SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

                                  FORM 10-K405

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended September 30, 2001

                         Commission file number 33-96190

                                Aearo Corporation
             (Exact name of registrant as specified in its charter)

                           --------------------------

                 Delaware
     (State or other jurisdiction of                      13-3840450
      incorporation or organization)        (I.R.S. Employer Identification No.)
          5457 West 79th Street
          Indianapolis, Indiana                             46268
 (Address of principal executive offices)                 (Zip Code)

                                 (317) 692-6666
              (Registrant's telephone number, including area code)
                           --------------------------

        Securities registered pursuant to Section 12(b) of the Act: none

        Securities registered pursuant to Section 12(g) of the Act: none

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

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

     As of December 1, 2001, all voting and non-voting common equity of the
Registrant was held by affiliates of the Registrant.

     The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of December 1, 2001 was 102,087.5.


                                     <PAGE>

                                TABLE OF CONTENTS


Part I.........................................................................3

   Item 1.  Business...........................................................3
   Item 2.  Properties........................................................11
   Item 3.  Legal Proceedings.................................................12
   Item 4.  Submission of Matters to a Vote of Security Holders...............13

Part II.......................................................................14

   Item 5.  Market for Registrant's Common Equity and Related Stockholder
            Matters...........................................................14
   Item 6.  Selected Financial Data...........................................15
   Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results Of Operations.........................................17
   Item 7A: Quantitative and Qualitative Disclosures about Market Risk........24
   Item 8.  Financial Statements and Supplementary Data.......................26
   Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..........................................51

PART III......................................................................52

   Item 10. Directors and Executive Officers..................................52
   Item 11. Executive Compensation............................................56
   Item 12. Security Ownership of Certain Beneficial Owners and Management....60
   Item 13. Certain Relationships and Related Transactions....................62

PART IV.......................................................................66

   Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..66


                                      -2-
<PAGE>


                                   PART I

Item 1.  Business

General Aearo  Corporation,  a Delaware  corporation  ("Aearo"),  and its direct
wholly owned  subsidiary,  Aearo Company I, doing business as Aearo  Company,  a
Delaware corporation (the "Subsidiary"),  are collectively referred to herein as
the "Company". The Company is one of the leaders in the hearing, eye, face, head
and respiratory protection segments of the personal protection equipment ("PPE")
market  worldwide.  PPE  encompasses all articles of equipment and clothing worn
for the purpose of protecting  against bodily injury,  including  safety eyewear
and goggles,  earmuffs and  earplugs,  respirators,  hard hats,  gloves,  safety
clothing and safety shoes. The Company manufactures and sells hearing protection
devices,  communication  headsets,   prescription  and  non-prescription  safety
eyewear, face shields, reusable and disposable respirators,  hard hats and first
aid  kits  in  more  than  85  countries  under  its  well-known   brand  names:
AOSafety(R),  E-A-R(R), and Peltor(R). The Company attributes its leading market
positions to:

- Strong, well-recognized brand names
- A reputation for providing innovative, quality products
- Intensive coverage of multiple distribution channels targeting a wide array of
  end-users
- One of the industry's broadest product offerings, and;
- A commitment to providing the highest level of customer service.

The Company also  manufactures a wide array of  energy-absorbing  materials that
are incorporated into other manufacturers'  products to control noise, vibration
and shock.  These products are marketed under its brand name E-A-R(R)  Specialty
Composites.

Aearo derives all of its operating income and cash flow from the Subsidiary, and
its only material  assets are the shares of common stock of the Subsidiary  that
Aearo owns.  Other than its ownership of the Subsidiary and its guarantee of the
indebtedness of the Subsidiary,  Aearo has no business or operations.  Aearo was
incorporated in the state of Delaware in June 1995.  Detailed  information  with
respect to the Company's  segment  reporting is presented in Note 15 of Notes to
Consolidated  Financial  Statements  of Aearo  Corporation  contained  in Item 8
hereof.

Recent Developments

On  September  30, 2001 the  Company  recorded a  restructuring  charge of $11.4
million related to a restructuring  plan announced by the Company to improve its
competitive position and long-term profitability.  The plan includes the closure
of its Ettlingen,  Germany plant,  significantly  reorganizing operations at the
Company's  Varnamo,  Sweden plant,  rationalizing the  manufacturing  assets and
product  mix of its  Specialty  Composites  business  unit  and a  reduction  of
products and product lines.

The  restructuring  charge  includes  cash  charges  that total $2.3 million and
includes  $1.8 million for severance and related costs to cover the reduction of
5% of the  Company's  current  work  force  and $0.5  million  for  other  costs
associated with this plan. The restructuring also includes non-cash charges that
total $9.1 million and includes $3.2 million for non-cancelable  long term lease
obligations,  asset  impairment  charges of $2.9  million,  $2.4 million for the
write-off of inventory  and $0.6  million  related to the sale of the  Company's
Ettlingen, Germany location.

Its is anticipated  that the  restructuring  will be  implemented  over the next
eighteen months and the annualized savings are expected to be $4.8 million, with
$2.4 million occurring in fiscal year 2002.

Segments

The Company  operates  three  business  segments.  The Safety  Products  segment
manufactures  and sells  hearing  protection  devices,  communication  headsets,
non-prescription   safety  eyewear,   face  shields,   reusable  and  disposable
respirators,  hard hats and first aid kits in more than 85  countries  under its
well-known brand names:


                                      -3-
<PAGE>

AOSafety(R),  E-A-R(R), and Peltor(R). The Safety Products segment accounted for
approximately  73% of the Company's net sales in fiscal 2001, and  approximately
72% and 73% in fiscal 2000 and 1999, respectively.

The Safety Prescription Eyewear segment manufactures and sells products that are
designed  to  protect  the eyes  from the  typical  hazards  encountered  in the
industrial work environment.  The Company purchases  component parts (lenses and
the majority of its frames) from various suppliers, grinds and shapes the lenses
to the  end-user's  prescription,  and then  assembles  the  glasses  using  the
end-user's  choice of frame. The Safety  Prescription  Eyewear segment accounted
for   approximately   14%  of  the  Company's  net  sales  in  fiscal  2001  and
approximately 13% and 12% in fiscal 2000 and 1999, respectively.

The Specialty  Composites segment  manufactures a wide array of energy-absorbing
materials that are incorporated  into other  manufacturers'  products to control
noise,  vibration and shock.  Specific  product  applications for such materials
include noise-reducing and vibration-damping  matting used in under hood and cab
treatments  of  transportation  equipment  such as Class 8 heavy  trucks,  shock
protection parts for electronic  devices such as computer disk drives,  servers,
and highly damped materials for the interior cabins of business and regional jet
aircraft.  Specialty  Composites also produces specially formulated foam used in
the  manufacture  of the Safety  Products  segment's  polyvinylchloride  ("PVC")
earplugs.  Specialty Composites accounted for approximately 14% of the Company's
net sales in fiscal 2001 and approximately 15% in fiscal 2000 and 1999.

Products - Safety Products Segment

Within  Safety  Products,  the  Company  classifies  its  products  in five main
categories:  hearing protection and communication  headsets;  eyewear;  face and
head protection; respiratory protection; and other protection products.

Hearing Protection and Communication  Headsets: The Company's hearing protection
products primarily consist of disposable earplugs, reusable earplugs,  earmuffs,
and  communication   headsets.   The  Company  has  been  a  leader  in  hearing
conservation  research and development  since 1972, when it first introduced the
PVC disposable  earplug.  Today,  this product is known as the "Classic" (R) and
its color yellow is a registered  trademark of the Company in the United  States
of America and Canada.  This product,  and the recently  introduced and patented
SuperFit(TM) product, is designed to be "rolled down" or compressed before being
inserted   into  the  ear,  and,  as  a  result  of  its  unique  slow  recovery
characteristics,  the plug slowly expands (or  "recovers") to fill the ear canal
and provide the desired  protection.  The  Company's  PVC earplugs are available
corded and  uncorded  and in a variety of  packaging  options.  The Company also
produces  versions of the PVC plug for many of the  international  airlines  for
inclusion in their amenity kits. In addition,  the Company  manufactures  a full
line of disposable polyurethane earplugs, including its E-Z-Fit(R), TaperFit(R),
and E-A-Rsoft(TM) products.

In the reusable  earplug segment of the market,  the Company offers its patented
UltraFit(R) and E-A-R(R)  Express(R)  products.  The E-A-R(R) Express(R) product
features a polyurethane pod and a short plastic stem to facilitate  sanitary and
easy  insertion of the plug into the ear. The Company also offers the "Flex"(TM)
line of  "semi-aural"  banded  products,  also  designed  to be  re-used.  These
products feature  articulating arms that allow for use in multiple positions and
for easy storage around the neck.

The  Company  manufactures,  assembles  and sells a broad line of  earmuffs  and
communication  headsets  under its  Peltor  brand.  The  Company  is a leader in
providing  noise  attenuating  headsets and wireless and hardwire  communication
headsets.  These products  serve a variety of end user markets where  protection
from  harmful  high  and low  frequency  noise  is  sought  or the need for easy
communication  in  noisy  or  remote   environments   exist,   such  as  in  the
construction, heavy machinery, airport, forestry, textile and mining industries.
The  Company  also  offers  auditory  systems   products,   which  are  sold  to
audiologists and are used in the testing of hearing.

Eye Protection: Non-prescription eye and face protection is used in work
environments where a number of hazards present a danger to the eyes and face,
including dust, flying particles, metal fragments, chemicals, extreme glare and
optical radiation. The Company offers a large number of task-specific
non-prescription safety eyewear products, all under the AOSafety(R) brand. The
basic categories of non-prescription eyewear protection are non-prescription
safety (or "plano") eyewear and goggles:



                                      -4-
<PAGE>


Plano (Non-prescription) Eyewear. Plano eyewear accounts for the majority of the
Company's  sales in this  category  and  includes a wide range of products  from
disposable  visitor safety spectacles to several lines of fashionable,  reusable
safety eyewear available in different colors and with a variety of applications.
As part of the continuing product development  efforts,  the Company now markets
its unique  Lexa(R) safety  eyewear  products that feature a patented  contoured
lens which  wraps  around the user's  face,  improving  peripheral  vision,  and
eliminating the need for separate side shields.

-    Goggles. The Company manufactures and sells a broad line of goggles,  which
     are typically required in work environments where a higher degree of impact
     protection is required,  where increased  protection  against dust, mist or
     chemical  splash is needed  and/or for use in welding  operations.  To meet
     these  requirements,  the  Company  manufactures  a variety  of vented  and
     non-vented goggles with varying fields of view.

Face and Head Protection.  Face and head protection is used in work environments
where a number of hazards present a danger to the eyes, face and head, including
dust,  flying  particles,  metal fragments,  chemicals,  extreme glare,  optical
radiation  and items dropped from above.  The basic  categories of face and head
protection are faceshields and hard hats:

-    Faceshields.  Faceshields are designed to protect against heat,  splash and
     flying  particles  and  are  worn  in  conjunction  with  other  protective
     equipment,  such  as  Plano  eyewear  and  respirators.   The  patented  AO
     TuffMaster(R)  line of  faceshields  is one of the  leading  brands  in the
     market.

-    Hard Hats.  The Company  manufactures  and sells a broad line of hard hats,
     including "bump" caps,  full-brim hats and traditional hard hats, featuring
     four or six point suspension,  ratchet adjustment,  and a wide selection of
     colors and custom imprinting.

-    Respiratory Protection. Respiratory protection products are used to protect
     against the harmful effects of contamination  and pollution caused by dust,
     gases,  fumes,  sprays and other  contaminants.  The Company offers a broad
     line of disposable dust and mist masks,  cartridge-equipped quarter-, half-
     and  full-face   respirators,   and  "escape"   respirators  (a  single-use
     respirator for emergencies) all under the AOSafety(R) brand.

-    Other  Protection  Products.   The  Company  also  offers  first  aid  kits
     predominantly through the  Consumer/Do-It-Yourself  (DIY) market. First aid
     kits are either for  general  use or for  industrial  or  commercial  uses.
     Additional products in this group include safety vests.

Products - Safety Prescription Eyewear Segment

The  Company's  Safety  Prescription  Eyewear  ("SRx")  products are designed to
protect the eyes from the typical  hazards  encountered in the  industrial  work
environment.  The Company purchases  component parts (lenses and the majority of
its  frames)  from  various  suppliers,  grinds and shapes the lenses to the end
user's prescription,  and then assembles the glasses using the end user's choice
of frame. The Company views its ability to provide individual  attention to each
patient through Company-employed,  as well as independently contracted,  eyecare
professionals as an essential part of its SRx business.

Products - Specialty Composites Segment

The  Company's  Specialty  Composites  segment  manufactures  a  wide  array  of
energy-absorbing  materials  that are  incorporated  into  other  manufacturers'
products to control noise,  vibration and shock.  Specialty Composites' products
fall into three broad categories:  (i) barriers and absorbers for airborne noise
control,  (ii) damping and isolation  products for vibration and shock  control,
and (iii) energy  control  products  for  vibration,  shock  control and comfort
management.  Specific product applications for such materials include noise- and
vibration-damping  matting used in under-hood cab treatments for  transportation
equipment such as Class 8 heavy trucks,  as well as shock  protection  parts for
electronic  devices  such as computer  disk  drives,  servers and highly  damped
materials  for the interior  cabins of business and regional jet  aircraft.  The
Company's  products  include   Tufcote(R)   polyurethane  foams  for  acoustical
applications,   Confor(R)  heavily  damped   viscoelastic  foams  for  ergonomic
cushioning  applications  and  shock  protection  and  Isodamp(R)  foams for the
reduction of mechanical  vibration,  noise and shock.  Specialty Composites also
produces the specially formulated foam used in the manufacture of Safety

                                      -5-
<PAGE>


Products' PVC earplugs.  The principal strengths of Specialty Composites are its
specialized polyurethane  formulations,  its thin-sheet casting capability,  its
composite  technologies and its applications  and materials  engineering.  These
strengths allow the Company to manufacture in a single process, high value-added
composites using casting, extrusion and molding processes.

Sales and Marketing

The  Company  divides  its sales and  marketing  force  into its three  business
segments, as follows:

Sales and Marketing - Safety Products Segment

Within Safety Products,  sales are managed through four channels: North American
Industrial   Distribution;    Consumer/Do-It-Yourself   ("DIY");   Europe;   and
International.  Each of  these  channels  has its own  sales  force  and its own
distinct yet synergistic sales strategies. In addition, through the acquisitions
of Peltor(R) and  Norhammer,  the Company has  significantly  expanded its sales
coverage,  including a dedicated  effort to serve the  specialty  communications
earmuff market.

-    North American  Industrial  Distribution  (NAI).  This is the largest sales
     channel for Safety  Products  and  includes  approximately  200  Dialog(TM)
     industrial  distributors and  approximately  160 industrial  dealers in the
     U.S., Canada and Mexico.  Participation in the Dialog(TM)  program requires
     minimum purchase levels while  encouraging  support across the full product
     line, in return for rebates based on growth and volume as well as preferred
     treatment regarding shipping terms, new products,  field sales support, and
     cooperative  advertising.  The Company also offers Dialog(TM)  distributors
     financial  incentives for  establishing  electronic  order  entry/invoicing
     interfaces with the Company and for developing  marketing  programs,  which
     promote the Company's products.

-    Consumer.  Under the  AOSafety(R)  brand  name,  the  Company is  America's
     leading supplier of personal safety products.  The AOSafety(R) brand offers
     a wide variety of quality  products to meet existing and emerging  consumer
     personal    safety    needs    in    many    marketplaces.    Within    the
     Hardware/Do-it-Yourself  marketplace,  AOSafety(R)  is  the  primary  brand
     carried by The Home Depot, Ace Hardware,  TruServ Corporation,  Lowe's Home
     Improvement Warehouse and other retailers.  AOSafety(R) also has a position
     in the  sporting  goods safety  marketplace  and  AOSafety(R)  products are
     marketed in the drug and mass merchandise channels.

-    Europe. The Company has a significant presence in Europe with manufacturing
     facilities in England and Sweden;  and sales  offices in the U.K.,  Sweden,
     Germany, France, Italy and Spain. The Company's historical strength in this
     market has been in passive  hearing  protection  products  (E-A-R(R))  sold
     through industrial distributors, and Peltor Communications products sold to
     the military, sport shooting, and rally sports market segments.

-    International.  The Company exports its products around the world, and this
     channel is managed  through  sales  representatives  located in  Singapore,
     Miami (covering the Caribbean and Central America),  Brazil, Australia, New
     Zealand and South Africa (covering the Middle East).

Sales and Marketing - Safety Prescription Eyewear Segment (SRx)

The SRx  segment  employs its own sales  force to sell its  products  throughout
North America.  Approximately 85% of the Company's safety  prescription  eyewear
are sold directly to more than 15,000 industrial locations, including a majority
of the  industrial  companies in the Fortune 500. The remainder of the Company's
SRx products are sold through the industrial  distribution  channel and directly
to eyecare professionals.

Sales and Marketing - Specialty Composites Segment

The Company  relies upon an  organization  of direct sales  representatives  and
independent  agents to  identify  OEM  applications  for  Specialty  Composites'
products and  technologies.  Once such  applications  have been identified,  the
Company's  sales and  technical  staffs  work  closely  with OEMs to provide the
customer with a cost effective,  integrated  solution for its noise,  vibration,
shock,  cushioning  and/or comfort  management  problems.  Currently,  Specialty
Composites'   products   are   sold   into   three   markets:    transportation;
health-related;  and  original  equipment  manufacturers  ("OEM") in  industrial
applications such as electronics and industrial equipment.


                                      -6-
<PAGE>


-    Transportation Market. Specialty Composites' products are incorporated into
     aircraft,  heavy trucks,  automobiles,  production boats and yachts, buses,
     leisure  vehicles,  defense,  farm and  construction  equipment in order to
     control noise and  vibration.  For example,  the Company  supplies  durable
     acoustical  foams and  barriers  that  control  sound  and help meet  noise
     standards  for Class 8 heavy  trucks.  The Company also  provides  complete
     noise  and  vibration  control  packages  for  high-end  yachts in order to
     contain engine room noise and to soundproof  passenger quarters.  Specialty
     Composites  applications  also exist with  respect to business and regional
     jet aircraft,  where relatively thin,  lightweight,  multi-function damping
     composites efficiently control sound and vibration.

-    Health-related    Market.    Applications    for    the    energy-absorbing
     characteristics of Specialty Composites' products, particularly its line of
     temperature-reactive   foams,  have  been  growing  in  the  health-related
     segment.  Such materials enhance physical protection and improve comfort in
     many devices including specialty pillows,  protective clothing, leg braces,
     orthotic  devices,  surgical  pillows,  wheelchair  cushions,  military and
     bicycle helmets, keyboard wrist supports and occupational seating.

-    OEM Market.  The Company  produces an extensive  assortment of polyurethane
     and PVC die-cut and molded parts for  vibration  isolation  and damping and
     for shock  protection  and noise  control in a wide range of  applications,
     including  precision  equipment  and  industrial  machinery,  computer disk
     drives, pagers, cell phones, industrial compressors and generator sets.

