also an anti-armor air-to-ground missile, the Maverick AGM-65, a general purpose air-to-ground missile, and the RIM-7 Sea Sparrow and Evolved Sea Sparrow missile, the U.S. Navy's intercept missiles;



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Ground-to-Ground—the TOW-2, a tube-launched, optically tracked and wire-guided anti-tank missile for which the Company has been the U.S. Army's primary supplier of flight motors since the program's inception in 1981, and the U.S. Army Tactical Missile System, or ATACMS, a large, stationary rocket launched weapon for which the Company manufactures the steel rocket motor case; and



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Projectiles—gun-launched, rocket-assisted munitions such as ANSR, ERGM, and TERM-KE.

        Production programs in related areas include warheads for the Maverick, Hellfire II/Longbow and AMRAAM missile systems, metal cases for the ATACMS ground-to-ground missile and gas generators for the Trident II and Tomahawk Cruise missiles. In advanced warhead systems, the Company currently has contracts for the production of warheads for the Hellfire/Longbow and AMRAAM missiles and a contract for the development and production of the Brimstone warhead and rocket motors. Major development programs include the propulsion systems for the Evolved Sea Sparrow Missile, a faster longer-range version of the Sea Sparrow propulsion system, the AIM-9X Sidewinder, the AMRAAM Propulsion Enhancement Program, the Line-of-Sight Anti-Tank (LOSAT) missile and the advanced smart 120mm kinetic energy tank round. The Company is the only propulsion source on the advanced smart 120mm kinetic energy tank round. The Company has recently completed qualification of the propulsion system for the Evolved Sea Sparrow missile program, which is a NATO program involving 13 nations. The Company is also pursuing propulsion systems and related technology for Standard Missile variants, which are being developed by the U.S. Navy for its Sea-based Midcourse Defense system, a proposed broad ranging missile defense system for a defined region or area. Other new business opportunities being pursued are the Advanced Gun System Land Attack Projectile, a 155mm shipboard gun munition, and other advanced long-range projectiles such as ANSR and ERGM.

        Composites.     ATK has been a leader in the design and manufacturing of composite structures for 40 years, pioneering the use of composites in many of today's markets. Composite structures are formed from high-strength carbon fibers and resin, which are sold to prime contractors in the aerospace and defense industries. Composite structures have performance advantages over metal structures largely through weight reduction, but also may be designed to enhance other performance characteristics such as fatigue resistance and thermal stability. These advantages, coupled with improved design and analysis

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capabilities and manufacturing process technologies, continue to expand the markets and applications using these structures. The Company has the ability to manufacture some of the largest composite structures in the world and provide composite structures for space launch vehicles, satellite platforms, military aircraft, commercial aircraft and satellites.

        The following table summarizes the principal uses for composite structures, including identification of the customer and the ultimate end-user:

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Programs and products currently in development.

        Space Launch Vehicle Structures.     In the space launch vehicle structures area, the Company is under contract with Boeing to produce composite structures for its Delta II, III and IV family of expendable launch vehicles. For the Delta IV the Company makes the Evolved Expendable Launch Vehicle/Delta IV common booster core nose cones, interstages, composite payload fairing, payload adapters and other large vehicle structures. The Company also produces large launch vehicle structure components for Lockheed Martin's Atlas V family of expendable launch vehicles, including interstages and a heat shield. Other launch vehicle structures being produced include the payload fairing for Orbital Sciences' Pegasus®, and a payload adapter structure for Ariane V. The Company also produces composite cases for several solid rocket motors. Current programs include GEM motor cases for Delta II, III, IV, and Ground-based Midcourse Defense; Trident II first and second stage; and cases for motors used in Pegasus®, Taurus®, Athena and Minotaur®.

        Aircraft Structures.     In the aircraft structures area, the Company has a contract to develop and produce fuselage skins for the Bell 609 commercial tilt-rotor aircraft. The Company is also under contract to produce a counterbalance mechanism for the C-17 transport aircraft, composite door springs for Boeing's 767 commercial aircraft and composite pivot shafts, stabilator skins and bypass offtake screens for F-22 military aircraft. Other new business opportunities being pursued include composite structure components on the F/A-18, C-17, F-22 and JSF military aircraft.

        Satellites.     The Company designs and fabricates composite structure components and assemblies for commercial, civil and military satellites. Products include instrument benches and dimensionally stable assemblies, antennae and reflector assemblies, spacecraft bus structures and other component parts.

        Military Weapons.     Composite structure programs and opportunities include components and assemblies for missiles, military land vehicles, launch tubes for the Army's Javelin anti-tank missile, gun turrets, torpedo launch tubes, composite overwrapped pressure vessels for use on satellites and various structures for liquid propulsion tanks and reusable launch vehicles.

        Other Aerospace Products.     The Company also manufactures visible and infrared illuminating devices and laser initiation devices and provides solid rocket motor propellant reclamation services.

Defense

        Conventional Munitions.     ATK designs, develops and manufactures small-, medium- and large-caliber ammunition, including tank ammunition, commercial gunpowder, and munition propellants for the U.S. and allied governments as well as for commercial applications.

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        The following table summarizes ATK's principal conventional munitions programs, including identification of the customer and the ultimate end-user:

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Programs and products currently in development.