Research and Development

Research and Development - Safety Products Segment

The Company believes that its Research and Development facilities, personnel and
programs are among the best in the PPE  industry.  Since its  inception in 1972,
the  Company's  ultimate  predecessor,  the former  E-A-R(R)  (Energy  Absorbing
Resins)  Division  of Cabot  Corporation  ("Cabot"),  has  been a leader  in the
development of technology for understanding  noise,  measuring noise and hearing
loss, and in developing  products and programs to encourage  hearing  protection
and  conservation.  In order  to test the  efficacy  of its  hearing  protection
products,  the  Company  owns  and  operates  a  National  Voluntary  Laboratory
Accreditation  Program  ("NVLAP")  laboratory  in the United  States of America,
which is accredited for testing the efficacy of hearing protection products. The
Company also operates sound chambers and testing facilities in the United States
of America and Sweden that measure the performance of its materials and designs.
The  Company  believes  it is a leader in the  development  of both  passive and
active hearing protection products.  Similarly, the Company believes that it has
been a pioneer  and leader in the  development  and  testing of safety  eyewear.
Extensive  facilities are operated for the design and testing of safety eyewear.
The Company also has facilities for the design and testing of respiratory safety
equipment.  Many of the  Research and  Development  personnel of the Company are
recognized experts in the safety products industry.

Research and Development - Safety Prescription Eyewear Segment

This segment shares some of the expertise within the Safety Products Segment and
works extensively with outside  suppliers for development of frames,  lenses and
coatings.

Research and Development - Specialty Composites Segment

The research and development efforts of Specialty Composites focus on developing
proprietary  materials and enhancing existing products in order to meet customer
needs  identified by the Company's sales and technical  staff.  Products such as
the VersaDamp(R) 2000 thermoplastic  elastomers and the Confor(R) heavily damped
viscoelastic  foams are being  introduced  in a growing  number of  applications
across all markets served by Specialty Composites.

Raw Materials and Suppliers

The Company buys and consumes a wide variety of raw materials,  component parts,
office  supplies,  and  maintenance  and repair  parts.  Significant  categories
purchased include  corrugated paper products,  poly packaging films,  chemicals,
eyewear frames and optical lenses. The chemical category includes plastic resins
such as


                                      -7-
<PAGE>

polycarbonates,  propionates, polyols, plasticizers,  substrates,  pre-polymers,
isocyanates and adhesives.  The eyewear frames are for both the  nonprescription
and SRx products.

The Company  does have a diverse  base of material  suppliers  and is subject to
market  risks  with  respect  to  industry  pricing in paper and crude oil as it
relates  to  various   commodity  items.   Items  of  potential  impact  include
paperboard,  packaging films, nylons, resins, propylene,  ethylene,  plasticizer
and freight.  With reference to supplier agreements that allow for price changes
based upon an index,  the Company builds  anticipated  commodity price movements
into each year's planning cycle. The Company manages pricing  pressure  exposure
on  large  volume  commodities  such as  polycarbonate,  polyols  and  polyvinyl
chloride  via price  negotiations  utilizing  alternative  supplier  competitive
pricing.  However,  where appropriate,  the Company will use a single source for
supply of certain items.  In addition,  based on the material,  availability  of
supply,  level of quality and the technical  difficulty to produce,  the Company
will use a major and minor source to insure  continued  best pricing and a ready
back up supply. The Company does not enter into derivative instruments to manage
commodity risk.

The  Company's  commodity  pricing and  negotiating  strategy is to  consolidate
suppliers where applicable,  leverage  competitive  pricing,  identify alternate
lower cost  materials and work with  existing  suppliers to reduce costs through
engineering and innovation.

Although the Company  outsources the production of less than 10% of its products
to various manufacturers, the Company has found resource availability,  abundant
supplier  competition  and  infrastructure  stability in the Far East to provide
favorable supply opportunities.

Manufacturing and Distribution Operations

The Company  maintains a high  degree of  vertical  integration,  allowing it to
manufacture  over 90% of the products  that it sells.  The  Company's  strengths
include  the  manufacture  of  foams  (casting,  molding  and  fabricating)  for
Specialty  Composites'  products  (including the foam used in the manufacture of
PVC earplugs); high speed assembly and packaging of earplugs;  plastic injection
molding,  coating  and  assembly  of  non-prescription  eyewear;  and  assembly,
grinding,  polishing  and coating of  prescription  eyewear.  The  Company  also
utilizes a number of  contract  manufacturers  in the United  States of America,
Mexico,  and Europe to supplement  internal  operations  and to assemble  and/or
manufacture  products  where the Company  does not have world  class  processing
capabilities.  The Company uses selected Asian  suppliers for some product lines
to complement Company manufactured products and fill in product families,  where
it is advantageous to minimize  capital  expenditures and accelerate new product
introductions.  The Company will  continue to use contract  manufacturers  where
appropriate to remain competitive and maximize profit margins. Consistent across
all of the Company's  manufacturing  operations is an emphasis on producing high
quality products.  Currently, all of the Company's manufacturing facilities have
been awarded ISO 9002 or ISO 9001 certification, indicating that the Company has
achieved and sustained a high degree of quality and consistency  with respect to
its products.  The Company is currently working toward QS 9000 certification for
the Specialty Composites operations. The Company believes that ISO certification
is  an   increasingly   important   selling   feature  both   domestically   and
internationally,  and certain customers require ISO certification from all their
vendors.

The  Company's  products  are  generally  shipped  within  several days from the
receipt  of a  purchase  order.  As a result,  backlog  is not  material  to the
Company's business.

Manufacturing and Distribution Operations - Safety Products Segment

The Company's  Indianapolis,  Indiana plant is the largest earplug manufacturing
facility in the world. It fabricates, molds and packages hundreds of millions of
pairs  of  earplugs  annually,  utilizing  automated,  high-speed  assembly  and
packaging  equipment.  Because the economies of scale present in this  operation
are unique in the hearing protection products industry, management believes that
they  offer the  Company a  competitive  advantage  of lower  costs  within  the
production  process.  The plant's high-speed robotic  fabrication,  assembly and
packaging  of  earplugs  facilitate  cost-savings,  high-volume  production  and
improved cycle times and inventory  management.  The Southbridge,  Massachusetts
facility is the Company's  largest  manufacturing  site and  manufactures a wide
variety of Personal  Protection  Equipment.  These manufactured  safety products
include  respiratory,  plug and muff type  hearing,  head and face,  and a broad
offering of safety eyewear protection.


                                      -8-
<PAGE>

All  Company  manufacturing  sites  have  implemented  a number  of  initiatives
resulting in significant improvements in the areas of safety, quality, cost, and
customer service.

The Company's principal  international  manufacturing  operations are located in
Poynton,  England and Varnamo,  Sweden. The Poynton facility serves customers in
Western Europe,  producing and packaging  earplugs and other hearing and eyewear
products.  The  Varnamo,  Sweden  plant is the  principal  Peltor  manufacturing
location  supplying  finished  goods  and  components  to  customers  and  other
subsidiaries from this location.

The Company fills virtually all of its domestic and certain of its international
orders through its distribution  center located in  Indianapolis,  Indiana which
has bar-code scanning  capabilities to assure rapid turn-around time and service
levels  for  customer  orders.   Recent  freight  studies,   having  taken  into
consideration Aearo Company manufacturing locations in conjunction with domestic
customer locations, have shown Indianapolis to be the ideal single warehouse and
distribution  location  for our  safety  business.  Over the road  carriers  are
readily available in Indianapolis,  which contributes to competitive pricing for
both our inbound and outbound  business.  Warehouse  availability  in the market
coinciding  with Aearo's  distribution  warehouse  lease signing and renewal has
allowed for below average lease costs.

European orders are filled from distribution facilities near Manchester,  UK and
in Varnamo, Sweden. The UK facility services all of Europe with the exception of
the Nordic countries.

Manufacturing and Distribution Operations - Safety Prescription Eyewear Segment

The SRx production  operations  are comprised of two  facilities  located in the
U.S.,  two in Canada and one in Europe.  The U.S.  locations  are in Indiana and
Oklahoma.  In Canada,  the Mississauga,  Ontario plant  fabricates  prescription
eyewear  and,  together  with a small  customer  service  operation in Montreal,
produces SRx products for the Canadian market. In Poynton,  England, the Company
has a small  SRx  laboratory  that  serves  primarily  the  U.K.  market.  These
facilities  possess  lens  surfacing,  edging,  grinding  and coating  machinery
capable of handling glass, plastic and polycarbonate lenses. The lenses are then
fitted  into  frames and the  finished  product is shipped to  customers.  These
facilities currently  manufacture and distribute  approximately 500,000 pairs of
safety  prescription  glasses  annually.  Prescription  eyewear  fulfillment  is
predominantly by US Postal Service.

Manufacturing and Distribution Operations - Specialty Composites Segment

Specialty  Composites'  products are manufactured in  Indianapolis,  Indiana and
Newark,  Delaware.  The Indianapolis plant, which supplies specially  formulated
foam for the Company's PVC earplugs,  manufactures and fabricates sheet and roll
PVC and polyurethane  materials and molds  polyurethane  foams and solids.  This
facility also houses applications engineering, research and development, quality
assurance  and  customer  service  support.   The  Newark,   Delaware   facility
manufactures polyurethane foams and houses the Company's proprietary, thin sheet
foam  casting  line,  which  permits  the  casting of both  sheet and  composite
materials, including facings and substrates, in a single pass through the line.

Competition and the Personal Protection Equipment Market

The PPE  market  is  fragmented  and  highly  competitive  as a large  number of
relatively small, independent manufacturers with limited product lines serve the
PPE market.  The Company estimates that there are more than 500 manufacturers of
PPE (other  than  safety  clothing,  gloves  and shoes) in the United  States of
America,  Europe and Southeast Asia.  Participants in the industry range in size
from small, independent, single-product companies with annual sales of less than
$15 million,  to a small number of multinational  corporations with annual sales
in excess of $100 million.  The Company  believes that  participants  in the PPE
market  compete  primarily  on the  basis of  product  characteristics  (such as
design, style and functional  performance),  product quality,  service and brand
name recognition  and, to a lesser extent,  price.  From a positive  competitive
standpoint,  the  Company  believes it is  currently  well  situated,  primarily
because of its large size and its broad  product  offerings,  to compete in this
fragmented  industry.  The Company enjoys certain economies of scale,  which are
not  available  to smaller  competitors.  However,  the  industry  has  recently
undergone some degree of consolidation that could potentially increase long-term
competitive   pressures  on  the  Company.  Many  of  the  Company's  customers,
particularly in the growing consumer/DIY  channel,  prefer the type of "one stop
shopping"  that the Company can provide.  The  Company's  advanced  distribution
center further facilitates timely and accurate deliveries.

                                      -9-
<PAGE>

The  specialty  composites  industry  is highly  competitive,  and  participants
compete on the basis of being able to provide  cost-effective  solutions  to the
noise, shock and vibration problems of OEMs.

Employees

As of September  30,  2001,  the Company had 1,519  employees,  of whom 972 were
primarily engaged in manufacturing, 367 in sales, marketing and distribution, 53
in research and development and 127 in general and  administrative.  The Company
believes  its employee  relations  are good.  The Company has one domestic  U.S.
facility  that  employs  union  members.  This  facility,  located in  Plymouth,
Indiana,   employs  66  members  of  the  International   Union  of  Electronic,
Electrical,  Salaried,  Maritime  and  Furniture  Workers  (out of a total of 75
employees),  and the  Company's  relations  with these  union  members are fully
satisfactory. The union contract expires on June 26, 2004.

Patents and Trademarks

The  Company  owns and has  obtained  licenses to various  domestic  and foreign
patents,  patent applications and trademarks related to its products,  processes
and business. The Company values particularly highly its trademark for the color
yellow  for  earplugs  in the  United  States of  America  and Canada and places
significant value on its overall patent portfolio.  However, no single patent or
patent  application is material to the Company.  The Company's patents expire at
various times in the future not exceeding 20 years.

Government Regulation

As a manufacturer  of safety  products,  the Company is subject to regulation by
numerous governmental bodies. Principal among the federal regulatory agencies in
the  United  States  of  America  are:  the   Occupational   Safety  and  Health
Administration  ("OSHA"), which regulates the occupational usage of all PPE, the
Environmental  Protection  Agency ("EPA"),  which regulates  labeling of hearing
protection devices; the Mine Safety and Health  Administration  ("MSHA") and the
National  Institute of Occupational  Safety and Health ("NIOSH"),  both of which
certify  respirators.  These  agencies  generally  mandate  that  the  Company's
products meet standards established by private groups, such as American National
Standards Institute ("ANSI"). The Company's products are also subject to foreign
laws and  regulations.  In  particular,  they  must  comply  with  the  Canadian
Standards  Association,  European  Committee  for  Normalization  and  Standards
Australia.  The Company  believes it is in compliance  in all material  respects
with the  regulations  and  standards  of  these  governmental  bodies,  and any
failures to comply with such  regulations and standards in the past have not had
a material adverse effect on its business.

Environmental Matters

The  Company  is  subject  to  various   evolving   federal,   state  and  local
environmental laws and regulations governing,  among other things,  emissions to
air, discharge to waters and the generation,  handling, storage, transportation,
treatment and disposal of hazardous  substances and wastes. The Company believes
that it is in substantial  compliance  with all such laws and  regulations.  The
Company has an active program to ensure environmental compliance and achievement
of environmental goals and objectives.  In addition,  all sites are implementing
Environmental  Management  Systems  as part of a phased  approach  to ISO  14001
registration and certification within the next 18 to 24 months.


                                      -10-
<PAGE>

Item 2.  Properties

The Company owns and/or leases facilities in the United States of America,
Canada, and Europe. The following table sets forth the location of each, its
square footage and the principal function of each.

                         Approximate
Location                 Square Feet          Function
SAFETY PRODUCTS
Southbridge, Massachusetts  295,000  Manufacturing/Administration
Indianapolis, Indiana (1)   220,564  Distribution/Customer Service
Indianapolis, Indiana        81,540  Manufacturing/Corporate Headquarters
Poynton, England (2)         56,530  Manufacturing/Distribution/Customer Service
Varnamo, Sweden             125,595  Manufacturing/Distribution/Customer Service
Ettlingen, Germany           45,000  Manufacturing/Distribution/Customer Service
Paris, France                 1,894  Sales Office
Barcelona, Spain                (*)  Sales Office
Milan, Italy                    (*)  Sales Office
Barrie, Ontario, Canada       4,768  Manufacturing/Distribution/Customer Service
Oslo, Norway                  6,300  Sales/Distribution/Customer Service

SAFETY PRESCRIPTION EYEWEAR
Chickasha, Oklahoma          35,000  Manufacturing/Customer Service
Plymouth, Indiana            10,224  Manufacturing/Customer Service
Athens, Tennessee            28,000  Manufacturing/Customer Service
Mississauga, Ontario, Canada 28,850  Manufacturing/Customer Service
Montreal, Quebec, Canada      1,800  Manufacturing/Customer Service

SPECIALTY COMPOSITES
Indianapolis, Indiana       156,000  Manufacturing/Distribution/Customer Service
Newark, Delaware             79,650  Manufacturing/Distribution
Newark, Delaware             75,200  Warehouse/Distribution
---------------------
(1)  This facility also serves as an international distribution center.

(2)  This facility's primary function is manufacturing safety products.

(*) Less than 1,000 square feet.

The Company  believes that its  facilities  are suitable for its  operations and
provide  sufficient  capacity  to  meet  the  Company's   requirements  for  the
foreseeable  future.  All of the Company's  facilities are leased except for the
following facilities owned by the Company: (I) the Safety Products manufacturing
facility    in     Indianapolis,      (ii)     the     Specialty     Composites
manufacturing/distribution   facility  in  Indianapolis,   (iii)  the  Specialty
Composites  manufacturing  facility  in  Newark,  and (iv) the  Safety  Products
manufacturing facility in Ettlingen,  Germany. The Company believes that it will
be able to renew each of its leases upon their  respective  expiration  dates on
commercially  reasonable terms. In addition,  the Company believes that it would
be able to lease  suitable  additional  or  replacement  space  on  commercially
reasonable terms.

                                      -11-
<PAGE>


Item 3.  Legal Proceedings

Various  lawsuits and claims arise against the Company in the ordinary course of
its business.  Most of these lawsuits and claims relate to the Company's  safety
eyewear and respiratory  product lines and primarily  involve  accidents  and/or
exposures  occurring  after the Company's  predecessor  acquired the AOSafety(R)
Division  from  American  Optical  Corporation  in April  1990.  The  Company is
contingently liable with respect to numerous lawsuits involving respirators sold
by American  Optical  Corporation  prior to the  acquisition of the  AOSafety(R)
Division in April 1990. These lawsuits  typically  involve  plaintiffs  alleging
that they suffer from asbestosis or silicosis,  and that such condition  results
in part from respirators,  which were negligently designed or manufactured.  The
defendants in these  lawsuits are often  numerous,  and include,  in addition to
respirator manufacturers,  employers of the plaintiffs and manufacturers of sand
(used in sand blasting) and asbestos. Responsibility for legal costs, as well as
for settlements and judgments, is shared contractually by the Company,  American
Optical  Corporation  and a prior owner of  American  Optical  Corporation.  The
Company  and Cabot have  entered  into an  arrangement  whereby,  so long as the
Company pays to Cabot an annual fee of  $400,000,  which the Company has elected
to pay,  Cabot will retain  responsibility  and liability for, and indemnify the
Company against,  certain legal claims asserted after July 11, 1995 (the date of
the  Company's  formation)  alleged  to  arise  out  of the  use of  respirators
manufactured  prior to July 1995. The Company has the right to  discontinue  the
payment of such annual fee at any time,  in which case the  Company  will assume
responsibility  for and  indemnify  Cabot with  respect to such claims  however,
management  intends to continue  the annual  payment of  $400,000 to Cabot.  The
Company  may be  responsible  for  claims  alleged  to  arise  out of the use of
respirators  manufactured  by the  Company  as well as  products  purchased  for
resale.  The Company  may also be  responsible  for  certain  claims of acquired
companies  other  than the  AOSafety(R)  division  that are not  covered  by the
agreement with Cabot.

At September 30, 2001, the Company has reserved  approximately  $4.9 million for
product  liabilities  including  those  arising  from  asbestosis  or  silicosis
litigation.  The reserve is re-evaluated  periodically and additional charges to
operations may result as additional  information  becomes available.  Consistent
with the general  environment being  experienced by other companies  involved in
asbestos-related  litigation,  there  has  been an  increase  in the  number  of
asserted  claims that could  potentially  involve the Company.  Various  factors
increase the difficulty in determining  the Company's  potential  liability,  if
any, in such claims,  including the fact that the  defendants in these  lawsuits
are often numerous and the claims generally do not specify the amount of damages
sought.   Additionally,   the  bankruptcy   filings  of  other   companies  with
asbestos-related  litigation could affect the Company's cost over time. However,
it is management's opinion, taking into account currently available information,
historical  experience,  uncertainties,  the Cabot agreement,  and the Company's
reserve,  that these suits and claims  should not result in final  judgments  or
settlements  that,  in the  aggregate,  would  have  a  material  effect  on the
Company's financial condition or results of operations.

In December 2000, the Company reached a non-cash  settlement with Moldex-Metric,
Inc.  as part of a  trademark  dispute  involving  the  Company's  "Yellow  Neon
Blasts"(TM) polyurethane earplugs.


                                      -12-
<PAGE>



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

On September  7,2001,  the Company held a special meeting of  stockholders.  The
stockholders  approved the  selection of Deloitte & Touche LLP as the  Company's
independent  public  accountants  for the year ending  September 30, 2002 with a
total of 99,537.5 votes in favor,  no votes in opposition  and 2,550  abstention
votes. The stockholders  voted to elect the following  directors for the ensuing
year  with a total  of  99,537.5  votes  in favor  of each  director  and  2,550
abstention votes for each director:  Norman W. Alpert,  Bryan P. Marsal, John D.
Curtin,  Jr.,  Margaret J.  Hanratty,  William E.  Kassling,  Michael A. McLain,
Arthur J. Nagle, Daniel S. O'Connell and Robert Rothberg.

Effective  October 31, 2001 Robert Rothberg resigned from the Company's Board of
Directors.  Effective  November 16, 2001,  William J. Brady was appointed,  as a
designee of Cabot Corporation pursuant to the Stockholders Agreement, dated July
11, 1995, to replace Mr. Rothberg. Mr. Rothberg's resignation was not related to
any disagreement with the Company.

                                      -13-
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder

Matters As of December 1, 2001 there were outstanding 102,087.5 shares of common
stock,  par value $0.01 per share, of Aearo ("Aearo Common  Stock").  All of the
Aearo  Common  Stock is held,  collectively,  by Vestar  Equity  Partners,  L.P.
(together  with  certain  related  persons,  "Vestar"),  Cabot  Corporation  and
management. As of December 1, 2001 there were 35 shareholders of record of Aearo
Common Stock. In July 1995,  Vestar,  Cabot and management  effected through the
Company  the  acquisition  of  substantially  all  of  the  assets  and  certain
liabilities  of Cabot  CSC  Corporation  ("Old  Cabot  Safety  Corporation"),  a
wholly-owned  subsidiary of Cabot, and certain of its affiliates (the "Formation
Acquisition")  for $206.1  million.  To finance the Formation  Acquisition,  the
Company incurred $47.5 million of senior secured debt ("Senior Bank Facilities")
sold $100  million of 12 1/2% senior  subordinated  notes due 2005 (the  "Senior
Subordinated Notes"),  issued to Vestar and Cabot an aggregate of $45 million of
12 1/2% redeemable  preferred stock (the "Aearo Preferred Stock"), and issued to
Vestar, Cabot and certain members of management and key employees of the Company
an aggregate of 100,000  shares of Aearo Common  Stock.  See Item 12,  "Security
Ownership of Certain  Beneficial Owners and Management." All of the common stock
of the Subsidiary is owned by Aearo,  and thus no trading market exists for such
stock.  Accordingly,  no  trading  market  exists for any  capital  stock of the
Company.

The Company has never paid cash dividends on the Aearo Common Stock.  Payment of
dividends  on the Aearo  Common  Stock is limited by the terms of the  Company's
Senior Bank  Facilities and Senior  Subordinated  Notes and is  subordinated  to
payment  of  dividends  on  the  Aearo  Preferred  Stock.  See  Note  7  to  the
Consolidated Financial Statements.


                                      -14-
<PAGE>


Item 6.  Selected Financial Data

The selected historical financial data as of and for the periods ended September
30, 1997, 1998, 1999, 2000, and 2001 are derived from the consolidated financial
statements of Aearo  Corporation  and  subsidiaries.  The data should be read in
conjunction  with the  consolidated  financial  statements  and  related  notes,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and other financial information included herein.


                                AEARO CORPORATION
                             SELECTED FINANCIAL DATA
           (Dollars in Millions, Except per Share Amounts and Ratios)
<TABLE>
<CAPTION>

                                                                        Year Ended September 30,
                                                 1997            1998           1999             2000            2001
                                              ----------     -----------    -----------      -----------     -----------
<S>                                           <C>            <C>            <C>              <C>             <C>
Income Statement Data:
Net Sales--
  Safety Products...................          $   250.2      $    217.1     $    212.7       $    219.7      $     206.3
  Safety Prescription Eyewear.......                 --            36.4           35.5             39.9             39.1
  Specialty Composites..............               36.3            39.7           42.9             45.9             38.5
                                              ----------     -----------    -----------      -----------     -----------
      Total net sales...............          $   286.5      $    293.2     $    291.1       $    305.5      $     283.9
Cost of Sales.......................              162.7           163.1          156.7            160.8            152.8
Unusual charges.....................                 --              --             --               --              2.4
                                              ----------     -----------    -----------      -----------     -----------
      Gross profit..................          $   123.8      $    130.1     $    134.4       $    144.7      $     128.7
Operating Expenses--
  Selling and administrative........               88.5            90.4           87.5             95.6             87.3
  Research and technical service....                5.1             4.7            4.7              5.5              5.2
  Amortization expense..............                7.0             6.8            6.8              6.9              6.5
  Other charges (income), net.......                2.5           (0.3)            0.8             (0.3)             0.7
  Unusual charges...................                 --            11.6 (3)         --               --              9.1 (4)
                                              ----------     ----------- --------------      -----------     -----------
      Operating income..............               20.7            16.9           34.6             37.0             19.9
      Interest expense, net.........               26.7            26.1           24.3             24.4             23.7
                                              ----------     -----------    -----------      -----------     -----------
      Income (loss) before income
      Taxes.........................               (6.0)           (9.2)          10.3             12.6            (3.8)
Provision for (benefit from) income taxes           0.9             2.2            3.2              3.6            (1.9)
                                              ----------     -----------    -----------      -----------     -----------
Net income (loss)...................          $    (6.9)     $    (11.4)    $      7.1      $       9.0     $      (1.9)
                                              ==========     ===========    ===========      ===========     ===========

Other Data:
EBITDA (1)..........................          $    37.8      $     47.1     $     51.0       $     54.6      $      48.1

Depreciation and amortization.......               18.6            20.3           18.3             18.7             18.7

Capital expenditures................                8.9             5.8            8.4              9.6              7.8

Ratio of earnings to fixed

charges (2).........................                   -               -           1.4              1.5              0.9

Balance Sheet Data (at period-end):

Total assets........................          $   314.1      $    293.0     $    282.3       $    266.8      $     261.3
Debt................................              244.7           233.2          214.8            199.8            202.2
Stockholders' equity................               23.1            11.1           16.5             15.8              9.9

</TABLE>


                                      -15-
<PAGE>


Notes to Selected Financial Data:

1.   EBITDA  is  defined  as  earnings  before  interest,  taxes,  depreciation,
     amortization,  and non-operating income or expense. Non-operating income or
     expense is further defined as  extraordinary  gains or losses,  or gains or
     losses from sales of assets other than in the ordinary  course of business.
     While the Company  believes EBITDA is a useful  indicator of its ability to
     service  debt,  EBITDA  should not be  considered  as a substitute  for net
     income  determined  in  accordance  with  generally   accepted   accounting
     principles as an indicator of operating performance or as an alternative to
     cash flow as a measure of liquidity.  Investors should be aware that EBITDA
     as  presented  above may not be  comparable  to similarly  titled  measures
     presented by other companies and comparisons could be misleading unless all
     companies and analysts  calculate this measure in the same fashion.  EBITDA
     presented for the years ended  September 30, 1998 and 2001 exclude  unusual
     charges of $11.6 million, and $11.4 million respectively.

2.   Ratio of  earnings  to fixed  charges  is  defined  as pretax  income  from
     continuing  operations plus fixed charges  divided by fixed charges.  Fixed
     charges include interest expense  (including  amortization of debt issuance
     costs).  Earnings  for the period  ended  September  30, 1997 and 1998 were
     inadequate  to  cover  fixed  charges  by $6.0  million  and  $9.2  million
     respectively.

3.   During fiscal 1998, the Company  recorded a  restructuring  charge of $11.6
     million related to the restructuring  plans announced by the Company during
     the fiscal year. On February 3, 1998, the Company announced the appointment
     of Michael A. McLain as President and Chief Executive  Officer and on March
     25, 1998, the Company announced plans to close the Boston  headquarters and
     relocate it to  Indianapolis,  Indiana,  where the Company has  substantial
     operations.  In addition, on September 30, 1998 the Company announced plans
     to improve profitability through complexity reduction and restructuring.

4.   On September 30, 2001, the Company recorded a restructuring charge of $11.4
     million related to a restructuring plan announced by the Company to improve
     its competitive position and long-term profitability. The plan includes the
     closure  of  its  Ettlingen,   Germany  plant,  significantly  reorganizing
     operations  at the  Company's  Varnamo,  Sweden  plant,  rationalizing  the
     manufacturing  assets and product mix of its Specialty  Composites business
     unit and a reduction of products and product lines (See Note 17 of Notes to
     Consolidated Financial Statements).

                                  -16-
<PAGE>

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

The following  discussion should be read in conjunction with "Selected Financial
Data," and the consolidated financial statements of the Company, including notes
thereto,   appearing   elsewhere   in  this   Report.   This   Report   contains
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of  1933  and  Section  21E of the  Securities  Exchange  Act of  1934.  The
Company's  actual results could differ  materially  from those set forth in such
forward-looking  statements.  The  factors  that might  cause such a  difference
include, among others, the following: risks associated with indebtedness;  risks
related  to  acquisitions;  risks  associated  with  the  conversion  to  a  new
management  information  system;  high  level of  competition  in the  Company's
markets;  importance  and costs of product  innovation;  risks  associated  with
international operations; product liability exposure; unpredictability of patent
protection and other intellectual property issues;  dependence on key personnel;
the risk of adverse effect of economic and regulatory  conditions on sales;  and
risks associated with environmental matters.

General

In the latter part of fiscal 1996, the Company  undertook efforts to implement a
new  management   information  system,   integrate  the  Peltor(R)  and  Eastern
acquisitions   that  were  acquired   earlier  in  that  year,  and  change  the
manufacturing  orientation at its  Southbridge,  Massachusetts  facility towards
cellular  manufacturing.  Difficulties associated with the systems conversion as
well as the other initiatives  resulted in problems with production planning and
control,  shipping and distribution,  and overall customer  service.  Throughout
most of fiscal 1997 the Company spent  significant sums in order to mitigate the
effects of these  problems on its customer  base.  As the year  progressed,  the
Company  realized  improvements  in service  levels as well as a return  towards
historic levels of profitability.

During fiscal year 1998 the Company continued to realize these  improvements and
experienced four successive  quarters of operating  profitability  improvements,
excluding the $11.6 million  restructuring  charge and $0.5 million of personnel
relocation  costs  associated with the move of the corporate  headquarters  from
Boston,  Massachusetts  to  Indianapolis,  Indiana,  as  compared  with the same
quarters of the prior year. A new management  team was installed,  starting with
the appointment of Michael A. McLain as President and Chief Executive Officer on
February 3, 1998. Greater  utilization of the new management  information system
allowed the Company to realize  additional  operating  improvements.  To further
accelerate the operational  benefits of the new management  information  system,
the Company completed a major update of its SAP management information system to
version  3.1H and  intends  to  continue  to apply  information  system  version
upgrades, as the Company deems appropriate.

During  fiscal  year  1999,  the  Company  implemented  the  restructuring  plan
announced on September 30, 1998.

1.   The Company  reorganized into strategic business  segments.  The reportable
     segments are Safety  Products,  Safety  Prescription  Eyewear and Specialty
     Composites.  This change was made to allow greater management attention and
     focus.

2.   The Company rationalized its product line in Safety Products; discontinuing
     over 50% of low volume, low margin stock keeping units. It consolidated its
     product  offering to retail  customers like Home Depot,  Lowe's,  ACE, etc.
     under the AOSafety(R) brand name and introduced  improved packaging and new
     graphics  at  the  same  time.  This  rationalization  has  contributed  to
     manufacturing efficiencies.

3.   In the Safety Prescription  Eyewear segment,  the Company  consolidated its
     customer service and distribution operations.

In addition, there have been continued productivity  improvements in purchasing,
logistics and manufacturing.  These, along with the restructuring  efforts, have
resulted in significant improvements in gross margin versus the previous year.

A part of the savings was  re-invested  in selling and  marketing to build brand
equity and introduce new and innovative products.  These included E-A-Rsoft(TM),
Yellow Neons(R),  the recently  introduced  SuperFit(TM),  Nassau Rave(R) safety
eyewear,  new safety  prescription  eyewear  frames and  several  new  Peltor(R)
communication  products. The Lexa(R) product line, first introduced in 1998, has
shown very positive growth.

                                      -17-
<PAGE>

During  fiscal year 2000,  the Company  achieved  record sales and EBITDA levels
with sales increasing 4.9%, despite a stronger US dollar. On a currency adjusted
basis sales were 7.7% higher than the previous year.  Although sales were higher
in all three of the Company's segments, the Specialty Composites trucking market
began  to  soften  during  the  fourth  quarter.   The  continued   productivity
improvements in purchasing and  manufacturing,  especially in the manufacture of
non-prescription  eyewear  product  lines,  drove a strong  improvement in gross
profit  performance,  resulting  in a .8 point  improvement  in the gross profit
percentage  of  sales.  The  gross  profit  would  have  been  approximately  an
additional .6 points higher had it not been for the weakness of the Euro,  which
depressed revenue while having a more limited impact on manufacturing costs.

During fiscal year 2001,  continued  softening of the trucking market that began
in the fourth  quarter of the previous year was followed by overall  softness in
the North American economy.  Order softness began with the consumer  marketplace
and then the  industrial  marketplace as consumer  confidence and  manufacturing
employment in North America declined during the year. In addition, the US dollar
continued to strengthen against most global currencies,  which had the affect of
depressing reported sales by approximately $8.0 million.  Continued productivity
improvements in purchasing and manufacturing  enabled the Company to offset much
of the  impact on  manufacturing  overhead  absorption  due to  reduced  volume.
Selling and administrative  expenses decreased $8.3 million primarily due to the
Company's proactive measures to reduce expenses in line with the slowdown in the
economy.  In May 2001 the  Company  completed  an upgrade of its SAP  management
information  system  to  version  3.1I  and it  intends  to  continue  to  apply
information system version upgrades, as it deems appropriate.  In July 2001, the
Company  successfully  completed the refinancing of its  indebtedness  under its
prior $165.0 million  Senior  Secured Credit  Facility with a new $135.0 million
facility and ended the year with undrawn  revolver  commitments of approximately
$35.0 million and cash of $18.2 million.

Results of Operations

The  following   table  sets  forth  the  major   components  of  the  Company's
consolidated statements of operations expressed as a percentage of net sales.

                                              Year Ended September 30,
                                     1999               2000            2001
                                ---------------  ---------------  --------------
Net sales:
Safety Products                          73.1  %         71.9  %         72.7  %
Safety Prescription Eyewear              12.2            13.1            13.8
Specialty Composites                     14.7            15.0            13.5
                                --------------   -------------    --------------
Total net sales                         100.0           100.0           100.0
Cost of sales                            53.8            52.6            54.7
                                --------------   -------------    --------------
Gross profit                             46.2            47.4            45.3
Selling and administrative               30.1            31.3            30.8
Research and technical services           1.6             1.8             1.8
Amortization expense                      2.3             2.2             2.3
Other charges (income), net               0.3               -               -
Unusual charge                              -               -             3.2
                                --------------   -------------    --------------
Operating Income                          11.9 %         12.1  %          7.2  %
                                ==============   =============    ==============

Fiscal 2001 Compared to Fiscal 2000

Net Sales.  Net sales in the year ended  September  30, 2001  decreased  7.1% to
$283.9  million from $305.5  million in the year ended  September 30, 2000.  The
change  in  sales  was  primarily  driven  by the  significant  slowdown  in the
manufacturing  sector of the economy as well as  weakness  in global  currencies
relative to the U.S. dollar. The strength of the U.S. dollar relative to foreign
currencies had the impact of reducing sales by approximately  $8.0 million.  The
Safety Products segment net sales in the year ended September 30, 2001 decreased
6.1% to $206.3 million from $219.7 million in the year ended September 30, 2000.
The strength of the U.S. dollar relative to foreign currencies had the impact of
reducing  Safety  Products  sales by  approximately  $7.9  million.  The  Safety
Prescription  Eyewear  segment  net sales in the year ended  September  30, 2001
decreased  2.0% to $39.1 million from $39.9 million in the year ended  September
30, 2000.

                                      -18-
<PAGE>

The Specialty  Composites segment net sales in the year ended September 30, 2001
decreased  16.1% to $38.5 million from $45.9 million in the year ended September
30, 2000. The decrease was primarily  driven by continued  weakness in the North
American  economy and  resulted in volume  declines in the truck  market and the
electronics segment of the precision equipment market,  which includes computers
and personal communication system (PCS) applications.

Gross Profit.  Gross profit in the year ended September 30, 2001 decreased 11.1%
to $128.7  million  from $144.7  million in the year ended  September  30, 2000.
Gross profit as a percentage  of net sales in the year ended  September 30, 2001
was  45.3% as  compared  to 47.4% in the year  ended  September  30,  2000.  The
decrease in gross margin was primarily due to the unusual charges related to the
provision for inventory as discussed below.  The gross profit  percentage in the
year  ended  September  30,  2001  excluding  unusual  charges  was  46.2%.  The
additional  decrease  in gross  margin  was due to lower  capacity  utilization,
higher  utility  costs and the adverse  impact of foreign  currencies  partially
offset by productivity improvements and cost reductions to offset the decline in
volume.  The  average  exchange  rate  used  for the  Euro  in the  consolidated
financial  statements  for the year ended  September 30, 2001 and 2000 was 0.888
and 0.970, respectively.

Selling and Administrative Expenses.  Selling and administrative expenses in the
year ended September 30, 2001 decreased 8.7% to $87.3 million from $95.6 million
in the year ended  September  30, 2000.  The  decrease is  primarily  due to the
Company's proactive measures to reduce expenses in line with the slowdown in the
economy.  Additionally,  expenses in 2000 included higher legal expenses related
to the  Moldex-Metric,  Inc.  trademark  dispute as well as costs related to the
development  of  our  e-commerce  infrastructure.   Selling  and  administrative
expenses as a percentage of net sales in the year ended  September 30, 2001 were
30.8% of net sales, compared to 31.3% in the year ended September 30, 2000.

Other Charges (Income),  Net. Other charges (income), net was an expense of $0.7
million  for the year ended  September  30,  2001 as  compared to income of $0.2
million for the year ended  September 30, 2000. The $0.7 million expense for the
year ended  September  30, 2001 was  primarily  attributed  to foreign  currency
transaction  losses of approximately  $0.6 million.  The $0.2 million income for
the year ended September 30, 2000 was primarily  attributed to foreign  currency
transaction  gains of  approximately  $0.9 million  somewhat  offset by the $0.5
million write off of an abandoned  information  technology system that was under
development for the Safety Prescription Eyewear segment.

Unusual  Charges.  On September  30, 2001 the Company  recorded a  restructuring
charge of $11.4 million related to a restructuring plan announced by the Company
to improve  its  competitive  position  and  long-term  profitability.  The plan
includes the closure of its Ettlingen, Germany plant, significantly reorganizing
operations  at  the  Company's   Varnamo,   Sweden  plant,   rationalizing   the
manufacturing  assets and product mix of its Specialty  Composites business unit
and a reduction of products and product lines.

The  restructuring  charge  includes  cash  charges  that total $2.3 million and
includes  $1.8 million for severance and related costs to cover the reduction of
5% of the Company's  current work force and $0.5 million other costs  associated
with this plan. The restructuring also includes non-cash charges that total $9.1
million  and  includes   $3.2  million  for   non-cancelable   long  term  lease
obligations,  asset  impairment  charges of $2.9  million,  $2.4 million for the
write-off of inventory  and $0.6  million  related to the sale of the  Company's
Ettlingen, Germany location.

It is  anticipated  that the  restructuring  will be  implemented  over the next
eighteen months and the annualized savings are expected to be $4.8 million, with
$2.4 million  occurring  in fiscal year 2002.  The  inventory  provision of $2.4
million  was  classified  as cost of  sales  in the  consolidated  statement  of
operations with the remaining $9.1 million classified as operating expenses.

Operating  Income.  Primarily  as a  result  of  the  factors  discussed  above,
operating income excluding  unusual charges,  decreased $5.7 million or 15.3% in
the year ended September 30, 2001 from $37.0 million in the year ended September
30,  2000.  Operating  income as a  percentage  of net  sales in the year  ended
September 30, 2001 was 11.1% before unusual  charges as compared to 12.1% in the
year ended September 30, 2000.