        Small-Caliber Ammunition.     The Company manufactures and develops small-caliber ammunition for the U.S. military, U.S. allies, federal and local law enforcement agencies, and commercial markets. The Company produces approximately 500 million rounds of ammunition per year for the U.S. military and U.S. allies, consisting of 5.56mm, 7.62mm, .30 caliber, and .50 caliber cartridges.

        The Company's small-caliber ammunition operations for the U.S. military and U.S. allies are conducted at the Lake City Army Ammunition Plant in Independence, Missouri, which supplies over 95% of the Army's small-caliber ammunition needs and is the Army's only small-caliber ammunition production facility. The Company took over operations of this facility on April 1, 2000, and is responsible for managing it, including leasing excess space to third parties in the private sector. The Company has a 10-year production contract to manage this plant that expires in April 2010, along with a facilities-use contract with this plant that expires in April 2025. Although this facilities-use contract expires 15 years after the plant production contract, were the plant production contract not renewed, the Company believes the U.S. Army would relieve the Company of all of its obligations under the facilities-use contract.

        In addition to production, the Company performs independent research and development for military ammunition and ammunition manufacture and supports the Army Research Development Engineering Center at Picatinny Arsenal, New Jersey for Department of Defense sponsored product design, development and testing. The Company is currently under contract to the U.S. Government for production quantities of 5.56mm ammunition incorporating lead-free projectiles, or "green" ammunition, and expect it will be phased into use for training over the next several years to replace most of the current training ammunition.

        Following the Company's acquisition of the ammunition and related products business, known as the Sporting Equipment Group or SEG, of Blount International, in December 2001, the Company now also manufactures small-caliber ammunition for federal and local law enforcement agencies and commercial markets. Principal products in the ammunition operations include ammunition for shotguns, pistols and rifles, and industrial power loads for the construction industry. These ammunition products are marketed under a number of well-known brand names including Federal (Premium, Gold Medal and Classic), CCI, Speer (Gold Dot and Blazer) and Estate Cartridge. All of these products are well known in their respective markets and are recognized for their quality by law enforcement officials and shooting sports enthusiasts. These products are distributed via mass merchants, specialty sporting equipment stores, specialty sporting equipment distributors, law enforcement agencies, and government agencies.

        Medium-Caliber Ammunition.     The Company is a leading supplier of medium-caliber ammunition and fuzes and produces, designs and develops medium-caliber ammunition for the U.S. military and U.S. allies.

        Production programs include:

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the 25mm family of Bushmaster rounds used for the main armaments of the U.S. Army's Bradley Infantry Fighting Vehicle and the U.S. Marine Corps' Light Armored Vehicle, as well as by some of the U.S. Navy's shipboard defense systems and by other fighting platforms of U.S. allies;



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the Lightweight 30mm ammunition for the U.S. Army's Apache attack helicopter;

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the GAU-8/A 30mm family of armor-piercing, high-explosive incendiary and target practice rounds currently used by the U.S. Air Force's A-10 close combat support aircraft and planned for use on the Marine Corps' new Advanced Amphibious Assault Vehicle;



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20mm round for U.S. Air Force and Navy fighter aircraft;



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the PGU-32 25mm round for the U.S. Marine Corps AV-8B aircraft; and



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the PGU-38 25mm enhanced combat rounds for the U.S. Air Force's AC-130 gunship.

        Development efforts include programs to improve the performance of medium-caliber ammunition in terms of lethality. The Company conducted a live fire demonstration in fiscal 2002 that illustrated the accuracy and repeatability of the turns/time fuze for an Air Burst Munition.

        The Company is also the only producer of the M758, M759 and FMU-151 fuzes for the Bradley Infantry Fighting Vehicle, the Apache helicopter, and the AC-130 gunship's high-explosive medium-caliber ammunition.

        Tank Ammunition.     The Company produces and develops a family of tactical and training tank rounds that are used by the Abrams tanks of the U.S. Army, Army Reserve, National Guard, Marine Corps and U.S. allies. Such rounds include the M830A1 multi-purpose round and the M831A1 and M865 training rounds. The Company is the only producer of the M830A1 multi-purpose round. The Company is one of two suppliers to the U.S. Government for the M831A1 and M865 training rounds. The Company is currently under contract to the U.S. Army to develop the M829A3 advanced kinetic energy rounds and the multi-purpose anti-tank training round for future training requirements. Some of the tank ammunition contains depleted uranium which is used for its armor penetrating qualities. Questions have been raised about the health and environmental effects of depleted uranium. The Company is also able to manufacture tank ammunition using alternatives to depleted uranium such as tungsten. As a result, the Company does not believe that a move by the U.S. Government or other customers away from the use of depleted uranium would have any material impact on sales or margins.

        Mid Range Munition.     The Company is currently developing an extended range kinetic energy tank round for use by the U.S. Army's Future Combat System (FCS) vehicle. This tank round will allow beyond-line-of-sight engagements, and the Company anticipates production to begin in 2008. The system utilizes a front-end sensor that locates intended targets and the extended range is provided by a rocket motor propulsion system. Multi-Role Armament Ammunition Suite (MRAAS) is a related development effort in support of the FCS combat vehicle.