Interest Expense,  Net.  Interest  expense,  net in the year ended September 30,
2001  decreased  2.9% to $23.7  million  from  $24.4  million  in the year ended
September  30, 2000.  The decrease is  attributed  to a lower  weighted  average
interest rate in the year ended September 30, 2001 as compared to the year ended
September 30, 2000.

                                      -19-
<PAGE>

Income (Loss) Before  Provision for (Benefit  From) Income Taxes.  Income (loss)
before  provision for (benefit from) income taxes  decreased  $16.4 million to a
loss of $3.8 million in the year ended  September 30, 2001 compared to income of
$12.6 million in the year ended  September  2000.  Income  before  provision for
benefits from income taxes excluding  unusual charges  decreased $4.9 million to
$7.7 million compared to $12.6 million in the prior year.

Provision  for (Benefit  From) Income Taxes.  The  provision for (benefit  from)
income taxes in the year ended September 30, 2001 was $(1.9) million compared to
$3.6 million in the year ended September 30, 2000.

Net Income (Loss). For the year ended September 30, 2001, the Company recorded a
net loss of $(1.9)  million as  compared  to net income of $9.0  million for the
year ended September 30, 2000.

EBITDA.  EBITDA is defined as earnings  before  interest,  taxes,  depreciation,
amortization,  and  non-operating  income or  expense.  Non-operating  income or
expense is further defined by the Company as extraordinary  gains or losses,  or
gains or losses from  disposition of assets other than in the ordinary course of
business. While the Company believes EBITDA is a useful indicator of its ability
to service debt,  EBITDA should not be considered as a substitute for net income
determined in accordance with accounting  principles  generally  accepted in the
United  States of America as an  indicator  of  operating  performance  or as an
alternative  to cash flow as a measure of liquidity.  Investors  should be aware
that  EBITDA  as  presented  below may not be  comparable  to  similarly  titled
measures presented by other companies and comparisons could be misleading unless
all companies and analysts calculate this measure in the same fashion.


                                                 EBITDA Calculation
                                               (Dollars in Thousands)
                                      Year Ended                      Change
                                     September 30,       Favorable (Unfavorable)
                                  2000         2001       Amount      Percent
                                --------     --------    --------     -------
Operating Income               $  37,011     $ 19,914  $ (17,097)     (46.2)%
Add Backs:
   Depreciation                   10,056       10,123         67         0.7%
   Amortization of intangibles     6,859        6,530       (329)      (4.8)%
   Non-operating costs               692           44      (648)      (93.6)%
   Unusual charges                    --       11,441      11,441          --
                                --------     --------    --------     -------
EBITDA                          $ 54,618     $ 48,052   $ (6,566)     (12.0)%
                                ========     ========   =========     =======

EBITDA for the year ended September 30, 2001,  excluding  unusual  charges,  was
$48.1  million,  which was $6.6 million lower than the year ended  September 30,
2000.  This  decrease  was due  primarily  to the  significant  slowdown  in the
economy.  EBITDA as a percentage  of net sales in the year ended  September  30,
2001,  excluding  unusual  charges,  was 16.9% as  compared to 17.9% in the year
ended September 30, 2000.

Fiscal 2000 Compared to Fiscal 1999

Net Sales.  Net sales in the year ended  September  30, 2000  increased  4.9% to
$305.5 million from $291.1  million in the year ended  September 30, 1999 as the
sales in all three reportable  segments  increased.  The Safety Products segment
net sales in the year ended  September 30, 2000 increased $7.0 million to $219.7
million from $212.7 million, or 3.3% even though the effect of the stronger U.S.
dollar as compared to the European and Canadian  currencies was to depress sales
by  approximately  $6.4 million.  Sales in Europe,  to North  American  Consumer
customers and to international customers were all higher than in the prior year.
The Safety  Prescription  Eyewear  segment net sales in the year ended September
30, 2000  increased  12.5% to $39.9 million from $35.5 million in the year ended
September 30, 1999. The Safety  Prescription  Eyewear  segment net sales for the
year ended September 30, 2000 included  approximately $4.0 million of sales from
Safety  Optical  that was  acquired in August  1999.  The  Specialty  Composites
segment net sales in the year ended September 30, 2000 increased $3.0 million to
$45.9 million from $42.9 million, or 6.9%. Increased sales were due to continued
growth in sales of


                                      -20-
<PAGE>

engineered  products to the general  aviation and  precision  equipment  markets
while sales into the trucking segment were lower by approximately 2%.

Gross Profit.  Gross profit in the year ended  September 30, 2000 increased 7.7%
to $144.7  million  from $134.4  million in the year ended  September  30, 1999.
Gross profit as a percentage  of net sales in the year ended  September 30, 2000
was  47.4% as  compared  to 46.2% in the year  ended  September  30,  1999.  The
continued productivity improvements in purchasing and manufacturing,  especially
in the  manufacturing  of the  non-prescription  eyewear  product lines were the
primary factors behind a strong improvement in the gross profit performance. The
gross  profit  would  have  been  approximately  47.6%  had it not  been for the
weakness of the Euro that  depresses  revenue while having a more limited impact
on manufacturing costs.

Selling and Administrative Expenses.  Selling and administrative expenses in the
year ended September 30, 2000 increased 9.2% to $95.6 million from $87.5 million
in the year ended September 30, 1999.  Selling and marketing  spending increased
$2.9  million as part of the  Company's  campaign to build brand  awareness  and
loyalty by more strongly promoting its global brands.  Administrative costs were
higher due to higher legal costs  driven by the  Moldex-Metric,  Inc.  trademark
dispute which was settled December 6, 2000, and the development of an e-commerce
initiative  designed to enhance the electronic  commerce  capability between the
Company and its customers.  Selling and administrative  expenses as a percentage
of net sales in the year  ended  September  30,  2000 were  31.3% of net  sales,
compared to 30.1% in the year ended September 30, 1999.

Research  and  Technical  Services  Expenses.  Research and  technical  services
expenses in the year ended  September 30, 2000  increased  17.0% to $5.5 million
from $4.7 million in the year ended September 30, 1999. This increase was due to
additional focus in the design and development of new products and technologies.

Amortization  of  Intangibles.  Amortization  expense  remained at a  relatively
consistent  $6.9 million in the year ended  September  30, 2000 compared to $6.8
million in the year ended September 30, 1999.

Other Charges  (Income),  Net.  Other charges  (income),  net was income of $0.2
million  for the year ended  September  30,  2000 as compared to expense of $0.8
million for the year ended  September 30, 1999.  The $0.2 million income for the
year ended  September  30, 2000 was  primarily  attributed  to foreign  currency
transaction  gains of  approximately  $0.9 million  somewhat  offset by the $0.5
million write off of an abandoned  information  technology system that was under
development  for the  Safety  Prescription  Eyewear  segment.  The $0.7  million
expense  for the year ended  September  30,  1999 was  primarily  attributed  to
foreign currency transaction losses of approximately $0.6 million.

Operating  Income.  Primarily  as a  result  of  the  factors  discussed  above,
operating income  increased $2.4 million to $37.0 million,  or 6.9%, in the year
ended  September  30, 2000 from $34.6  million in the year ended  September  30,
1999.  Operating income as a percentage of net sales in the year ended September
30, 2000 was 12.1% as compared to 11.9% in the year ended September 30, 1999.

Interest Expense,  Net.  Interest  expense,  net in the year ended September 30,
2000 remained relatively constant at $24.4 million compared to $24.3 million for
the year ended  September 30, 1999. The increase is attributed to an increase in
the weighted  average  interest  rates in effect for the year,  mostly offset by
lower average borrowings.

Income (Loss) Before  Provision for (Benefit  From) Income Taxes.  Income before
provision  for (benefit  from) income taxes  increased  $2.3 million in the year
ended September 30, 2000 to income of $12.6 million  compared to income of $10.3
million in the year  ended  September  30,  1999 due to the  improved  operating
income.

Provision  for (Benefit  From) Income Taxes.  The  provision for (benefit  from)
income taxes in the year ended  September 30, 2000 was $3.6 million  compared to
$3.2 million in the year ended September 30, 1999.

Net Income (Loss).  For the year ended September 30, 2000, the Company  recorded
net  income of $9.0  million  as  compared  to $7.1  million  for the year ended
September 30, 1999.

EBITDA.  EBITDA is defined as earnings  before  interest,  taxes,  depreciation,
amortization,  and  non-operating  income or  expense.  Non-operating  income or
expense is further defined by the Company as extraordinary  gains or losses,  or
gains or losses from  disposition of assets other than in the ordinary course of
business. While the Company believes EBITDA is a useful indicator of its ability
to service debt,  EBITDA should not be considered


                                      -21-
<PAGE>

as a  substitute  for  net  income  determined  in  accordance  with  accounting
principles generally accepted in the United States of America as an indicator of
operating  performance  or as an  alternative  to  cash  flow  as a  measure  of
liquidity.  Investors  should be awarethat  EBITDA as presented below may not be
comparable  to  similarly  titled  measures  presented  by other  companies  and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.

                               EBITDA Calculation
                             (Dollars in Thousands)

                                         Year Ended          Change
                                        September 30, Favorable (Unfavorable)

                                       1999      2000    Amount    Percent
                                      -------   -------  -------   ------
Operating Income ...................  $34,619   $37,011   $2,392     6.9%
Add Backs:
      Depreciation .................    9,399    10,056      657     7.0%
      Amortization of Intangibles ..    6,793     6,859       66     1.0%
      Non-operating Costs ..........      190       692      502       --
                                     --------  --------  -------   ------
EBITDA                               $ 51,001  $ 54,618  $ 3,617     7.1%
                                     ========  ========  =======   ======

EBITDA for the year ended  September 30, 2000 was $54.6 million,  which was $3.6
million higher than for the year ended September 30, 1999. This increase was due
primarily to improved sales volume, a strong gross margin performance  partially
offset by increased  spending in selling,  general  administrative and technical
costs.  EBITDA as a percentage of net sales in the year ended September 30, 2000
was 17.9% as compared to 17.5% in the year ended September 30, 1999.

Effects of Changes in Exchange Rates

In general,  the  Company's  results of  operations  are  affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and Canada in local  currencies.  While many of the Company's selling and
distribution costs are also denominated in these currencies,  a large portion of
product costs are U.S. Dollar  denominated.  As a result, a decline in the value
of the U.S. Dollar relative to other  currencies can have a favorable  impact on
the profitability of the Company and an increase in the value of the U.S. Dollar
relative  to  these  other   currencies  can  have  a  negative  effect  on  the
profitability of the Company.  As a result of the acquisition of Peltor(R),  the
Company's  operations are also affected by changes in exchange rates relative to
the  Swedish  Krona.  A  decline  in the value of the  Krona  relative  to other
currencies can have a favorable  impact on the  profitability of the Company and
an increase in the value of the Krona  relative to other  currencies  can have a
negative  impact on the  profitability  of the  Company.  The  company  utilizes
forward foreign currency contracts to mitigate the effects of changes in foreign
currency rates on profitability.

Effects of Inflation

In recent  years,  inflation  has been modest and has not had a material  impact
upon the results of the Company's operations.

Year 2000 Compliance

The  Company  did  not  experience   significant  problems  related  to  systems
recognizing  date sensitive  information as a result of the year 2000. The costs
associated  with making its  information  systems year 2000  compliant  were not
material.

Liquidity and Capital Resources

The Company's  sources of funds have consisted  primarily of operating cash flow
and debt  financing.  The Company's  uses of those funds consist  principally of
debt service, capital expenditures and acquisitions.

On July 13, 2001,  the Company  amended and restated its credit  agreement  that
provides for secured  borrowings from a syndicate of lenders consisting of (i) a
secured term loan facility of $100 million,  (ii) a revolver credit


                                      -22-
<PAGE>


facility  for up to $30  million and (iii) a UK  overdraft  facility of up to an
equivalent of $5.0 million in Great Britain  Pounds  (collectively  the Restated
Senior Bank Facilities).

Term loan maturities under the Restated Senior Bank Facilities are $ 8.0 million
in fiscal 2002,  $ 12.0  million in fiscal 2003 and $ 78.0  million  thereafter.
Other than upon a change of control or as a result of certain asset sales, or in
the event that  certain  excess  funds  exist at the end of a fiscal  year,  the
Company  will not be required to make any  principal  payments in respect of the
Notes until  maturity.  The Company is required to make  interest  payments with
respect to both the Senior Bank Facilities and the Notes. The Company's revolver
and Term Loans mature in March 2005.

The Company  typically  makes  capital  expenditures  related  primarily  to the
maintenance and improvement of manufacturing facilities.  The Company spent $7.8
million  for  capital  expenditures  for the year ended  September  30,  2001 as
compared to $9.6 million for capital  expenditures  for the year ended September
30, 2000 and $8.4 million for the year ended  September 30, 1999.  The Company's
capital spending is of a relatively short duration, with the complete commitment
process typically involving less than one year.

The Company's principal source of cash to fund these capital requirements is net
cash  provided by  operating  activities.  The  Company's  net cash  provided by
operating activities for the year ended September 30, 2001 totaled $21.5 million
as compared to $27.6 million in 2000.  The decrease was due primarily to a $10.9
million  decline  in  net  income,  a $6.0  million  unfavorable  change  in the
Company's net change in assets and  liabilities,  partially  offset by the $11.4
million non-cash  restructuring  charge.  The Company's net change in assets and
liabilities was primarily driven by a decrease in the change in accounts payable
and accrued  liabilities  of $5.9  million and a decrease in the change of other
assets and liabilities of $6.2 million,  offset by an increase in the net change
in  accounts  receivable  of $4.0  million  and an increase in the net change in
inventories of $2.0 million.

Net cash  used by  investing  activities  was $7.8  million  for the year  ended
September 30, 2001 as compared to $14.0 million for the year ended September 30,
2000 and $12.1 million in the year ended  September  30, 1999.  Net cash used by
investing  activities  consisted of $7.8 million of capital  expenditures in the
year ended  September  30, 2001 as  compared  to $9.6  million in the year ended
September  30, 2000 and $8.3 million in the year ended  September  30, 1999.  In
addition, the Company invested $4.1 million for the acquisition of Norhammer and
$0.3  million for the  acquisition  of Livax in fiscal 2000 and $3.7 million for
the acquisition of Safety Optical in fiscal 1999.

Net cash generated by financing activities for the year ended September 30, 2001
was $1.6 million compared to cash used by financing  activities of $11.6 million
in 2000 and $16.2 million in 1999.  The increase of $13.3 million in fiscal 2001
consisted of $14.2  million in repayments on the  preexisting  revolving  credit
facility and $26.8 million of increased  borrowings  under the amended term loan
agreement. In 1999 net cash used for financing activities included $12.9 million
for the  repayment  of term  loans,  and $2.2  million of  repayments  under the
revolving  credit facility and $1.4 million for the repayment of other long term
debt.

The Company has a  substantial  amount of  indebtedness.  The Company  relies on
internally generated funds, and to the extent necessary, on borrowings under the
revolving credit facility (subject to certain  customary drawing  conditions) to
meet its liquidity needs. The Company  anticipates that operating cash flow will
be adequate to meet its operating and capital  expenditure  requirements for the
next several years,  although there can be no assurances that existing levels of
sales and normalized profitability,  and therefore cash flow, will be maintained
in the future.

Levels of sales and profitability  may be impacted by service levels,  continued
new  product   development,   worldwide  economic   conditions  and  competitive
pressures.  In  particular,   during  2001  the  Company  was  affected  by  the
significant slowdown in the manufacturing sector of the economy and the strength
of the U.S. Dollar relative to foreign currencies.  In addition, the Company may
make  additional  acquisitions  in the  future  and  would  rely  on  internally
generated  funds and, to the extent  necessary,  on  borrowings  to finance such
acquisitions.

                                      -23-
<PAGE>


Item 7A: Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risks related to changes in foreign currencies,
interest rates and commodity  pricing.  The Company uses derivatives to mitigate
the impact of changes in foreign  currencies and interest rates.  All derivative
activities  are for  purposes  other  than  trading.  The  Company  adopted  the
provisions  of  Statement  of  Financial  Accounting  Standard  (SFAS) No.  133,
"Accounting  for Derivative  Instruments  and Hedging  Activities" on October 1,
2000. The Company has formally documented its hedging  relationships,  including
identification  of hedging  instruments and the hedge items, as well as its risk
management objectives.

Foreign Currency Risk

The  Company's  results  of  operations  are  subject  to risk  associated  with
operating in foreign  countries,  including  fluctuations  in currency  exchange
rates.   While  many  of  the  Company's  selling  and  distribution  costs  are
denominated  in Canadian and  European  currencies,  a large  portion of product
costs are U.S. Dollar  denominated.  As a result,  a decline in the value of the
U.S.  Dollar  relative to other  currencies  can have a favorable  impact on the
profitability  of the Company  and an  increase in the value of the U.S.  Dollar
relative  to  these  other   currencies  can  have  a  negative  effect  on  the
profitability of the Company. The Company executes two hedging programs, one for
transaction  exposures,  and the  other  for cash  flow  exposures  on  European
operations.  The Company has utilized  forward  foreign  currency  contracts for
transaction  and cash flow  exposures.  During the year ended September 30, 2001
net transaction losses were $0.4 million and cash flow hedge losses were of $0.2
million. In addition,  the Company limits foreign exchange impact on the balance
sheet with foreign  denominated  debt in Great Britain Pound  Sterling (GBP) and
Euros.

The  adoption  of SFAS No.  133 on October 1, 2000  resulted  in a $0.3  million
transition  adjustment  charge  to  accumulate  other  comprehensive  income  to
recognize the fair value of forward  foreign  currency  contracts  designated as
cash flow hedges.  As a result of the forward  foreign  currency  contracts  the
Company has recorded a derivative  liability of $0.4 million as of September 30,
2001. The forward foreign currency contracts will expire over the next 3 months.

Interest Rates

The Company is exposed to market  risk  changes in  interest  rates  through its
debt.  The Company  utilizes  interest rate  instruments to reduce the impact of
either  increases or decreases in interest rates of its floating rate debt. With
the  continuing  increases  in interest  rates  since June of 1999,  the Company
unwound its zero premium  collar on February 28, 2000,  rolling gains into a new
interest rate swap that matches the notional  amounts of the credit agreement by
loan currency.  This interest rate swap expired August 31, 2001. During the year
ended  September 30, 2001,  the Company  incurred an additional  $0.7 million of
interest expense as a result of the interest rate swap.

The  adoption  of SFAS No.  133 on October 1, 2001  resulted  in a $0.1  million
transaction  adjustment  charge to  accumulated  other  comprehensive  income to
recognize  the fair value of the interest  rate swap  agreement  designated as a
cash flow hedge. With the expiration of the interest swap in August of 2001, the
fair value became zero.

As a result of the current  economic  slowdown and  corresponding  interest rate
reduction,  the Company  entered  into an interest  rate collar  arrangement  in
October 2001 to protect $25.0 million of the outstanding variable term debt. The
collar  floor is set at 2% LIBOR and cap at 6.25%  LIBOR.  The Company is of the
opinion that it is well positioned to manage interest  expense in the short term
and continues to monitor rates and has mitigated the risks of potential interest
rate hikes and the related profit impact on the Company's  financial  statements
through these efforts.

Commodity Risk

The Company is subject to market risks with respect to industry pricing in paper
and crude oil as it relates to various  commodity  items.  Items with  potential
impact are paperboard,  packaging films, nylons,  resins,  propylene,  ethylene,
plasticizer, and freight. The Company manages pricing exposures on larger volume
commodities  such as  polycarbonate,  polyols and  polyvinyl  chloride via price
negotiations  utilizing  alternative  supplier  competitive pricing. The Company
sources some products and parts from the Far East where  resource


                                      -24-
<PAGE>


availability, competition, and infrastructure stability has provided a favorable
purchasing  environment.  The Company does not enter into derivative instruments
to manage commodity risk.


                                      -25-
<PAGE>

Item 8.  Financial Statements and Supplementary Data

Index to Financial Statements


Independent Auditor's Report..................................................27
Report Of Independent Public Accountants......................................28
Consolidated Balance Sheets...................................................29
Consolidated Statements Of Operations.........................................30
Consolidated Statements Of Stockholders' Equity...............................31
Consolidated Statements Of Cash Flows.........................................32
Notes To Consolidated Financial Statements....................................33



                                      -26-
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of Aearo Corporation:

We have audited the accompanying consolidated balance sheet of Aearo Corporation
and  subsidiaries  as of  September  30,  2001,  and  the  related  consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended.  Our audit also included the financial  statement  schedule listed in the
index at item 14. These financial  statements and financial  statement  schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express  an  opinion  on these  financial  statements  and  financial  statement
schedule based on our audit.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Aearo Corporation and subsidiaries
at September 30, 2001, and the results of their  operations and their cash flows
for the year then ended,  in conformity  with  accounting  principles  generally
accepted in the United States of America.  Also, in our opinion,  such financial
statement  schedule,  when  considered  in  relation  to the basic  consolidated
financial  statements  taken as a whole,  presents  fairly well in all  material
respects the information set forth therein.


DELOITTE & TOUCHE LLP
Indianapolis, Indiana
November 9, 2001


                                      -27-
<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Aearo Corporation:

We have audited the accompanying consolidated balance sheet of Aearo Corporation
and  subsidiaries  (a Delaware  corporation)  as of September 30, 2000,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for the  years  ended  September  30,  1999  and  2000.  These  financial
statements  and the  schedule  referred to below are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and the schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial  position  of  Aearo  Corporation  and
subsidiaries  as of September 30, 2000, and the results of their  operations and
their cash flows for the years ended  September 30, 1999 and 2000, in conformity
with accounting principles generally accepted in the United States.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole. The schedule listed in the index to the
accompanying  financial  statements is presented for purposes of complying  with
the  Securities  and  Exchange  Commission's  rules and is not part of the basic
financial  statements.  For the years  ended  September  30 1999 and  2000,  the
schedule has been subjected to the auditing  procedures applied in our audits of
the basic  financial  statements  and, in our  opinion,  fairly  states,  in all
material  respects,  the  financial  data  required  to be set forth  therein in
relation to the basic financial statements taken as a whole.


ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
December 15, 2000


                                      -28-
<PAGE>


                       AEARO CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                  (Dollars in Thousands, Except Share Amounts)
                                                                September 30,
                                                              2000        2001
                                                           ---------    -------
                               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents .............................$  3,495  $  18,233
     Accounts receivable (net of reserve for doubtful
       accounts of $1,354 and $831 respectively) ...........  44,242     42,428
     Inventories ...........................................  34,310     29,564
     Deferred and prepaid expenses .........................   2,623      2,325
                                                            --------  ---------
       Total current assets ................................  84,670     92,550
                                                            --------  ---------

LONG TERM ASSETS:
     Property, plant and equipment, net ....................  53,163     47,003
     Intangible assets, net ................................ 126,242    118,200
     Other assets ..........................................   2,691      3,549
                                                            --------  ---------
       Total assets ........................................$266,766  $ 261,302
                                                            ========  =========

                            LIABILITIES
CURRENT LIABILITIES:
     Current portion of long-term debt .....................$ 19,313  $   8,393
     Accounts payable and accrued liabilities ..............  36,666     37,896
     Accrued interest ......................................   3,423      2,691
     U.S. and foreign income taxes .........................   5,375      2,265
                                                            --------  ---------
       Total current liabilities ...........................  64,777     51,245
                                                            --------  ---------

Long-term debt ............................................. 180,506    193,836
Deferred income taxes ......................................     507        383
Other liabilities ..........................................   5,127      5,982
                                                            --------  ---------
       Total liabilities ...................................$250,917  $ 251,446
                                                            --------  ---------

                   COMMITMENTS AND CONTINGENCIES
Stockholders' Equity:
     Preferred stock, $.01 par value-
     (Redemption value of $85,590 and $96,801 respectively)
     Authorized - 200,000 shares
     Issued and outstanding - 45,000 shares ................     --         --
     Common stock $.01 par value-
       Authorized -- 200,000 shares
       Issued and outstanding -- 102,088 and 102,088 shares        1         1
Additional paid-in-capital .................................  32,213    32,374
Retained earnings (deficit) ................................    (614)  (2,494)
Accumulated other comprehensive loss ....................... (15,751) (20,025)
                                                            --------  --------
       Total stockholders' equity ..........................  15,849     9,856
                                                            --------  --------
       Total liabilities and stockholders' equity .........$ 266,766 $ 261,302
                                                           ========= =========

The accompanying notes are an integral part of these consolidated financial
statements


                                      -29-
<PAGE>



                       AEARO CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             (Dollars in Thousands)

                                                  Years Ended September 30,
                                                 1999       2000         2001
                                             ----------  ----------   ---------

Net sales....................................$  291,089  $  305,475   $ 283,862
Cost of sales................................   156,735     160,759     152,849
Unusual charges..............................         -           -       2,364
                                             ----------  ----------  ----------
 Gross profit................................   134,354     144,716     128,649

Selling and administrative...................    87,543      95,560      87,286
Research and technical services..............     4,651       5,528       5,162
Amortization expense.........................     6,793       6,859       6,530
Other charges (income), net..................       748       (242)         680
Unusual charges..............................                             9,077
                                             ----------  ----------   ---------

 Operating income............................    34,619      37,011      19,914
 Interest expense, net.......................    24,322      24,387      23,666
                                             ----------  ----------   ---------

 Income (loss) before provision for (benefit
      from) income taxes.....................    10,297      12,624     (3,752)
 Provision for (benefit from) income taxes...     3,244       3,576     (1,872)
                                             ----------  ----------   ----------

 Net income (loss)...........................$    7,053  $    9,048  $  (1,880)
                                             ==========  ==========   =========

The accompanying notes are an integral part of these consolidated financial
statements


                                      -30-
<PAGE>

                       AEARO CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in Thousands)



<TABLE>
<CAPTION>
                                                                                      Accumulated
                                   Preferred Stock   Common Stock     Additional                 Other             Comprehensive
                                   ----------------------------------- Paid-in   Accumulated  Comprehensive            (Loss)
                                   Shares Amount  Shares     Amount    Capital     Deficit        Loss      Total      Income
                                   -----------------------------------
                                   ---------------------------------------------------------------------------------------------
<S>                                <C>        <C> <C>              <C> <C>        <C>         <C>            <C>     <C>
Balance, October 1, 1998......      45,000     -  102,338           1  $ 32,383   $(16,715)   $(4,618)       $11,051
  Repayment of shareholder
    notes.....................           -     -        -           -       143         -            -         143
  Sales of common
    stock, net................           -     -      200           -        40         -            -          40
  Foreign currency
    translation adjustment....           -     -        -           -         -         -      (1,813)      (1,813) $  (1,813)
  Net income..................           -     -        -           -         -       7,053          -       7,053       7,053
                                                                                                                   -----------
    Comprehensive income......                                                                                      $    5,240
                                   ------------- --------  ---------- ---------  ----------  ---------      ------  ==========
Balance, September 30, 1999...      45,000     - 102,538            1    32,566     (9,662)    (6,431)      16,474

    Issuance of shareholder notes        -     -        -           -      (67)           -          -        (67)
    Repurchase of common stock, net      -     -    (450)           -     (286)           -          -       (286)
  Foreign currency
    translation adjustment....           -     -        -           -         -           -    (9,320)      (9,320) $  (9,320)
  Net income..................           -     -        -           -         -       9,048          -       9,048       9,048
                                                                                                                   -----------
    Comprehensive loss........                                                                                     $     (272)
                                   ------------- --------  ---------- ---------  ----------  ---------      ------ ===========
Balance, September 30, 2000...      45,000     -  102,088           1    32,213       (614)   (15,751)      15,849
  Repayment of shareholder
    Notes.....................          -      -        -           -       161           -          -         161
  Foreign currency
    translation adjustment....          -      -        -           -        -            -    (4,252)      (4,252)$   (4,252)
  Unrealized loss on derivative
    Instruments...............                                                                    (22)        (22)        (22)
  Net income..................          -      -        -           -        -      (1,880)          -      (1,880)    (1,880)
                                                                                                                   -----------
    Comprehensive loss........                                                                                     $   (6,154)
                                   ------ ------ --------  ---------- --------   ----------  ---------      ------ ===========
Balance, September 30, 2001...     45,000 $    - $102,088  $        1 $ 32,374   $  (2,494)  $(20,025)      $9,856
                                   ====== ====== ========  ========== ========   ==========  =========      ======
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements


                                      -31-
<PAGE>


                       AEARO CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                                                     1999        2000        2001
                                                                 --------    --------    --------
Cash Flows from Operating Activities:
<S>                                                              <C>         <C>         <C>
  Net income (loss) ..........................................   $  7,053    $  9,048    $ (1,880)
  Adjustments to reconcile net income (loss) to
     cash provided by operating activities--
     Depreciation ............................................      9,399      10,056      10,123
     Amortization ............................................      8,853       8,616       8,543
     Deferred income taxes ...................................        (70)       (196)       (101)
     Provision for restructuring charge ......................       --          --        11,441
     Other non-cash items, net ...............................        346         859         248
     Changes in assets and liabilities--
        Accounts receivable, net .............................        300      (2,812)      1,210
        Inventories ..........................................     (3,156)       (275)      1,758
        Accounts payable and accrued liabilities .............      3,126         633      (5,222)
        Other ................................................        447       1,631      (4,582)
                                                                 --------    --------    --------
           Net cash provided by operating activities .........     26,298      27,560      21,537
                                                                 --------    --------    --------
Cash Flows from Investing Activities:
     Cash paid for Norhammer .................................       --        (4,115)         --
     Cash paid for Livax .....................................       --          (350)         --
     Cash paid for Safety Optical ............................     (3,725)       --            --
     Additions to property, plant and equipment ..............     (8,355)     (9,552)     (7,799)
     Proceeds provided by disposals of property,
        plant and equipment ..................................         29          34          38
                                                                 --------    --------    --------
           Net cash used in investing activities .............    (12,051)    (13,983)     (7,761)
                                                                 --------    --------    --------

Cash Flows from Financing Activities:

     Sale (repurchase) of common stock, net ..................         40        (286)         --
     Repayment (issuance) of shareholder notes ...............        143         (67)        161
     (Repayment of) proceeds from revolving
        credit facility, net .................................     (2,150)      4,150     (10,000)
     (Proceeds from) repayment of term loans .................    (12,853)    (15,146)     11,700
     Repayment of other long-term debt .......................     (1,386)       (269)       (222)
                                                                 --------    --------    --------
           Net cash (used in) provided by financing activities    (16,206)    (11,618)      1,639
                                                                 --------    --------    --------

Effect of Exchange Rate Changes on Cash ......................       (728)     (2,514)       (678)
                                                                 --------    --------    --------

Net increase (decrease) in Cash and Cash Equivalents .........     (2,687)       (555)     14,738
Cash and Cash Equivalents, beginning of year .................      6,737       4,050       3,495
                                                                 --------    --------    --------
Cash and Cash Equivalents, end of year .......................   $  4,050    $  3,495    $ 18,233
                                                                 ========    ========    ========
Cash Paid for:
Interest .....................................................   $ 22,641    $ 22,637    $ 22,023
                                                                 ========    ========    ========
Income taxes .................................................   $  1,485    $  2,233    $  1,983
                                                                 ========    ========    ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements


                                      -32-
<PAGE>



                       AEARO CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis  of  Presentation
("Aearo"),  and its  direct  wholly  owned  subsidiary,  Aearo  Company I, doing
business  as  Aearo  Company,   a  Delaware   corporation   (the   "Subsidiary")
(collectively referred to herein as the Company) manufactures and sells products
through three reportable  segments.  The Company's segments are Safety Products,
Safety  Prescription  Eyewear  and  Specialty  Composites.  The Safety  Products
segment  manufactures  and sells hearing  protection  devices,  non-prescription
safety eyewear, face shields, reusable and disposable respirators, hard hats and
first aid kits under the brand names: AOSafety(R),  E-A-R(R), and Peltor(R). The
Safety Prescription  Eyewear segment manufactures and sells prescription eyewear
products  that are  designed  to  protect  the eyes  from  the  typical  hazards
encountered  in  the  industrial   work   environment.   The  Company's   Safety
Prescription  Eyewear segment purchases component parts (lenses and the majority
of its  frames)  from  various  suppliers,  grinds  and shapes the lenses to the
customer's  prescription,  and then  assembles the glasses using the  customer's
choice of frame. The Specialty  Composites segment manufactures and sells a wide
array  of   energy-absorbing   materials  that  are   incorporated   into  other
manufacturers' products to control noise, vibration and shock.

Aearo Corporation was formed by Vestar Equity Partners,  L.P. ("Vestar") in June
1995  to  effect  the  acquisition  of  substantially  all  of  the  assets  and
liabilities   of  Cabot  Safety   Corporation   and  certain   affiliates   (the
"Predecessor"),  all of which were wholly owned by Cabot Corporation  ("Cabot"),
(the  "Formation  Acquisition").  The Formation  Acquisition  closed on July 11,
1995,  when  Aearo  Corporation  acquired  substantially  all of the  assets and
certain  liabilities of the  Predecessor  for cash,  preferred stock and a 42.5%
common  equity  interest in Aearo  Corporation.  Aearo  Corporation  immediately
contributed the acquired assets and liabilities to Aearo Company, a wholly owned
subsidiary of Aearo  Corporation,  pursuant to an asset transfer agreement dated
June 13, 1995. Aearo  Corporation has no other material  assets,  liabilities or
operations  other than those that result from its  ownership of the common stock
of  Aearo  Company.  Separate  financial  statements  of Aearo  Company  are not
presented  because they do not provide any additional  information  from what is
presented in the  consolidated  financial  statements of Aearo  Corporation that
would be  meaningful to the holders of the Senior  Subordinated  Notes (see Note
7).

The  Formation  Acquisition  has been  accounted  for as a purchase  transaction
effective as of July 11, 1995, in accordance  with Accounting  Principles  Board
Opinion ("APB") No. 16, "Business Combinations", and EITF Issue No. 88-16, Basis
in Leveraged Buyout Transactions,  and accordingly,  the consolidated  financial
statements  for the periods  subsequent  to July 11, 1995  reflect the  purchase
price,  including transaction costs, allocated to tangible and intangible assets
acquired and  liabilities  assumed,  based on a portion of their  estimated fair
values as of July 11,  1995.  The  valuation of assets and  liabilities  reflect
carryover basis for the percentage ownership retained by Cabot.

2.  Significant Accounting Policies

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with accounting principles generally accepted in the United States of
America.  All  significant  intercompany  balances  and  transactions  have been
eliminated in consolidation.  The significant accounting policies of the Company
are described below.

Use of Estimates

The  preparation of the  consolidated  financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities  at the  date  of the  consolidated  financial  statements  and  the
reported amounts of revenues and expenses during the reporting  periods.  Actual
results could differ from those estimates.


                                      -33-
<PAGE>


Reclassifications

Certain amounts included in the prior year's consolidated  financial  statements
have  been  reclassified  to  conform  to the  current  year  presentation.  The
reclassifications have no impact on net income (loss) previously reported.


Revenue Recognition

The Company recognizes revenue upon shipment of its products to customers.

Advertising

The Company  expenses the costs of advertising as incurred.  These expenses were
approximately  $7,507,000,   $7,870,000  and  $5,882,000  for  the  years  ended
September 30, 1999, 2000 and 2001, respectively.

Cash Equivalents

The Company  considers  all time  deposits and  short-term  investments  with an
original maturity of three months or less to be cash equivalents.

Foreign Currency Translation and Transactions

Assets and liabilities of non-U.S.  subsidiaries  are translated at the exchange
rate as of the end of the  year.  Income  and  expenses  are  translated  at the
approximate average exchange rates during the year. Foreign currency translation
adjustments  are  recorded  as a separate  component  of  stockholders'  equity.
Foreign  currency  gains and  losses  arising  from  transactions  by any of the
Company's  subsidiaries  are  reflected  in net  income.  For  the  years  ended
September 30, 1999, 2000 and 2001 the  accompanying  consolidated  statements of
operations include approximately $559,000, $444,000 and $394,000,  respectively,
of transaction losses included in other (income) charges, net.

The Company  enters into  forward  foreign  currency  contracts  to mitigate the
effects of changes in foreign currency rates on  profitability  related to trade
accounts   receivable  and  trade  accounts   payable   denominated  in  foreign
currencies.  Gains and losses related to contracts designated as hedges of trade
accounts receivable and trade accounts payable denominated in foreign currencies
are accrued as exchange  rates  change and are  recognized  in the  accompanying
consolidated  statements  of operations  as  transaction  (gains) and losses and
included in other (income)  charges,  net. As of September 30, 2001, the Company
had forward foreign currency contracts open in the following amounts:

Currency             Amount (000s)   Contract Position
--------             -------------   -----------------
British Pound             3,398             Buy
Canadian Dollar             259             Buy
Norwegian Krona           4,374             Sell
Swedish Krona           111,122             Buy
Swiss Franc               1,538             Buy
Euro                     8,876              Sell
Danish Krona              2,807             Sell

As of September 30, 2001, the Company has recorded an unrealized loss of $92,000
associated with the above forward foreign currency contract commitments.

The Company enters into foreign currency forward contracts to hedge a portion of
anticipated  sales  denominated  in Great  Britain  Pound  Sterling  and Euro to
mitigate  the impact of the  effects of  changes  in foreign  currency  rates on
profitability  related to cash flows from European operations.  Gains and losses
on these hedge  contracts  are deferred and  recognized  as an adjustment to the
other charges (income), net. For the year ended September 30, 2000 and 2001, the
consolidated  statement of operations  included  approximately  $1.4 million and
($0.2) million of gains (losses) related to these instruments.

The U.S.  dollar  equivalent  notional  amount of  outstanding  forward  foreign
currency  contracts to hedge a portion of anticipated sales denominated in Great
Britain Pound Sterling and Euro is  approximately  $7.7 million at September 30,
2001.  Deferred  losses  related  to hedges of future  sales  transactions  were
approximately  $22,000


                                      -34-
<PAGE>


at September  30, 2001.  Contracts  outstanding  at September 30, 2001 mature at
various dates through  December 31, 2001.  The Company does not enter into these
contracts for trading purposes.

Inventories

Inventories  are  stated at the lower of cost or market,  cost being  determined
using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property,  plant and  equipment is recorded at cost.  Depreciation  of property,
plant and  equipment  is  calculated  using the  straight-line  method  based on
estimated  economic useful lives.  Expenditures  for maintenance and repairs and
minor  renewals  are charged to expense.  Expenses for  maintenance  and repairs
totaled approximately $2,902,000,  $2,928,000 and $2,414,000 for the years ended
September 30, 1999, 2000 and 2001, respectively.