        Precision Munitions.     The Company has entered into an agreement with GIWS, a joint venture between Rheinmetall W & M GmbH and Diehl Stiftung & Co., to sell the SMArt 155® 155mm sensor fuzed munition in the United States and other countries. The Company estimates that future funding for a Sensor Fuzed Munition program appears likely in 2003 or 2004. Additionally, the Company was recently awarded a contract to support the development of the Raytheon Advanced Gun System 155mm Land Attack Projectile proposed to be used in the U.S. Navy's new destroyer, the DD(X). Together with the prime contractor Aerojet-General Corporation, a subsidiary of GenCorp Inc., the Company developed and produced the Sense and Destroy Armor Munition, or SADARM, a howitzer-fired anti-armor munition. Future funding for this program was terminated in the latest Defense Appropriations and Authorization Bill, and the Company completed production on this program in fiscal 2002.

        Solid Extruded Propellants.     The Company manufactures, designs and develops solid extruded propellants for use in over 25 types of ammunition and rockets used by the U.S. military services. The Company also loads, assembles and packs 155mm artillery propelling charges.

        Primary production programs include propellants for multiple training and war reserve 120mm tank rounds, the modular artillery charge system, and 25mm and 30mm ammunition. The Company is also the

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only supplier to the U.S. Government of Mk-90 propellant grains for use in the Hydra 70 missile and launch motors for the TOW II missile. The Company is a major producer of several types of smokeless nitrocellulose, which is a primary ingredient in the manufacturing of ammunition propellants and powders. In addition to the military programs, the Company produces a wide range of commercial gun powders for manufacturers of sporting ammunition and reloaders, who make their own bullets by refilling previously fired bullet casings.

        Propellant development opportunities being pursued include next-generation 2.75" rocket propellant grain, environmentally friendly propellant, and propellant for advanced artillery charges.

        Commercial Accessories and Optics Products.     Following the Company's acquisition of SEG, the Company now manufactures reloading equipment, gun care products and accessories, and distributes imported sports optical products. Principal products in the accessories operations include reloading equipment for use by hunters and sportsmen who prefer to reload their own ammunition, gun care products and accessories, and trap-shooting products. These products are sold under well-known brand names including RCBS, Outers, and Ram-Line. Principal products in the optics operations include binoculars, scopes and scope mounting systems, which are marketed under a number of well-known brand names, including Simmons, Redfield and Weaver. These products are distributed via mass merchants, specialty sporting equipment stores, and specialty sporting equipment distributors, and have leading market shares in their respective product categories.

        Precision Capabilities.     ATK designs, develops and manufactures anti-tank barriers, electronic warfare systems, electronic support equipment, missile warning systems, infantry weapons systems, electro-mechanical and electronic fuzes, smart weapons, sensors, demolition systems and batteries for military and aerospace applications for the U.S. and allied governments.

        The following table summarizes ATK's principal defense systems programs, including identification of both the customer and the ultimate end-user:

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Programs and products currently in development.

        Integrated Defense Systems.     The Company develops and produces barrier systems, weapons systems and precision munitions, along with the AAR-47 missile warning system.

        Barrier Systems.     The Company produces and develops advanced barrier systems. Primary production programs are the Volcano system, a modular barrier system delivered from ground and air platforms, and Shielder, a vehicle-launched smart anti-tank munition system, for which the Company is the system's prime contractor to the U.K.'s Ministry of Defense. The Company has other international contracts and opportunities in this area.

        There has been growing international interest in developing alternatives to current land barrier systems culminating in the Ottawa Convention sponsored by the United Nations. The Company has contracts to develop the Anti-Personnel Land Mine Alternative program, or APL-A, which is designed to be an integrated barrier system having operator command and control capabilities as an alternative to current potentially indiscriminate land mines and mine fields. The Company believes this system will provide an increased measure of operational effectiveness and minimize risks to friendly troops and civilians. In 2001, the Company was announced as a subcontractor on another team which the U.S. Government selected to develop the next-generation scatterable barrier system. These awards put the Company at the forefront of barrier system development in the United States.

        Weapon Systems.     The Objective Individual Combat Weapon, or OICW, is a lightweight, shoulder-fired weapon designed to gradually replace the M16 rifle/M203 grenade launcher as the primary weapon of the U.S. Infantry. The system consists of a combination weapon that fires both a 20mm high-explosive bursting munition with a smart fuze and a 5.56mm kinetic energy round and utilizes a ballistic fire control system with thermal sights. The Company is responsible for systems integration and development of the weapon system and its high-explosive ammunition.

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        The Company has also developed the Badger fighting position excavator for U.S. and international applications. This excavator explosively fractures the ground, which significantly reduces a soldier's foxhole digging time while increasing safety.

        Missile Warning System.     The Company produces the AAR-47 missile warning system, a passive electro-optic threat warning device used to protect low, slow-flying helicopters and fixed-wing aircraft by detecting ground-to-air-missiles. The Company completed a production contract for the system and has upgraded the central processor unit, both hardware and software, for improved probabilities of detection, longer warning times and lower false alarm rates. The Company also won a competitive bid for an upgraded, higher performance sensor to include a laser warning capability. The sensor upgrade was completed in June 2001 and the Company expects full scale production to begin in the quarter ending December 31, 2002.