Property, plant, equipment, and the related estimated useful lives are as
follows:

Asset Classification      Estimated Useful Life
--------------------      ---------------------
Buildings                 25-40 years
Leasehold improvements    Life of the lease or useful life, whichever is
                          shorter
Machinery and equipment   3-10 years
Furniture and fixtures    3-10 years

Upon  the sale or  retirement  of  assets,  the  cost  and  related  accumulated
depreciation are removed from the  consolidated  financial  statements,  and any
resultant gain or loss is recognized.

Income Taxes

Deferred  tax assets and  liabilities  are  determined  based on the  difference
between the financial  statement and tax basis of assets and  liabilities  using
currently enacted tax rates.

Intangible Assets

Intangible  assets  consist  primarily  of  goodwill,   patents  and  trademarks
purchased in business  acquisitions.  Intangible assets are amortized over their
estimated useful lives.

Estimated lives by major category of intangible assets at September 30, 2001
are as follows:

Goodwill                  25 years
--------                  --------
Patents                   Life of patents (up to 17 years)
Non-compete agreements    Life of agreements (up to 5 years)
Trademarks, trade names
and other                 Varies from 15 to 25 years

Impairment

The Company accounts for long-lived and certain  intangible assets in accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The Company  continually  reviews its long-lived and intangible  assets for
events or changes in  circumstances  that might indicate the carrying  amount of
the assets may not be recoverable.  The Company assesses the  recoverability  of
the assets by  determining  whether the  amortization  of such assets over their
remaining  lives can be recovered  through  projected  undiscounted  future cash
flows.  The  amount  of  impairment,  if any,  is  measured  based on  projected
discounted  future cash flows using a discount  rate  reflecting  the  Company's
average cost of funds.  During the year ended  September  30, 2000,  the Company
identified  a certain  information  technology  system that was  impaired.  As a
result,  the Company wrote off  approximately  $500,000  related to this system,
which  is  included  in other  (income)  charges,  net.  During  the year  ended
September  30,  2001,  the  Company  identified  certain  assets in the  Newark,
Delaware  facility  that were  impaired.  As a  result,  the  Company  wrote off
approximately $2.9 million related to those assets (see Note 17).


                                      -35-
<PAGE>

Deferred Financing Costs

Deferred  financing  costs are stated at cost as a component of other assets and
amortized over the life of the related debt.  Amortization of deferred financing
costs is included  in interest  expense  and  aggregated  $1.8  million and $2.0
million for the years ended September 30, 2000 and 2001, respectively.

Fair Value of Financial Instruments

In accordance  with the  requirements of SFAS No. 107,  "Disclosures  about Fair
Value of Financial  Instruments",  the Company has determined the estimated fair
value of its financial  instruments  using  appropriate  market  information and
valuation  methodologies.  Considerable  judgment  is  required  to develop  the
estimates of fair value;  thus, the estimates are not necessarily  indicative of
the amounts that could be realized in a current market exchange.

The  Company's  financial  instruments  consist  of cash and  cash  equivalents,
accounts  receivable,  accounts payable,  Senior  Subordinated  Notes, bank debt
(including  term loans,  revolving  credit facility and other debt) and interest
rate  instruments.  The  carrying  value of these  assets and  liabilities  is a
reasonable estimate of their fair market value at September 30, 2001, except for
the Senior  Subordinated  Notes, for which the Company estimates the fair market
value to be  approximately $ 98.0 million at September 30, 2001. The Company had
no open interest rate instruments at September 30, 2001.

The Company also has  off-balance  sheet  financial  instruments  in the form of
forward foreign currency contracts as described in Note 2. Current market prices
were used to estimate the fair value of the forward foreign currency contracts.

The future  value of the  forward  foreign  currency  contracts  and the related
currency  positions are subject to offsetting market risk resulting from foreign
currency exchange rate volatility.  The  counter-parties  to these contracts are
substantial  and  creditworthy  financial  institutions.  Neither  the  risks of
counter-party  non-performance  nor the economic  consequences of  counter-party
non-performance  associated  with these  contracts  are  considered  by us to be
material.

Accounting for Stock-based Compensation

SFAS No. 123 "Accounting for Stock-Based  Compensation" addresses accounting and
reporting  requirements for stock options and other equity instruments issued or
granted  based on their fair  market  values.  The  Company  intends to continue
accounting for its  stock-based  compensation  plans for employees in accordance
APB No. 25,  "Accounting  for Stock  Issued to  Employees".  Under SFAS No. 123,
companies  choosing to  continue  to use APB No. 25 to account  for  stock-based
compensation plans for employees must make footnote  disclosure of the pro forma
effects on earnings per share, had the principles  contained within SFAS No. 123
been applied (see Note 12).

Shipping and Handling Fees and Costs

Shipping and handling  costs include  payments to third parties for the delivery
of products  to  customers,  as well as internal  salaries  and  overhead  costs
incurred to store, move and prepare finished products for shipment. Shipping and
handling  costs are  included  with selling and  administrative  expenses in the
accompanying consolidated statement of operations and totaled $9.7 million, $9.9
million  and $9.3  million  in fiscal  1999,  2000 and 2001,  respectively.  The
Company  recovers  a  portion  of its  shipping  and  handling  costs  from  its
customers.  In September 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on issue No. 00-10 (EITF 00-10), "Accounting for Shipping and Handling
Fees and Costs".  This  pronouncement was effective for the Company beginning in
the fourth quarter of fiscal 2001.  Prior to the effective date,  reimbursements
received from customers for shipping and handling costs had been classified as a
reduction of the related expense. As required by this pronouncement, the Company
has reclassified  reimbursements  for all prior periods  presented to net sales,
including reimbursements totaling $0.7 million, $0.5 million and $0.4 million in
fiscal 1999, 2000 and 2001, respectively.


                                      -36-
<PAGE>

Accounting for Derivative Instruments and Hedging Activities

The Company  adopted the provisions of SFAS No. 133,  "Accounting for Derivative
Instruments  and Hedging  Activities" on October 1, 2000.  SFAS No. 133 requires
that every  derivative  instrument be recorded in the balance sheet as either an
asset or a liability measured at its fair value. The adoption of SFAS No. 133 on
October 1, 2000  resulted  in a $0.4  million  transition  adjustment  charge to
accumulated  other  comprehensive  income  to  recognize  the fair  value of all
derivatives that are designated as cash flow hedges.

The  Company  has  formally  documented  its  hedging  relationships,  including
identification  of the hedging  instruments  and the hedge items, as well as its
risk   management   objectives  and  strategies  for   undertaking   each  hedge
transaction. From time to time the Company enters into foreign currency exchange
contracts and interest rate swap agreements, which are derivatives as defined by
SFAS No. 133. The Company  enters into  forward  foreign  currency  contracts to
mitigate the effects of changes in foreign currency rates on  profitability  and
enters into  interest rate swap  agreements to hedge its variable  interest rate
risk.  These  derivatives  are cash flow hedges.  For all  qualifying and highly
effective cash flow hedges, the changes in the fair value of the derivatives are
recorded in other  comprehensive  income  (loss).  Amounts  accumulated in other
comprehensive  income (loss) will be  reclassified  as earnings when the related
product sales affect  earnings for forward  foreign  currency  contracts or when
related interest payments affect earnings for interest rate swaps.

As a result of the forward foreign currency contracts,  the Company has recorded
a derivative  liability of $22,000 at September 30, 2001. All forward  contracts
will expire over the next three months.  There were no interest rate derivatives
at September 30, 2001.

For the year ended September 30, 2001 the Company  reclassified  into earnings a
net loss of $244,000  resulting  from the exercise of forward  foreign  currency
contracts  and  a net  loss  of  $724,000  resulting  from  interest  rate  swap
settlements.  All forward  foreign  currency  contracts  and interest  rate swap
agreements were determined to be highly effective whereby no ineffectiveness was
recorded in earnings.

The Company also executes  forward foreign  currency  contracts for up to 30 day
terms to protect against the adverse effects that exchange rate fluctuations may
have on the foreign-currency-denominated trade activities (receivables, payables
and cash) of foreign  subsidiaries.  These contracts have not been designated as
hedges  under  SFAS No.  133 and  accordingly,  the gains and losses on both the
derivative  and  foreign-currency-denominated  trade  activities are recorded as
transaction  adjustments in current earnings.  The impact on earnings was a loss
of approximately $392,000 for the year ended September 30, 2001.

New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived Assets".  SFAS No. 144 addresses financial accounting and
reporting for the  impairment or disposal of  long-lived  assets and  superseded
SFAS No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed Of" and APB No. 30,  "Reporting the Results of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS
No. 144 is effective in fiscal years  beginning  after  December 15, 2001,  with
early  adoption  permitted.  The Company is  currently  assessing  the impact of
adopting this standard and has not yet  determined the effect of adoption on its
financial position and results of operations.

In July 2001,  the FASB issued SFAS  No.143,  "Accounting  for Asset  Retirement
Obligations".  SFAS No. 143 is effective for fiscal years  beginning  after June
15, 2002, and establishes an accounting  standard requiring the recording of the
fair value of liabilities associated with the retirement of long-lived assets in
the period in which they are  incurred.  The Company is currently  assessing the
impact of  adopting  this  standard  and has not yet  determined  the  effect of
adoption on its financial position and results of operations.

In June 2001, the FASB issued two new  pronouncements:  SFAS No. 141,  "Business
Combinations"  and SFAS No. 142 "Goodwill and Other  Intangibles."  SFAS No. 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations   initiated   after  June  30,   2001  and  that  the  use  of  the
pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon
adoption, amortization of goodwill will cease and

                                      -37-
<PAGE>


instead, the carrying value of goodwill be evaluated for impairment on an annual
basis.  Identifiable  intangible assets will continue to be amortized over their
useful  lives and  reviewed  for  impairment  in  accordance  with SFAS No.  121
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of". SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The Company
is currently  assessing the impact of adopting  these  standards and has not yet
determined  the effect of  adoption  on its  financial  position  and results of
operations.

3. Inventories

   Inventories consisted of the following at September 30
   (dollars in thousands):
                                           2000      2001
                                        -------   -------
   Raw materials .......................$ 8,246   $ 7,259
   Work in process .....................  7,662     8,364
   Finished goods ...................... 18,402    13,941
                                        -------   -------
                                        $34,310   $29,564
                                        =======   =======

4. Property, Plant and Equipment

   Property, plant and equipment consisted of the following at September 30
   (dollars in thousands):
                                        2000             2001
                                    -----------      -----------
   Land ............................$     2,570      $     2,540
   Buildings and improvements .......    19,043           19,650
   Machinery and equipment ..........    54,086           49,912
   Furniture and fixtures ...........    18,571           19,715
   Construction in progress ........      4,633            7,015
                                     ----------      -----------
                                         98,903           98,832
   Less - Accumulated depreciation .     45,740           51,829
                                    -----------      -----------
                                    $    53,163      $    47,003
                                    ===========      ===========
5. Intangible Assets

Intangible assets consisted of the following at September 30 (dollars in
thousands):
                                                            2000            2001
                                                        --------        --------
Goodwill .......................................          82,037        $ 80,395
Trademarks and trade names .....................          74,122          74,122
Patents ........................................           1,638           1,638
Non-compete agreement ..........................             834             585
Other ..........................................             375             215
                                                        --------        --------
                                                         159,006         156,955
Less - Accumulated amortization ................          32,764          38,755
                                                        --------        --------
                                                        $126,242        $118,200
                                                        ========        ========

6. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following at
September 30 (dollars in thousands):
                                                             2000           2001
                                                          -------        -------
Accounts payable - trade .........................        $16,454        $14,614
Accrued liabilities -
Employee compensation and benefits
(Note 9) .........................................         12,957         11,827
Restructuring reserve ............................           --            6,343
Other ............................................          7,255          5,112
                                                          -------        -------
                                                          $36,666        $37,896
                                                          =======        =======

                                      -38-
<PAGE>

7. Debt

The long-term debt consisted of the following at September 30 (dollars in
thousands):
                                                              2000          2001
                                                          --------      --------
Term loans, due 2002 ...............................      $ 39,102      $  8,131
Term loans, due 2003 ...............................        47,875        12,196
Term loans, due 2004 ...............................          --          16,262
Term loans, due 2005 ...............................          --          63,047
Revolving credit facility ..........................        10,000          --
Senior subordinated notes, due 2005, 12.5% .........       100,000       100,000
Mortgage note, due 1998 - 2006, 10.1% ..............         2,300         2,236
Other ..............................................           542           357
                                                          --------      --------
                                                           199,819       202,229
Less-- Current portion of long-term debt ...........        19,313         8,393
                                                          --------      --------
     Total .........................................      $180,506      $193,836
                                                          ========      ========

Senior Bank Facilities

The  Company's  Senior  Bank  Facilities  consist of Term Loans and a  Revolving
Credit Facility as hereinafter  defined.  The Senior Bank Facilities  consist of
(a) a secured term loan facility  consisting of loans providing for up to $100.0
million of A Term Loans (collectively,  the Term Loans); a portion of the A Term
Loans is  denominated  in an  equivalent  amount of  foreign  currencies,  (b) a
secured revolving credit facility (the Revolving Credit Facility)  providing for
up to $30.0 million of revolving loans, for general  corporate  purposes and, as
to $30.0  million  thereof,  to finance  permitted  acquisitions  and (c) a U.K.
overdraft  facility  of up to an  equivalent  of $5.0  million in Great  Britain
Pounds for working capital requirements as needed. The Revolving Credit Facility
provides for the issuance of letters of credit in an aggregate face amount of up
to $10.0  million.  A Term Loans  amortize  quarterly  over a four year  period.
Amounts  repaid or prepaid in respect of the Term Loans may not be  re-borrowed.
Loans  and  letters  of credit  under  the  Revolving  Credit  Facility  will be
available until the Revolving Loan Maturity Date, which is March 31, 2005.

At the Company's  option,  the interest rates per annum applicable to the Senior
Bank  Facilities  are either (a) an adjusted rate based on the London  Interbank
Offered  Rate  (LIBOR)  plus a margin  of 3.25% in the case of A Term  Loans and
2.75% for  Revolving  Loans or (b) the Base Rate,  as defined,  plus a margin of
2.25% in the case of A Term Loans and 1.75% for Revolving  Loans.  The Base Rate
is the higher of Bankers  Trust  Company's  announced  prime lending rate or the
Overnight  Federal  Funds rate plus 0.50%.  The Company must pay certain fees in
connection with the Senior Bank  Facilities,  including a commitment fee ranging
from 0.375% to 0.50% on the undrawn portion of the commitments in respect of the
Revolving  Credit Facility based upon the Company's  leverage ratio, and a 0.25%
facing fee relating to the issuance of letters of credit.

The  Company is  entitled  to an  Interest  Reduction  Discount of .25% when the
Company achieves a leverage ratio of less then 3.50. The discount would apply to
all A Term Loans and the Revolving Loans.

Under the terms of the Senior  Bank  Facilities,  Aearo  Company is  required to
comply  with a  number  of  affirmative  and  negative  covenants.  Among  other
restrictions, Aearo Company must satisfy certain financial covenants and ratios,
including  interest  coverage  ratios,  leverage  ratios,  fixed charge coverage
ratios and limits on the amount of permitted  capital  acquisitions.  The Senior
Bank Facilities also impose limitations on certain business  activities of Aearo
Company. The Senior Bank Facilities restrict, among other things, the incurrence
of additional  indebtedness,  creation of certain liens, sales of certain assets
and limitations on transactions with affiliates. As of September 30, 2001, Aearo
Company is in compliance with the covenants of the Senior Bank  Facilities.  The
Senior Bank Facilities are  unconditionally  guaranteed by Aearo Corporation and
secured by first priority  security  interests in substantially  all the capital
stock and tangible and intangible assets of the Company.

On October  17,  2001,  the Senior  Bank  Facilities  were  amended to allow the
Company to repurchase up to $10.0 million of Senior Subordinated Notes at par or
below.  The first $5.0 million would be purchased  from  available

                                      -39-
<PAGE>


cash with the second $5.0 million from cash or new A Term Loans.  This amendment
expires December 20, 2001.

Term Loans

At September  30, 2001,  the total balance  outstanding  on the A Term Loans was
$99.6  million  and  interest  rates  were 5.8% for the U.S.  Dollar A Term Loan
($58.8  million US dollars  outstanding  at September  30,  2001),  7.8% for the
British Pound A Term Loan (17.3 million British Pounds  outstanding at September
30,  2001),  6.9% for the Euro A Term Loan (12.6  million  Euro  outstanding  at
September 30, 2001), and 6.5% for the Canadian A Term Loan (6.2 million Canadian
dollars  outstanding  at September 30, 2001).  For the year ended  September 30,
2001, the weighted average interest rates paid were 7.0%, 8.6% 7.8% and 7.6% for
the U.S.  Dollar A Term Loan,  the British  Pounds A Term Loan,  the Euro A Term
Loan and the Canadian A Term Loan, respectively.

At September 30, 2000, the total balance outstanding on the Term Loans was $87.0
million  and  interest  rates were 9.0% for the U.S.  Dollar A Term Loan  ($15.5
million U.S.  dollars  outstanding  at September 30, 2000),  6.7% for the German
Deutsche Mark A Term Loan (13.8 million  German  deutsche  marks  outstanding at
September 30, 2000), 9.1% for the British Pound A Term Loan (9.0 million British
pounds  outstanding  at September 30,  2000),  8.4% for the Canadian A Term Loan
(6.2 million Canadian  dollars  outstanding at September 30, 2000), and 9.5% for
the U.S. Dollar B Term Loan ($47.9 million U.S. dollars outstanding at September
30, 2000).  For the year ended September 30, 2000, the weighted average interest
rates paid were 8.6%,  6.1%,  8.6%,  8.0%,  and 9.1% for the U.S.  Dollar A Term
Loan,  the German  Deutsche Mark A Term Loan, the British Pound A Term Loan, the
Canadian A Term Loan and the U.S. Dollar B Term Loan, respectively.

Revolving Credit Facility

At September  30, 2001,  no amounts were  outstanding  on the  Revolving  Credit
Facility.  For the year ended September 30, 2001, the maximum amount outstanding
was $23.4  million,  the average  was $13.5  million  and the  weighted  average
interest rate paid was 8.8%. At September 30, 2001,  approximately $29.3 million
is available for additional  borrowings and $30.0 million to finance  additional
permitted acquisitions.

At September 30, 2000, the balance  outstanding on the Revolving Credit Facility
was $10.0  million,  all of which bore  interest at LIBOR ($5.0 million at 8.91%
and $5.0 million at 8.94%).  For the year ended  September 30, 2000, the maximum
amount  outstanding  was $23.2 million,  the average was $13.4 million,  and the
weighted average interest rate paid was 9.3%.

Senior Subordinated Notes

In  connection  with the  acquisition,  Aearo Company  issued $100.0  million of
Senior Subordinated Notes due 2005 (Notes),  which are unsecured  obligations of
Aearo Company. The Notes bear interest at a rate of 12.5% per annum and interest
is payable semiannually on each January 15 and July 15.

The Notes are  redeemable at the option of Aearo  Company,  on or after July 15,
2000.  From and after July 15, 2000,  the Notes will be subject to redemption at
the option of Aearo Company,  in whole or in part, at various redemption prices,
declining from 106.3% of the principal amount to par on and after July 15, 2004.
The Company repurchased $2.0 million of Notes in October 2001.

The Notes indenture contains affirmative and negative covenants and restrictions
similar  to those  required  under  the  terms  of the  Senior  Bank  Facilities
discussed  above. As of September 30, 2001,  Aearo Company is in compliance with
the various  covenants  of the Notes  agreement.  The Notes are  unconditionally
guaranteed on an unsecured, senior subordinated basis by Aearo Corporation.