        Electronic Support Equipment.     Electronic support equipment programs include the Common Munitions BIT/Reprogramming Equipment, or CMBRE, which is a portable field tester/mission programmer with a common interface to support the growing U.S. inventory of smart weapons. Smart weapons provide mid-air guidance updates and can locate, track and attack targets at extended range. Production of the Common Munitions BIT/Reprogramming Equipment began in fiscal 1998 and is expected to continue for eight years. Other programs include the analog-to-digital adaptable recorder input-output, which is a multi-channel data formatter for high-speed digital recorders. The Company also has programs to design, develop and test advanced solid state laser radar, which is a next-generation seeker technology for smart weapons.

        The Company is also pursuing new business opportunities including sensors and seekers for smart munitions, guided projectile systems and potential international missile warning system programs.

        Fuzes.     The Company develops and manufactures fuzes for the United States and its allies.

        Gun Hardened Fuzes.     Sole source fuze production programs include the safety and arming subsystem for the M734A1 fuze for mortar rounds. The safety and arming subsystem ensures that a round is armed and ready to fire only after it has traveled a safe distance from the barrel. The Company is also developing and has been awarded a Low Rate Initial Production contract for the U.S. Navy's Mk 419 Multi-Function Fuze which provides point detonation, delay, variable time and proximity functions. The Company is also developing the U.S. Army's Electronic Time Fuze for Mortars.

        Air Armament Fuzes.     The Company is under contract to produce the DSU-33B/B proximity sensor for air-delivered bombs. This sensor allows a bomb to be detonated as it approaches the ground, thereby increasing the bomb's overall effectiveness. In addition, the Company has recently completed four contracts with U.S. allied nations for the production of the FMU-139 bomb fuze, and has been awarded a contract with the U.S. Navy to build approximately 18,000 FMU-139 Accessory Kits. The Company has a U.S. Air Force development contract for the Hard Target Smart Fuze (HTSF) and has been awarded the first two years of Pre-Production options. In addition, the Company is under contract to the U.S. Air Force to develop the next-generation hard target fuze, the Multiple Event Hard Target Fuze.

        Embedded Fuzes.     The Company has entered low rate initial production for the Brilliant Anti-Tank, or BAT, Submunition which is an electronic safe and arm device. The Company also produces the Selectable Light Attack Munition, or SLAM, a demolition system for U.S. Special Operation Forces.

        Batteries.     The Company develops and manufactures specialized lithium batteries for U.S. and foreign military and aerospace customers. The principal lithium battery products are reserve batteries, which are used in such applications as anti-tank barriers, fuzes and artillery systems that require long-term

17

storage capacity. The Company has been awarded contracts for the U.S. Army's M767 and MOFA fuzes. The Company is developing a LI-ION Polymer Battery for the U.S. Navy's Advanced Sailor Delivery System (ASDS).

Major Customers

        The Company's sales are predominantly derived from contracts with agencies of the U.S. Government and its prime contractors and subcontractors. The various U.S. Government customers, which include NASA, the U.S. Army, Navy and Air Force, exercise independent purchasing power. As a result, sales to the U.S. Government generally are not regarded as constituting sales to one customer. Instead, each contracting customer entity is considered to be a separate customer.

        The Company's U.S. Government sales, including sales to U.S. Government prime contractors, during the last three fiscal years are summarized in the following table:

        During fiscal 2002, approximately 75% of the Company's sales were derived from contracts with the U.S. Government or U.S. Government prime contractors. Approximately 20% of the Company's sales in fiscal 2002 were derived from the reusable solid rocket motor contract with NASA. This significant reliance upon contracts related to U.S. Government programs entails inherent benefits and risks, including those particular to the defense and aerospace industry.

        The following table summarizes the approximate percentage breakdown of fiscal 2002 sales to the U.S. Government as a prime contractor and a subcontractor:

        The following table summarizes the approximate percentage breakdown of all fiscal 2002 sales to various categories of customers:

        During fiscal 2002, in addition to the sales to the U.S. Government customers listed above, sales to The Boeing Company and its affiliates accounted for more than 10% of sales. These sales related to multiple contracts and included commercial contracts. The Company's top ten contracts accounted for approximately 55% of fiscal 2002 net sales.

        Approximately 7% of fiscal 2002 sales were to foreign governments and corporations approved by the Department of Defense and the State Department. The vast majority of these sales are in the Defense segment. These products are sold both directly and through the U.S. Government, primarily to NATO

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allies or other governments friendly to the United States. Export sales for each of the last three fiscal years are summarized below:

        Major law enforcement customers include the New York City Police Department, the Federal Bureau of Investigation, and the U.S. Secret Service. Major commercial customers include Wal-Mart, Accusport, and Ellett Brothers.

U.S. Government Contracts and Regulations

        Types of Contracts.     The Company's U.S. Government contracts can be categorized as either "cost-plus" or "fixed-price."

        Cost-Plus Contracts.     Cost-plus contracts are either cost-plus-fixed-fee, cost-plus-incentive-fee, or cost-plus-award-fee contracts. Cost-plus-fixed-fee contracts provide for reimbursement of costs, to the extent that the costs are allowable, and the payment of a fixed fee. Cost-plus-incentive-fee contracts and cost-plus-award-fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule, and performance.