                                      -40-
<PAGE>


Maturities

As of September 30, 2001, the scheduled maturity of indebtedness for each of the
next five years and thereafter is as follows (dollars in thousands):
                       Amount
                  -----------
2002              $     8,393
2003                   12,289
2004                   16,363
2005                  163,157
2006                    1,919
Thereafter                108
                  -----------
                     $202,229
8.  Interest Expense, Net

Interest expense, net comprises the following items (dollars in thousands):

                                     Years Ended September 30,
                               1999            2000             2001
                          ------------   -------------   --------------
Expense                   $     24,553   $     24,546    $      23,869
Income                           (231)          (159)            (203)
                          ------------   ------------    -------------
Interest expense, net     $     24,322   $     24,387    $      23,666
                          ============   ============    =============

9.  Employee Benefit Plans

The Company  maintains a  noncontributory  defined  benefit cash balance pension
plan.  Benefits  provided under the plan are primarily based on years of service
and the employee's compensation.

The tables that follow  provide a  reconciliation  of benefit  obligation,  plan
assets and funded status of the pension plan (dollars in thousands):

                                                     Years Ended September 30,
Change in benefit obligation .................      1999       2000        2001
                                                 -------    -------    --------
      Benefit obligation at beginning of year    $ 9,650    $ 9,500    $  9,887
           Service cost ......................     1,414      1,299       1,336
           Interest cost .....................       624        668         721
           Plan amendments ...................       115       --          --
           Benefits paid .....................    (1,306)    (1,299)       (993)
           Actuarial gain ....................      (997)      (281)        392
                                                 -------    -------    --------
      Benefit obligation at end of year ......   $ 9,500    $ 9,887    $ 11,343
                                                 =======    =======    ========

                                                      Years Ended September 30,
Change in plan assets ........................      1999        2000        2001
                                                 -------    --------    --------
Fair value of plan assets at beginning of year   $ 8,732    $  9,103    $ 10,535
   Actual return of plan assets ..............     1,327         960     (1,491)
   Employer contributions ....................       350       1,771       1,208
   Benefits paid .............................    (1,306)     (1,299)      (993)
                                                 -------    --------    --------
Fair value of plan assets at end of year .....   $ 9,103    $ 10,535    $  9,259
                                                 =======    ========    ========

                                                      As of September 30,
Reconciliation of Funded status ..............     1999        2000        2001
                                                 -------    --------    --------
  Fair value of plan assets at end of year ...     9,103      10,535      9,259
  Benefit obligations at end of year .........     9,500       9,887     11,343
                                                 -------    --------    --------
  Funded status ..............................   $  (397)   $    648    $(2,084)
  Unrecognized prior service cost ............       110         103         96
  Unrecognized actuarial (gain) ............. .   (3,034)     (3,442)      (572)
                                                 -------    --------    --------
Net pension liability included in accrued
  liabilities                                   $(3,321)   $ (2,691)   $ (2,560)
                                                 =======    ========    ========

                                      -41-
<PAGE>


                                                    Years Ended September 30,
Components of net periodic benefit cost ....     1999        2000        2001
                                                -------     -------     -------
  Service cost .............................    $ 1,414     $ 1,299     $ 1,336
  Interest cost ............................        624         668         721
  Expected return on plan assets ...........       (670)       (700)       (842)
  Unrecognized prior service cost ..........          5           7           7
  Recognized actuarial gain ................        (33)       (130)       (145)
                                                -------     -------     -------
  Net periodic benefit cost ................    $ 1,340     $ 1,144     $ 1,077
                                                =======     =======     =======

The weighted  average  assumptions used in determining net periodic benefit cost
and the projected benefit obligation were as follows:
                                                       As of September 30,
                                                    1999        2000        2001
                                                   -----      -------     ------
Discount rate ..................................   7.50%       7.75%       7.50%
Expected long-term rate of return on plan assets   8.00        8.00        8.00
Rate of compensation increase ..................   4.00        4.00        4.00

In  addition,  the  Company has an  unfunded,  noncontributory  defined  benefit
pension plan, the Aearo Company Supplemental Executive Retirement Plan (the SERP
Plan),  which is also a cash balance plan. The SERP Plan,  effective  January 1,
1994, covers certain employees in the United States of America. The costs to the
Company for the SERP Plan were  $81,000,  $141,000  and  $121,000  for the years
ended September 30, 1999, 2000 and 2001, respectively.

A 401(k) plan, the Aearo Company Employees' 401(k) Savings Plan, was established
as of May 1, 1990. Employees normally scheduled to work a minimum of 1,000 hours
per year can join the plan  immediately  and may  contribute  up to 15% of their
compensation.  The Company  contributes  amounts equal to 50% of the  employee's
contribution  to a maximum of 3% of the employee's pay. The costs to the Company
for this Plan were $765,000, $857,000 and $903,000 for the years ended September
30, 1999, 2000 and 2001, respectively.

The Company has a defined  contribution  savings plan for U.K. employees,  under
which  eligible  employees  are  allowed  to  contribute  up  to  15%  of  their
compensation.  The Company  contributes 5% of pay for all eligible employees and
additional  amounts equal to 40% of the employee's  contribution to a maximum of
2% of the employee's pay. For the years ended September 30, 1999, 2000 and 2001,
the  Company  contributed   approximately  $197,000,   $198,000,  and  $150,000,
respectively.

Postretirement Benefits

The Company does not provide defined benefit  postretirement  plans for retirees
after age 65, except that all employees who elect early  retirement at age 62 or
older are eligible to receive life insurance  coverage that  terminates on their
65th birthday. In addition,  employees who were age 55 or older with 10 years of
service as of April 1, 1990 are eligible to receive limited health care and life
insurance  coverage for  themselves  and their  eligible  dependents  upon early
retirement at age 62 or older. These coverages terminate on the 65th birthday of
the retiree or his or her  spouse.  The health  care  benefit is a fixed  dollar
contribution and the life insurance benefit is a fixed coverage amount.

10.  Related Party Transactions

An annual  management fee, which is to be shared by Cabot and Vestar, is paid in
aggregate  amounts  with respect to each fiscal year equal to the greater of (i)
$400,000  or (ii) 1.25% of the  consolidated  net income of the  Company and its
subsidiaries before cash interest, taxes, depreciation and amortization for such
fiscal year.  This


                                      -42-
<PAGE>

annual  management  fee is shared by Cabot and  Vestar  based on their  relative
equity ownership of the Company and payments totaled  approximately $ 706,000, $
686,000 and $728,000  during the years ended  September 30, 1999, 2000 and 2001,
respectively.

The  Company  and Cabot have  entered  into an  arrangement  relating to certain
respirator  claims  asserted  after  the  Formation  Acquisition  as long as the
Company  pays to Cabot an annual fee of  $400,000,  as discussed in Note 13. The
Company paid Cabot $400,000 for each of the years ended September 30, 1999, 2000
and 2001.

The Company has made  available  to certain  members of  management  (Management
Investors) loans in order to provide such Management  Investors with funds to be
applied to a portion of the purchase price of the Common Stock purchased by such
Management  Investors  under the Stock Purchase Plan. Such loans (i) are secured
by Common Stock  purchased with the proceeds  thereof,  (ii) have a term of from
five to 10 years,  (iii) bear interest at an annual rate determined  pursuant to
Section  7872(f)(2)  of the  Internal  Revenue  Code,  and (iv) are  subject  to
mandatory  prepayment in the event the employment of such  Management  Investors
terminates. The aggregate amount of these loans was approximately $1,496,000 and
$1,335,000 at September 30, 2000 and 2001,  respectively,  and is reflected as a
reduction  of  the  additional  paid-in  capital  account  in  the  consolidated
statements of stockholders' equity.

11.  Income Taxes

Income (loss) before provision for income taxes was as follows (dollars in
thousands):
                                               Years Ended September 30,
                                          1999            2000             2001
                                       -------         -------         --------
   Domestic ..................         $ 3,836         $ 6,157         $(10,865)
   Foreign ...................           6,461           6,467            7,113
                                       -------         -------         --------
   Total .....................         $10,297         $12,624         $ (3,752)
                                       =======         =======         ========

A summary of provision (benefit) for income taxes was as follows (dollars in
thousands):
                                                  Years Ended September 30,
U.S. Federal and State                     1999           2000           2001
                                          -------        -------        -------
     Current ...........................  $   347        $   163        $(3,525)
     Deferred ..........................      716          1,940             --
                                          -------        -------        -------
                                          $ 1,063        $ 2,103        $(3,525)
                                          =======        =======        =======
                                          $ 2,315          1,581          1,957
Foreign
     Current ...........................     (134)          (108)          (304)
     Deferred ..........................    2,181          1,473          1,653
                                          -------        -------        -------
Total .............................       $ 3,244          3,576        $(1,872)
                                          =======        =======        =======

The provision  (benefit)  for income taxes at the  Company's  effective tax rate
differed from the provision  (benefit) for income taxes at the statutory rate as
follows (dollars in thousands):
                                                   Years Ended September 30,
                                                -------------------------------
                                                   1999        2000        2001
                                                -------     -------     -------
Computed tax expense (benefit) at the
     expected statutory rate ...............    $ 3,502     $ 4,293     $(1,277)
State taxes, net of federal effect .........        322          37         (51)
Foreign income taxed at different rates ....       (147)       (192)     (1,172)
Foreign dividends ..........................      1,888        --          --
Non-deductible goodwill amortization .......      1,076         320         308
Non-deductible expenses ....................         90         200         267
Increase (decrease) in valuation
      allowance ............................     (3,708)       (493)        110
Other, net .................................        221        (589)        (57)
                                                -------     -------     -------
Provision (benefit) for income taxes .......    $ 3,244     $ 3,576     $(1,872)
                                                =======     =======     =======

                                      -43-
<PAGE>

Significant  components of deferred  income taxes are as follows at September 30
(dollars in thousands):

Deferred tax assets                              1999        2000        2001
                                               --------    --------    --------
Pension and other benefits .................   $  2,367    $  2,844    $  2,086
Property, plant and equipment ..............     (5,046)     (4,368)     (3,441)
Intangible assets ..........................      1,572         397       1,716
Restructuring charges ......................         71           7       2,079
Inventory ..................................      1,652         995       1,202
Net operating loss carryforwards - Foreign .        895         273       2,538
Net operating loss carryforwards - Domestic      11,155       9,719      10,474
Accrued Expenses and Other .................      1,101       1,747       1,233
                                               --------    --------    --------
Subtotal ...................................     13,767      11,614      17,887
Valuation allowances .......................    (14,592)    (12,121)    (18,270)
                                               ========    ========    ========
Total deferred tax liability ...............   $   (825)   $   (507)   $   (383)
                                               ========    ========    ========

The  valuation  allowance  at  September  30,  2000  and  2001  relates  to  the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss  carryforwards.  The gross amount of domestic and foreign net
operating loss  carryforwards,  before the tax effect,  is  approximately  $30.8
million  and $7.5  million,  respectively,  as of  September  30,  2001.  Of the
valuation  allowance  recorded as of  September  30,  2001,  approximately  $7.1
million will be used to reduce goodwill if the benefits are realized.

During  the year  ended  September  30,  2000,  approximately  $1.9  million  of
valuation  allowances  originally  established  through purchase accounting were
reversed through goodwill.

12. Stockholders' Equity

Stock Ownership and Stockholders' Agreement

As of September 30, 2001,  Cabot owns 41.6% of common stock (42,500  shares) and
50% of redeemable  preferred stock (22,500 shares),  Vestar owns 41.6% of common
stock (42,500 shares) and 50% of redeemable  preferred stock (22,500 shares) and
the Management Investors and certain other employees of the Company own 16.8% of
common stock (17,087.5 shares).  Vestar,  Cabot and the Management Investors are
parties  to  a  stockholders'  agreement  (the  Stockholders'  Agreement).   The
Stockholders'  Agreement  contains  stock  transfer  restrictions,  as  well  as
provisions  granting certain tag-along rights,  drag-along rights,  registration
rights and participation rights.

The preferred  stock is cumulative  redeemable  $.01 par value stock.  Dividends
accrue whether or not dividends are declared or funds are available at an annual
rate of 12.5%,  compounded  quarterly.  Prior to September 30 2001,  the Company
calculated the preferred  dividend based on an annual rate of 12.5%,  compounded
daily.  During  the year  ended  September  30,  2001 the  Company  amended  the
methodology  used to calculate the dividend accrual to be in accordance with the
Company's  charter  documents whereby the calculation was changed to a quarterly
determination.  To date, no dividends have been declared.  Accrued dividends may
be  paid  in cash  or in  additional  shares  of  preferred  stock.  Shares  are
redeemable for cash at any time, subject to certain exceptions, at the option of
the Company at a redemption  price equal to the actual or implied purchase price
($45  million)  plus a  redemption  payment  based on the dividend  rate.  As of
September 30, 2001, the redemption value of the preferred stock is $96,801,000.

Aearo Company is permitted to pay cash dividends to Aearo  Corporation for taxes
and expenses in the  ordinary  course of  business.  The maximum  amount of cash
dividends  paid to Aearo  Corporation  for  ordinary  business  expenses may not
exceed  $1,000,000  in any fiscal  year.  As long as no event of  default  would
result,  Aearo  Corporation  and Aearo  Company are  permitted to pay  dividends
consisting of shares of qualified  capital stock,  as defined in the Senior Bank
Facilities,  and Aearo  Corporation may redeem or purchase shares of its capital
stock held by former  employees of Aearo  Corporation or any of its subsidiaries
following  the  termination  of their  employment,  provided  that the aggregate
amount paid by Aearo  Corporation  with respect to such purchases or redemptions
does not  exceed  $5.0  million  in any  fiscal  year and  $7.5  million  in the
aggregate.  Aearo Company

                                      -44-
<PAGE>

may  pay  cash  dividends  to  Aearo   Corporation   for  the  latter   purpose.
Additionally,  Aearo  Corporation  may pay dividends on its  preferred  stock in
additional shares of preferred stock.

Stock Option Plans

On June 27,  1996,  the Company  adopted the  Executive  Stock  Option Plan (the
Executive  Plan)  whereby  the  Company,  subject  to  approval  of the Board of
Directors,  may grant up to 5,000  non-qualified  options to certain  members of
management.  In July 1997,  the  Company's  Board of  Directors  adopted and the
stockholders  subsequently approved the 1997 Stock Option Plan (the "1997 Option
Plan")  under which 10,000  shares of Aearo Common Stock have been  reserved for
issuance. Under the 1997 Option Plan, non-qualified and qualified options may be
granted to employees of the Company.  Options  granted under the Executive  Plan
and the 1997  Option Plan will vest and become  exercisable  upon the earlier of
the date on which a  stipulated  return (as  defined)  is achieved by Vestar and
Cabot on their investment in the Company or the tenth anniversary of the date of
grant.  The option term will be 10 years,  except that  options  shall expire in
certain instances of termination of employment and upon the sale of the Company.
As of September 30, 2001, a total of 12,071.25  options were  outstanding  under
the  Executive  Plan and 1997 Option Plan and a total of 2,928.75  options  were
available for grant.

Pro Forma Stock-Based Compensation Expense

SFAS  No.  123,   Accounting  for   Stock-Based   Compensation,   sets  forth  a
fair-value-based  method of recognizing  stock-based  compensation  expense.  As
permitted  by SFAS No. 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based  compensation plans. Had compensation cost for
these plans been  determined  consistent  with SFAS No. 123, the  Company's  net
(loss) would have been increase by $0.1 million in the year ended  September 30,
2001.

The fair value of each option  grant was  estimated  on the grant date using the
Black-Scholes pricing model with the following weighted average assumptions:

                                                         1999     2000     2001
                                                            -        -        -
Risk-free interest rate ............................    4.99%     6.01%    5.22%
Expected life of options granted ................... 10 years  10 years 10 years
Expected volatility of underlying stock ............       0%        0%       0%
Dividend yield .....................................       0%        0%       0%

Stock Option Activity

Stock option data for the Executive  Plan and the 1997 Option Plan for the years
ended September 30, 1999, 2000 and 2001 were as follows:

                                              Number          Weighted Average
                                            of Shares          Exercise Price

      Outstanding, September 30, 1998             7,154       $             600
      Granted                                     1,044                     600
      Exercised                                       -                       -
      Forfeited                                   (469)                     600
      Expired                                         -                       -
                                         --------------       ------------------

      Outstanding, September 30, 1999             7,729       $             600
      Granted                                       750                     600
      Granted                                     1,466                     800
      Exercised                                       -                       -
      Forfeited                                    (62)                     600
      Expired                                         -                       -
                                         --------------       ------------------

                                      -45-
<PAGE>

      Outstanding, September 30, 2000             9,883       $             630
      Granted                                     2,500                     800
      Exercised                                       -                       -
      Forfeited                                   (218)                     600
      Forfeited                                    (94)                     800
      Expired                                         -                       -
                                         --------------       ------------------
      Outstanding, September 30, 2001            12,071       $             664
                                         ==============       ==================

The following table sets forth information regarding options outstanding at
September 30, 2001:
<TABLE>
<CAPTION>
                                                                                                        Weighted Average
                                                                                   Weighted Average    Exercise Price for
  Number                              Number Currently     Weighted Average         Remaining            Currently
of Options        Exercise Price         Exercisable        Exercise Price      Contractual Life        Exercisable
-------------- --------------------- -------------------- -------------------- -------------------- --------------------
<S>           <C>                         <C>            <C>                      <C>                      <C>
 8,199        $       600.00                 -           $       600.00           6.11 years               N/A
 3,872        $       800.00                 -           $       800.00           8.79 years               N/A
</TABLE>

13.  Commitments and Contingencies

Lease Commitments

The Company leases certain transportation vehicles, warehouse facilities, office
space, and machinery and equipment under cancelable and noncancelable  operating
leases. Rent expense under such arrangements totaled $5,544,000,  $6,395,000 and
$7,547,000 for the years ended September 30, 1999, 2000 and 2001,  respectively.
Future  minimum  rental  commitments  under  noncancelable  leases  in effect at
September 30, 2000 are as follows (dollars in thousands):

      2002   $ 4,701
      2003     3,873
      2004     3,356
      2005     2,215
      2006     2,383
Thereafter     1,518
             -------
Total        $18,046
             =======

Contingencies

Various  lawsuits and claims arise against the Company in the ordinary course of
its business.  Most of these lawsuits and claims relate to the Company's  safety
eyewear and respiratory  product lines and primarily  involve  accidents  and/or
exposures  occurring  after the Company's  predecessor  acquired the AOSafety(R)
Division  from  American  Optical  Corporation  in April  1990.  The  Company is
contingently liable with respect to numerous lawsuits involving respirators sold
by American  Optical  Corporation  prior to the  acquisition of the  AOSafety(R)
Division in April 1990. These lawsuits  typically  involve  plaintiffs  alleging
that they suffer from asbestosis or silicosis,  and that such condition  results
in part from respirators,  which were negligently designed or manufactured.  The
defendants in these  lawsuits are often  numerous,  and include,  in addition to
respirator manufacturers,  employers of the plaintiffs and manufacturers of sand
(used in sand blasting) and asbestos. Responsibility for legal costs, as well as
for settlements and judgments, is shared contractually by the Company,  American
Optical  Corporation  and a prior owner of  American  Optical  Corporation.  The
Company  and Cabot have  entered  into an  arrangement  whereby,  so long as the
Company pays to Cabot an annual fee of  $400,000,  which the Company has elected
to pay,  Cabot will retain  responsibility  and liability for, and indemnify the
Company against,  certain legal claims asserted after July 11, 1995 (the date of
the  Company's  formation)  alleged  to  arise  out  of the  use of  respirators
manufactured  prior to July 1995. The Company has the right to  discontinue  the
payment of such annual fee at any time,  in which case the  Company  will assume
responsibility  for and  indemnify  Cabot with  respect to such claims  however,
management  intends to continue  the annual  payment of  $400,000 to Cabot.  The

                                      -46-
<PAGE>

Company  may be  responsible  for  claims  alleged  to  arise  out of the use of
respirators  manufactured  by the  Company  as well as  products  purchased  for
resale.  The Company  may also be  responsible  for  certain  claims of acquired
companies  other  than the  AOSafety(R)  division  that are not  covered  by the
agreement with Cabot.