        Fixed-Price Contracts.     Fixed-price contracts are either firm-fixed-price, fixed-price-incentive, or fixed- price-level-of-effort contracts. Under firm-fixed-price contracts, the Company agrees to perform certain work for a fixed price and realize all the benefit or detriment resulting from decreases or increases in the costs of performing the contract. Fixed-price-incentive contracts are fixed-price contracts providing for adjustment of profit and establishment of final contract prices by a formula based on the relationship which total final costs bear to total target cost. The final contract price under a fixed-price-incentive contract is a function of cost, which may be affected by schedule and performance. Fixed-price-level-of-effort contracts are generally structured with a fixed price per labor hour, subject to the customers' labor hour needs up to a contract cap. All fixed-price contracts present the inherent risk of unreimbursed cost overruns, which could have a material adverse effect on results of operations or financial condition. In addition, certain costs, including certain financing costs, portions of research and development costs, and certain marketing expenses related to the preparation of competitive bids and proposals and international sales, are not reimbursable under U.S. Government contracts. The U.S. Government also regulates the methods under which costs are allocated to U.S. Government contracts.

        The following table summarizes how much each of these types of contracts contributed to the Company's U.S. Government business in fiscal 2002:

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        Contract Termination.     The terms of U.S. Government contracts permit the U.S. Government to terminate the contracts, either for its convenience or in the event of a default by the contractor. Upon termination of a cost-plus contract, the contractor is entitled to reimbursement of its allowable costs. If the termination is for convenience, the contractor is also entitled to receive payment of a total fee proportionate to the percentage of the work completed under the contract. Upon termination of fixed-price contracts, the contractor is entitled to receive payment for items delivered to and accepted by the U.S. Government. If the termination is for convenience, the contractor is also entitled to receive payment of fair compensation for work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed. If a contract termination is for default:

•

the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government,



•

the U.S. Government is not liable for the contractor's costs for unaccepted items, and is entitled to repayment of any advance payments and progress payments related to the terminated portions of the contract, and



•

the contractor may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.

        Loss of Appropriations.     U.S. Government contracts are also conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. In addition, most U.S. Government contracts are subject to modification in the event of changes in funding. Any failure by Congress to appropriate additional funds to any program in which the Company participates, or any contract modification as a result of funding changes, could materially delay or terminate the program. This could have a material adverse effect on future results of operations or financial condition.

        Reductions or Changes in Military Expenditures.     Although the Company expects the U.S. defense budget to increase over the next five years, future levels of defense spending cannot be predicted with certainty. The impact of possible future declines in the level of defense procurement on the Company's results of operations or financial condition will depend upon the timing and size of the changes and the Company's ability to offset their impact with new business, business consolidations, or cost reductions. The loss or significant curtailment of a material program in which the Company participates could have a material adverse effect on future results of operations and financial condition.

        Procurement and Other Related Laws and Regulations.     The Company is subject to extensive and complex U.S. Government procurement laws and regulations. These laws and regulations provide for ongoing U.S. Government audits and reviews of contract procurement, performance, and administration. The Company could suffer adverse consequences if it were to:

•

fail to comply, even inadvertently, with these laws and regulations or with laws governing the export of munitions and other controlled products and commodities; or



•

commit a significant violation of any other federal law.

        These consequences potentially include:

•

contract termination;



•

civil and criminal penalties; and

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•

under certain circumstances, the Company's suspension and debarment, or that of one of its subsidiaries involved in the program, from future U.S. Government contracts for a specified period of time.

        As a government contractor, the Company is subject to audit and review by the U.S. Government of contract performance and of accounting and general practices relating to contracts. The costs and prices under these contracts may be subject to adjustment based upon the results of the audit. To date, these audits have not had a material effect on results of operations or financial condition. However, the Company cannot ensure that future audits will not have a material adverse effect on business, financial condition, or results of operations.

        In addition, licenses are required from U.S. Government agencies for export from the United States of many products. The Company is currently not permitted to export some products.

        Competitive Bidding.     The Company obtains military contracts through either competitive bidding or sole-source procurement. A significant portion of the Company's sales are from contracts that were awarded after a competitive bidding process that often involved many bidders. A similar competitive bidding process is likely to apply to the Company's efforts to win future contract awards. There is always the risk in both competitive bidding and sole-source procurements that if a bid is submitted and a contract is subsequently awarded, actual performance costs may exceed the projected costs upon which the submitted bid or contract price was based. If actual costs exceed the projected costs on which bids or contract prices were based, profitability could be materially adversely affected.

        Novation of U.S. Government Contracts.     When U.S. Government contracts are transferred from one contractor to another contractor, such as in connection with the sale of a business, the U.S. Government may require that the parties enter into a novation agreement. A novation agreement generally provides that:

•

the transferring contractor guarantees or otherwise assumes liability for the performance of the acquiring contractor's obligations under the contract;



•

the acquiring contractor assumes all obligations under the contract; and



•

the U.S. Government recognizes the transfer of the contract and related assets.

        The Company has entered into similar novation agreements in connection with the sale of the former Marine Systems Group. In this case, however, as the seller, the Company has guaranteed performance of the buyer's obligations under the contracts transferred to the buyer, and the buyer, rather than the Company, has the performance and indemnification obligations described above.

        The Company completed in April 2001 a novation agreement covering contracts acquired in the Hercules Aerospace Company acquisition. This novation agreement provides that the Company assumes all obligations under the acquired contracts and that the U.S. Government recognizes the transfer to the Company of the acquired contracts and related assets. The acquired contracts are scheduled to be performed over time, and it is not expected that they will be fully and finally discharged for several years. Hercules has agreed to indemnify the Company against any liability that the Company may incur under the novation agreement by reason of any prior failure by Hercules to perform its obligations under the novated contracts. The Company has agreed to indemnify Hercules against any liability that Hercules may incur under the novation agreement by reason of any failure by the Company to perform its obligations under the novated contracts.

        The Company was not required to novate the contracts acquired in the Thiokol acquisition because the Company acquired Cordant's stock, rather than the assets of the business. The Company has provided the U.S. Government with a corporate guarantee that its obligations under the contracts will be fulfilled.

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        Other Risks Associated With U.S. Government Contracts.     In addition, like all defense contractors, the Company is subject to risks associated with uncertain cost factors related to:

•

scarce technological skills and components;



•

the frequent need to bid on programs in advance of design completion, which may result in unforeseen technological difficulties and/or cost overruns;



•

the substantial time and effort required for relatively unproductive design and development;



•

design complexity;



•

rapid obsolescence; and



•

the potential need for design improvement.

Competition

        The Company encounters intense competition for most contracts from numerous other companies. Some of these companies have substantially greater financial, technical, marketing, manufacturing, distribution, and other resources. The Company's ability to compete for these contracts depends to a large extent upon:

•

the effectiveness and innovativeness of research and development programs;



•

the ability to offer better program performance than the competitors at a lower cost; and



•

the readiness with respect to facilities, equipment, and personnel to undertake the programs for which it competes.

        In some instances, the U.S. Government directs a program to a single supplier. In these cases, there may be other suppliers who have the capability to compete for the programs involved, but they can only enter or reenter the market if the U.S. Government chooses to open the particular program to competition. The Company's principal sole-source contracts are for the following programs: reusable solid rocket motor (RSRM) Space Shuttle boosters, Trident II missiles, Titan IV solid rocket motor upgrade space boosters, AMRAAM, Hellfire, Sensor Fuzed Weapon propulsion systems, M830A1 multi-purpose tank ammunition rounds, Volcano anti-tank scatterable barriers, M758 fuze for medium-caliber ammunition, the AAR-47 missile warning system, and Javelin launch tubes.

        In the case of the RSRM Space Shuttle boosters, the Company believes that the time and cost to qualify a second source of supply would be prohibitive in light of the Space Shuttle flight schedule and current levels of government expenditures on the Space Shuttle program. Liquid propulsion systems that may be competitive with the RSRM are under study, but are not yet developed. The Company expects to retain its status as the only qualified supplier for the RSRM.

        In the market for ammunition and accessories, the Company competes against manufacturers that have well-established brand names and strong market positions.

        The Company generally faces competition from a number of competitors in each business area, although no single competitor competes along all four of the Company's business lanes. The Company's principal competitors in each of its business lanes are as follows:

•

Propulsion:   Pratt & Whitney Space and Missile Propulsion of United Technologies Corporation; Aerojet-General Corporation, a subsidiary of GenCorp Inc.; Atlantic Research Corporation, a subsidiary of Sequa Corporation; and Rocketdyne, Inc., a subsidiary of Boeing



•

Composites:   The Boeing Company; Lockheed Martin Corporation; Raytheon Company; Bell Helicopter Textron, a subsidiary of Textron Inc.; Northrop Grumman Corporation; Composite Optics,

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Incorporated; Applied Aerospace Structures Corporation; and Programmed Composites Inc., a division of Pressure Systems, Inc.

•

Conventional Munitions:   General Dynamics Ordnance and Tactical Systems, Inc., a subsidiary of General Dynamics (formerly Primex Technologies, Inc.); Fiocchi; PMC; Remington; Sellier; and Winchester



•

Precision Capabilities:   Raytheon; Textron Inc.; L3/KDI; L3/Bulova Technologies; and Giat Industries S.A.

        The downsizing of the munitions industrial base has resulted in a reduction in the number of competitors through consolidations and departures from the industry. This has reduced the number of competitors for some programs, but has strengthened the capabilities of some of the remaining competitors. In addition, it is possible that there will be increasing competition from the remaining competitors in business areas where they do not currently compete, particularly in those business areas dealing with electronics.

Raw Materials

        Key raw materials used in the Company's operations include aluminum, steel, steel alloys, copper, brass, lead, depleted uranium, graphite fiber, prepreg, hydroxy terminated polybutadiene, epoxy resins and adhesives, ethylene propylene diene monomer rubbers, nitrocellulose, diethylether, x-ray film, plasticizers and nitrate esters, impregnated ablative materials, various natural and synthetic rubber compounds, polybutaadiene, acrylonitrile and ammonium perchlorate. The Company also purchases chemicals, electronic, electro-mechanical and mechanical components, subassemblies, and subsystems which are integrated with the manufactured parts for final assembly into finished products and systems.

        The Company closely monitors sources of supply in order to assure an adequate supply of raw materials and other supplies needed in manufacturing processes. As a U.S. Government contractor, the Company is frequently limited to procuring materials and components from sources of supply approved by the U.S. Department of Defense. In addition, as business conditions, the Department of Defense budget and Congressional allocations change, suppliers of specialty chemicals and materials sometimes consider dropping low volume items from their product lines, which may require, as it has in the past, qualification of new suppliers for raw materials on key programs. The supply of ammonium perchlorate, a principal raw material used in the Company's operations, is limited to a single source that supplies the entire domestic solid propellant industry. This single source, however, maintains two separate manufacturing lines a reasonable distance apart, which mitigates the likelihood of a fire, explosion, or other problem impacting all production. The Company also presently relies on one primary supplier for graphite fiber, which is used in the production of composite materials. This supplier has multiple manufacturing lines for graphite fiber. Although other sources of graphite fiber exist, the addition of a new supplier would require the Company to qualify the new source for use.

        Current suppliers of some insulation materials used in rocket motors have announced plans to close manufacturing plants and discontinue product lines. These materials include polymers used in ethylene propylene diene monomer rubber insulation and aerospace grade rayon used in nozzles. The Company has qualified new replacement materials for certain programs. For other programs, the Company has produced sufficient inventory to cover program requirements through 2003 and is in the process of qualifying new replacement materials. The Company expects these new materials to be qualified in time to meet future production needs.

        Prolonged disruptions in the supply of any of the Company's key raw materials, difficulty completing qualification of new sources of supply, or implementing use of replacement materials or new sources of supply could have a material adverse effect on the Company's business, financial condition, or results of operations.

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Manufacturing and Handling of Explosive Materials

        Some of the Company's products, including those relating to propulsion systems, propellants, ammunition, and artillery systems, involve the manufacture and /or handling of a variety of explosive and flammable materials. From time to time in the past, these activities have resulted in incidents which have temporarily shut down or otherwise disrupted some manufacturing processes, causing production delays and resulting in liability for workplace injuries and fatalities. While the Company cannot ensure that it will not experience similar incidents in the future or that any similar incidents will not result in production delays or otherwise have a material adverse effect on business, financial condition, or results of operations, the Company does have safety and loss prevention programs in place to mitigate such incidents, as well as a variety of insurance policies. The Company has one of the lowest workplace injury rates in the industry. The Company's safety and loss prevention program requires detailed pre-construction reviews of process changes and new operations in order to prevent significant events from occurring. The Company routinely conducts safety audits of its operations involving explosive materials.

Backlog

        The total amount of contracted backlog was approximately $3.5 billion as of March 31, 2002, compared to $2.2 billion as of March 31, 2001. It is expected that approximately 71% of fiscal 2003 sales will fill orders that were in backlog at April 1, 2002. Contracted backlog represents the estimated value of contracts for which the Company is authorized to incur costs but for which revenue has not yet been recognized. Total backlog, which also includes contracts awarded but for which the company is not yet authorized to incur costs, plus the value of unexercised options, was approximately $5.6 billion as of March 31, 2002.

Seasonality

        Other than sales of shooting sports ammunition, which are expected to be significantly higher in the Company's second and third fiscal quarters, most of the Company's business is not seasonal in nature.

Employees

        As of March 31, 2002, the Company employed approximately 11,600 employees. Approximately 2,000 of these employees were covered by collective bargaining agreements. The following table summarizes the

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number of these agreements, the approximate number of covered employees, and the expiration dates of the agreements.

        The Company is in the process of closing the DeSoto, Kansas, facility and therefore has not renegotiated the collective bargaining agreement in place for this facility which expired November 1, 2001. Relations between the Company and unionized and non-unionized employees and their various representatives are generally considered satisfactory. However, the Company cannot ensure that new labor contracts can be agreed to without work stoppages and resultant adverse financial impacts.

Patents

        As of March 31, 2002, the Company owned approximately 450 U.S. patents and 325 foreign patents, and had approximately 200 U.S. patent applications and 340 foreign patent applications pending. Although the conduct of the Company's business involves the manufacture of various products that are covered by patents, the Company does not believe that any one single existing patent or license or group of patents is material to the success of the business as a whole. The Company believes that unpatented research, development and engineering skills also make an important contribution to its business. The U.S. Government typically receives royalty-free licenses to inventions made under U.S. Government contracts, under which the Company retains all other rights, including all commercial rights, to such inventions. In addition, the proprietary information is protected through the requirement that employees sign confidentiality agreements as a condition of employment and the Company's policy of protecting proprietary information from unauthorized disclosure.

Environmental Matters

        The Company's operations and ownership or use of real property are subject to a number of federal, state, and local environmental laws and regulations. In addition, the Company has liability relating to the off-site disposal and releases of hazardous wastes. The Company could incur substantial costs, including cleanup costs, fines and penalties or third party property damage or personal injury claims, as a result of violations or liabilities under environmental laws or non-compliance with environmental permits. To date, environmental laws and regulations have not had a material adverse effect on the Company's financial condition or results of operations. Environmental laws and regulations change frequently, however, and it is difficult to predict how and to what extent they may impact the results of operations or financial condition in the future. The Company has environmental management programs in place, on both the corporate and individual facility levels, to mitigate these risks.

        At certain sites, there is known and potential contamination that the Company is required to investigate or remediate. In addition, the discovery of additional contaminants could lead to unanticipated costs. However, the costs associated with these cleanups may be covered by various indemnification agreements. For example, at the time of the spin-off from Honeywell, the Company entered into an

25

environmental matters agreement with Honeywell Inc. This agreement addresses the liability of the parties for the off-site disposal of hazardous materials prior to the spin-off. Under this agreement, the Company agreed to indemnify Honeywell for the Company's proportional share of the costs of remedial and/or corrective action allocated to Honeywell as a "potentially responsible party." The Company's proportional share is the percentage that the volume of the material generated by the Company's initial businesses bears to the total volume of material generated by Honeywell at each site. The Company does not believe that its ultimate contribution or liability relating to these matters, individually or in the aggregate, would be reasonably likely to have a material adverse effect on business, financial condition, or results of operations, taken as a whole.

        As part of the Hercules acquisition, the Company assumed responsibility for environmental compliance at the acquired facilities. There may also be significant environmental remediation costs associated with these facilities that will, in some cases, be funded in the first instance by the Company, subject to recovery or indemnification as described below. The Company believes that a portion of the compliance and remediation costs associated with these facilities will be recoverable under U.S. Government contracts, and that those environmental remediation costs not recoverable under these contracts will be covered by Hercules Incorporated (Hercules) under environmental agreements entered into in connection with the Hercules acquisition. Under these environmental agreements, Hercules has agreed to indemnify the Company for:

•

environmental conditions relating to releases or hazardous waste activities occurring prior to the closing of the Hercules acquisition;



•

fines relating to pre-closing environmental compliance; and



•

environmental claims arising out of breaches of Hercules's representations and warranties.

        In December 2001, the Company received notice from the State of Utah of a potential claim against the Company under Section 107(f) of CERCLA for natural resource damages. The notice letter, which was issued in order to preserve the State's rights under CERCLA, also expressly acknowledged the State's willingness to allow the Company to go forward with its currently-planned monitoring and remediation program. The preliminary estimate of damages contained in this claim was $139 million, which is based on known and alleged groundwater contamination at and near the Company's Bacchus facility in Magna, Utah and is related to the Company's and its predecessors' manufacturing operations at the site. The Company has had discussions with the State regarding this claim and entered into a tolling agreement in January 2002. This agreement effectively defers the bringing of any potential claim against the Company by the State for a period of at least 10 years. It allows the Company time to continue to identify and address the contamination by the normal and planned regulatory remediation processes in Utah. Although the Company has previously made accruals for its best estimate of the probable and reasonably estimable costs related to the remediation obligations known to the Company with respect to the affected area, the Company cannot yet predict if or when a suit may be filed against it, nor can the Company determine any additional costs that may be incurred in connection with this claim.

        Hercules is not required to indemnify the Company for any individual claims below $50,000. Hercules is obligated to indemnify the Company for the lowest cost response of remediation required at the facility that is acceptable to the applicable regulatory agencies. The Company is not responsible for conducting any remedial activities with respect to the Kenvil, New Jersey facility or the Clearwater, Florida facility. Hercules' environmental indemnity obligation relating to contamination on federal lands remains effective, provided that the Company gives notice of any claims related to federal lands on or before December 31, 2005. The indemnity obligation on non-federal lands has expired.

        The Company expects that a portion of the compliance and remediation costs associated with the acquired Thiokol facilities will be recoverable under U.S. Government contracts. The Company has recorded an accrual of approximately $15 million to cover those environmental remediation costs at these

26

facilities not recovered through U.S. Government contracts. The Company is responsible for any costs up to $29 million; the Company and Alcoa have agreed to split evenly any amounts between $29 million and $49 million, subject to the Company having appropriately notified Alcoa of any issues prior to January 30, 2004; and the Company is responsible for any payments in excess of $49 million.

        With respect to the facilities purchased from Blount International, Inc. (Blount), Blount has agreed to indemnify the Company for certain compliance and remediation liabilities, to the extent those liabilities are related to pre-closing environmental conditions at or related to these facilities. Some other remediation costs are expected to be paid directly by a third party pursuant to an existing indemnification agreement with Blount. However, Blount's indemnification obligations relating to environmental matters, which extend for five years following closing, are capped at $30 million, less any other indemnification payments made for breaches of representations and warranties, and the third party's obligations, which extend through November 4, 2007, are capped at approximately $125 million, less payments previously made.

        The Company cannot ensure that the U.S. Government, Hercules, Alcoa, Blount, or other third parties will reimburse it for any particular environmental costs or reimburse the Company in a timely manner or that any claims for indemnification will not be disputed. U.S. Government reimbursements for cleanups are financed out of a particular agency's operating budget and the ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. The Company's failure to obtain full or timely reimbursement from the U.S. Government, Hercules, Alcoa, Blount, or other third parties could have a material adverse effect on the Company's business, financial position, or results of operations.

Captive Insurance Subsidiary

        Alliant Assurance Ltd. (Assurance) is a wholly-owned subsidiary of the Company. Assurance was organized to provide insurance and reinsurance for the property and liability risks of the Company. The various types of insurance coverage provided includes property damage and business interruption risks, excess liability and general liability risks. In addition, Assurance has assumed specific liabilities of the Company for environmental remediation and post-retirement medical and life insurance benefits. For certain of these liabilities, reserves for policy claims are established based on actuarial projections of ultimate losses.

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