At September 30, 2001, the Company has reserved  approximately  $4.9 million for
product  liabilities  including  those  arising  from  asbestosis  or  silicosis
litigation.  The reserve is re-evaluated  periodically and additional charges to
operations may result as additional  information  becomes available.  Consistent
with the general  environment being  experienced by other companies  involved in
asbestos-related  litigation,  there  has  been an  increase  in the  number  of
asserted  claims that could  potentially  involve the Company.  Various  factors
increase the difficulty in determining  the Company's  potential  liability,  if
any, in such claims,  including the fact that the  defendants in these  lawsuits
are often numerous and the claims generally do not specify the amount of damages
sought.   Additionally,   the  bankruptcy   filings  of  other   companies  with
asbestos-related  litigation could affect the Company's cost over time. However,
it is management's opinion, taking into account currently available information,
historical  experience,  uncertainties,  the Cabot agreement,  and the Company's
reserve,  that these suits and claims  should not result in final  judgments  or
settlements  that,  in the  aggregate,  would  have  a  material  effect  on the
Company's financial condition or results of operations.

In December 2000, the Company reached a non-cash  settlement with Moldex-Metric,
Inc.  as part of a  trademark  dispute  involving  the  Company's  "Yellow  Neon
Blasts"(TM) polyurethane earplugs.

14. Acquisitions

On October 28, 1999, the Company acquired Norhammer Limited of Ontario,  Canada.
The acquisition  has been accounted for as a purchase  transaction in accordance
with APB No. 16, and, accordingly, the consolidated financial statements for the
periods  subsequent to October,  28, 1999 reflect the purchase price,  including
transaction  costs,  allocated to tangible and  intangible  assets  acquired and
liabilities  assumed,  based on their  estimated  fair  values as of October 28,
1999.

The allocation of the $4.1 million purchase price and direct  acquisition  costs
is summarized as follows (dollars in thousands):

Cash paid for Norhammer Limited                            $              3,711
Acquisition costs                                                           404
                                                           --------------------
      Total consideration and acquisition costs                           4,115
Net assets acquired                                                       1,188
                                                           --------------------
      Excess of consideration paid over historical cost    $              2,927
                                                           ====================

The  allocation  of  excess  of  consideration  paid  over  historical  cost was
allocated to goodwill.

On June 1, 2000, the Company  acquired Norway based Livax A/S for  approximately
$0.3 million.  The transaction has been accounted for as a purchase  transaction
in accordance with APB No. 16, and accordingly,  the operating  results of Livax
have been included with those of the Company subsequent to June 1, 2000.

On August 2,  1999,  the  Company  acquired  Safety  Optical,  Inc.  of  Athens,
Tennessee.  The acquisition has been accounted for as a purchase  transaction in
accordance  with  APB  No.  16,  and  accordingly,  the  consolidated  financial
statements  for the periods  subsequent  to August 2, 1999  reflect the purchase
price,  including transaction costs, allocated to tangible and intangible assets
acquired and  liabilities  assumed,  based on their  estimated fair values as of
August 2, 1999.

                                      -47-
<PAGE>

The allocation of the $3.7 million purchase price and direct  acquisition  costs
is summarized as follows (dollars in thousands):

Cash paid for Safety Optical, Inc                           $             3,425
Acquisition costs                                                           300
                                                            -------------------
      Total consideration and acquisition costs                           3,725
Net assets acquired                                                       1,029
                                                            -------------------
      Excess of consideration paid over historical cost     $             2,696
                                                            ===================

Allocation of Excess of Consideration Paid over Historical Cost:

Property, plant and equipment, net                          $               193
Intangible assets                                                         3,429
Accrued liabilities                                                       (926)
                                                            -------------------
                                                            $             2,696
                                                            ===================
15.   Segment Data

As defined by SFAS No. 131,  "Disclosures  about  Segments of an Enterprise  and
Related  Information",  the  Company's  three  reportable  segments  are  Safety
Products,  Safety  Prescription  Eyewear and  Specialty  Composites.  The Safety
Products   segment   manufactures   and  sells   hearing   protection   devices,
communication headsets,  non-prescription safety eyewear, face shields, reusable
and  disposable   respirators,   hard  hats  and  first  aid  kits.  The  Safety
Prescription   Eyewear  segment  manufactures  and  sells  prescription  eyewear
products  that are  designed  to  protect  the eyes  from  the  typical  hazards
encountered in the industrial work environment.  The Safety Prescription Eyewear
segment  purchases  component parts (lenses and the majority of its frames) from
various suppliers,  grinds and shapes the lenses to the customer's prescription,
and then  assembles  the  glasses  using the  customer's  choice  of frame.  The
Specialty  Composites  segment  manufactures  a wide  array of  energy-absorbing
materials that are incorporated  into other  manufacturers'  products to control
noise, vibration and shock.


                                      -48-
<PAGE>

Net sales to external customers by business segment (dollars in thousands):

                                                1999          2000          2001
                                            --------      --------      --------
Safety Products ......................      $212,718      $219,710      $206,311
Safety Prescription Eyewear ..........        35,489        39,913        39,076
Specialty Composites .................        42,882        45,852        38,475
                                            --------      --------      --------
Total ................................      $291,089      $305,475      $283,862
                                            ========      ========      ========

EBITDA by business  segment and  reconciliation  to income before  provision for
(benefit from) income taxes (dollars in thousands):
                                                      1999       2000      2001
                                                   -------   --------  --------
Safety Products ................................   $42,246   $ 48,775  $ 39,844
Safety Prescription Eyewear ....................     3,491      4,008     2,237
Specialty Composites ...........................     2,954      3,531     1,409
Reconciling items ..............................     2,310     (1,696)    4,562
                                                   -------   --------  --------
      Total EBITDA .............................   $51,001   $ 54,618  $ 48,052
                                                   =======   ========  ========

Depreciation ...................................     9,399     10,056    10,123
Amortization of intangibles ....................     6,793      6,859     6,530
Non-operating costs (income) ...................       190        692        44
Unusual charges ................................    11,441
Interest, net ..................................    24,322     24,387    23,666
                                                   -------   --------  --------
      Income before provision for/(benefit from)
       income taxes ............................   $10,297   $ 12,624  $ (3,752)
                                                   =======   ========  ========

The Company  evaluates  performance  of its operating  entities based on EBITDA,
which  is  defined  by  the  Company  as  earnings   before   interest,   taxes,
depreciation,  amortization,  and non-operating income or expense. Non-operating
income or expense  is further  defined by the  Company  for EBITDA  purposes  as
extraordinary  gains or losses,  or gains or losses  from sales of assets  other
than in the ordinary course of business.  While the Company believes EBITDA is a
useful indicator of its ability to service debt, EBITDA should not be considered
as a  substitute  for  net  income  determined  in  accordance  with  accounting
principles generally accepted in the United States of America as an indicator of
operating  performance  or as an  alternative  to  cash  flow  as a  measure  of
liquidity. Investors should be aware that EBITDA, as presented above, may not be
comparable  to  similarly  titled  measures  presented  by other  companies  and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.

Intersegment  sales of the Specialty  Composites  segment to the Safety Products
segment  totaled $3.9 million and $4.2 million for the years ended September 30,
2000  and  2001,  respectively.   The  intersegment  sales  value  is  generally
determined at fully absorbed inventory cost at standard rates plus 25%.

Reconciling  items include  unallocated  selling,  administrative,  research and
technical  expenses as well as  manufacturing  profit  realized on  intercompany
transactions not allocable to a specific segment.

Depreciation by business segment (dollars in thousands):
                                                1999          2000          2001
                                              ------       -------       -------
Safety Products .......................       $6,898       $ 7,384       $ 7,966
Safety Prescription Eyewear ...........          682           765           378
Specialty Composites ..................        1,819         1,907         1,779
                                              ------       -------       -------
Total .................................       $9,399       $10,056       $10,123

                                      -49-
<PAGE>

Identifiable assets by business segment (dollars in thousands):
                                                1999          2000          2001
                                            --------      --------      --------
Safety Products ......................      $230,123      $217,072      $201,183
Safety Prescription Eyewear ..........        13,546        13,986        15,095
Specialty Composites .................        25,052        23,730        18,918
Reconciling items ....................        13,572        12,078        26,106
                                            --------      --------      --------
Total ................................      $282,293      $266,866      $261,302
                                            ========      ========      ========

Reconciling items include corporate assets such as cash, information
technology and other shared systems.

Capital expenditures by business segment (dollars in thousands):
                                                  1999         2000         2001
                                                ------       ------       ------
Safety Products .........................       $5,088       $7,628       $5,788
Safety Prescription Eyewear .............          883           37          425
Specialty Composites ....................        1,804        1,347        1,075
Reconciling items .......................          580          540          511
                                                ------       ------       ------
Total ...................................       $8,355       $9,552       $7,799
                                                ======       ======       ======

Reconciling items include corporate expenditures such as information
technology and other shared systems.

Net sales by principal geographic areas (dollars in thousands):
                                           1999            2000             2001
                                    -----------     -----------      -----------
United States of America            $   182,615     $   194,452      $   179,398
Canada                                   22,346          22,103           20,370
United Kingdom                           15,866          16,635           13,501
Germany                                  11,009          11,449           11,447
Sweden                                   12,646          12,405           10,981
France                                    7,715           7,568            6,975
Italy                                     5,164           5,387            5,156
All others                               33,728          35,476           36,034
                                    -----------     -----------      -----------
Total                               $   291,089     $   305,475      $   283,862
                                    ===========     ===========      ===========

The sales as shown above  represent the value of shipments  into the  customer's
country of residence.  For the years ended September 30, 1999, 2000 and 2001, no
single customer accounted for more than 10% of sales.

Net identifiable assets by principal geographic areas (dollars in thousands):
                                           1999            2000             2001
                                    -----------     -----------      -----------
United States of America            $   184,603     $   176,822      $   173,076
Canada                                    5,693           9,333            9,584
United Kingdom                           17,458          17,708           19,304
Germany                                   1,830           1,451            2,138
Sweden                                   72,027          60,834           56,673
All others                                  682             718              527
                                    -----------     -----------      -----------
Total                               $   282,293     $   266,866      $   261,302
                                    ===========     ===========      ===========

                                      -50-
<PAGE>

16.  Quarterly Financial Data (Unaudited)

The following table contains  selected  unaudited  quarterly  financial data for
fiscal years 2000 and 2001.
<TABLE>
<CAPTION>
                                                                QUARTERLY FINANCIAL DATA
                                                        (In Thousands, Except Per Share Amounts)
                                                 Fiscal Year                              Fiscal Year
                                                     2000                                     2001
                               --------------------------------------- -----------------------------------------
                                First    Second     Third    Fourth      First     Second    Third     Fourth
                               -------- ---------- -------- ---------- ---------- --------- --------- ----------
                               -------- ---------- -------- ---------- ---------- --------- --------- ----------
<S>                             <C>      <C>        <C>      <C>        <C>        <C>       <C>       <C>
Net Sales                       $72,318  $ 77,561   $80,295  $75,320    $ 68,365   $74,039   $72,138   $69,320
Cost of Sales                   38,448     41,231   42,054    39,026      37,553    39,116    39,007    39,537
                                -------  ---------  -------  --------   ---------  --------  --------  -------

  Gross Profit                  33,870     36,330   38,241    36,294      30,812    34,923    33,131    29,783
Unusual Charge                       -          -        -         -           -         -         -     9,077

Income (Loss) before provision
for
  (benefit from) income taxes      974      3,654    4,588     3,408      (2,320)    3,619     5,466   (10,517)

  Net Income (Loss)                673      2,541    3,493     2,341      (2,387)    3,035     5,012    (7,540)
</TABLE>

17.   Restructuring

On September  30, 2001 the Company  recorded an unusual  charge of $11.4 million
related  to a  restructuring  plan  announced  by the  Company  to  improve  its
competitive position and long-term profitability.  The plan includes the closure
of its Ettlingen,  Germany plant,  significantly  reorganizing operations at the
Company's  Varnamo,  Sweden plant,  rationalizing the  manufacturing  assets and
product  mix of its  Specialty  Composites  business  unit  and a  reduction  of
products and product lines. The restructuring  charge includes cash charges that
total $2.3 million and includes  $1.8 million for severance and related costs to
cover the reduction of 5% of the  Company's  current work force and $0.5 million
for other costs  associated  with this plan.  The  restructuring  also  includes
non-cash  charges  that  total  $9.1  million  and  includes  $3.2  million  for
non-cancelable  long term lease  obligations,  asset impairment  charges of $2.9
million, $2.4 million for the write-off of inventory and $0.6 million related to
the sale of the Company's Ettlingen, Germany location.

                                      -51-
<PAGE>

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

On May 18, 2001, the Company filed a Current Report on Form 8-K regarding the
dismissal of Arthur Andersen and the appointment of Deloitte and Touche as its
independent accountants.

                                      -52-
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers

The following table sets forth certain information with respect to the directors
and executive officers of the
Company as of December 1, 2001.

Name                          Age  Position
---------------------------- -----------------------------------------------
Michael A. McLain (1)         51   Chief Executive Officer, President, and
                                   Chairman  of the Board of Directors

Jeffrey S. Kulka              44   Vice President and Chief Financial
                                   Officer, Treasurer and Secretary

James Bernhardt               57   Vice President and Chief Marketing Officer

James H. Floyd                46   Senior Vice President, Logistics and
                                   Information Technology, Managing
                                   Director, International and
                                   Business Director, Consumer

Joseph C. Marlette            59   Senior Vice President, Manufacturing and
                                   Research and Development

M. Rand Mallitz               59   Vice President and Senior Vice President
                                   Specialty Composites
D. Garrad (Gary) Warren, III  49   Senior Vice President, North American
                                   Industrial Safety Sales and
                                   Managing Director - Europe

James M. Phillips             49   Vice President, Human Resources

Rahul Kapur                   50   Vice President, Corporate Development
                                   and Business Director, SRx

Norman W. Alpert (1,2)        42   Director

Daniel S. O'Connell           46   Director

Arthur J. Nagle               65   Director

Bryan P. Marsal               49   Director

William E. Kassling           56   Director

William J. Brady (3)          40   Director

Robert Rothberg (3)           52   Former Director

Margaret J. Hanratty (1,2)    52   Director

John D. Curtin, Jr.           67   Director

                                      -53-
<PAGE>

1. Member of Compensation Committee

2. Member of Audit Committee

3. Effective  October 31, 2001, Robert Rothberg resigned from the Company's
   Board of  Directors.  Effective  November  16,  2001,  William J. Brady was
   appointed,  as a designee of Cabot Corporation pursuant to the Stockholders
   Agreement,  dated  July  11,  1995 to  replace  Mr.  Robert  Rothberg.  Mr.
   Rothberg's  resignation  was  not  related  to any  disagreement  with  the
   Company.

Michael A. McLain has been President,  Chief  Executive  Officer and Director of
the Company since February  1998.  Effective May 30, 2001, he was named Chairman
of the Board of  Directors.  Prior to joining the Company,  he was President and
Chief Executive  Officer of DowBrands,  Inc., a large  manufacturer of household
consumer  products.  Mr.  McLain is a  Director  of Park  Tudor  School,  Cluett
American Corporation, and Little Rapids Corporation.

Jeffrey S. Kulka,  Vice  President and Chief  Financial  Officer,  Treasurer and
Secretary  joined the Company in March 1997 as  Corporate  Controller.  Prior to
joining  Aearo,  he spent ten years with Augat Inc. in a variety of  assignments
including  Divisional  Controllerships and Business  Development in domestic and
international settings.

James H.  Bernhardt  joined the Company in February  2001, as Vice President and
Chief   Marketing   Officer.   Prior  to  joining  Aearo,  he  was  Senior  Vice
President/General  Manager of the  Miracle-Gro  Division of the Scotts  Company.
Altogether, he has 30 years of experience in packaged goods marketing.

James H. Floyd,  Senior Vice President,  Logistics and  Information  Technology,
Managing Director,  International and Business Director,  Consumer, joined Aearo
in April  1998.  Prior to 1998,  he was  responsible  for global  logistics  and
packaging  functions  at  DowBrands.  He began his career at Procter  and Gamble
where he worked for seven years.

Joseph C.  Marlette,  Senior Vice  President,  Manufacturing  and  Research  and
Development  joined the Company in April 1998.  Prior to joining Aearo, he spent
33 years in various manufacturing positions with the Dow Chemical Company.

M. Rand Mallitz joined the Company in January 1992 as Vice President and General
Manager, E-A-R(R)Specialty Composites. In December 1999, he was promoted to Vice
President Aearo,  Senior Vice President Specialty  Composites.  Prior to joining
the Company, Mr. Mallitz was CEO/President of Roth Office Products until 1992.

D. Garrad (Gary)  Warren,  III joined the Company in November 1999 and currently
serves as Senior Vice President - NAI Sales and Managing Director, Europe. Prior
to that, Mr. Warren was Senior Vice  President,  Sales and Customer  Development
for International Home Foods in Parsippany, New Jersey.

James M.  Phillips  joined  the  Company  in May 1998 as Vice  President,  Human
Resources.  He worked for Dow  Chemical  Company  for more than 20 years and has
worked in recruiting,  training and compensation  for many diverse  divisions of
Dow.

Rahul Kapur  joined the  Company in April 1998 as Vice  President  of  Corporate
Development.  He  currently  is Vice  President  of  Corporate  Development  and
Business  Director,  SRx..  Mr.  Kapur  joined  DowBrands in 1985 in New Product
Development and held various  positions in Marketing and Strategic  Development,
including  Director of Marketing for Europe. He began his career with Richardson
Vicks and Unilever.

Norman W. Alpert is a Managing  Director of Vestar  Capital  Partners  and was a
founding partner of Vestar at its inception in 1988. Mr. Alpert is a director of
Advanced Organics, Inc., Siegelgale Holdings, Inc., Cluett American Corporation,
Remington Products Company, L.L.C. and MCG Capital Corp., all companies in which
Vestar  or its  affiliates  have a  significant  equity  interest.  He  became a
director of the Company in July 1995.

Daniel S. O'Connell is the Chief Executive Officer and founder of Vestar Capital
Partners.  Mr. O'Connell is a director of Cluett American  Corporation,  Insight
Communications  Company,  Inc.,  Remington  Products Company L.L.C.,  Siegelgale
Holdings  Inc.,  Sunrise  Medical,  Inc.,  St. John Knits Co., Inc., and Michael
Foods,  Inc.  All  are  companies  in  which  Vestar  or its  affiliates  have a
significant equity interest. He became a director of the Company in July 1995.

                                      -54-
<PAGE>

Arthur J. Nagle is a Managing  Director  of Vestar  Capital  Partners  and was a
founding  partner of Vestar at its inception in 1988. Mr. Nagle is a director of
Advanced  Organics,  Inc.,  Gleason  Corporation,  Remington  Products  Company,
L.L.C.,  and Sheridan  Healthcare,  Inc.,  all  companies in which Vestar or its
affiliates  have a  significant  equity  interest.  He became a director  of the
Company in July 1995.

Bryan P.  Marsal,  Chairman  and CEO Cluett  American  Group,  has led  numerous
businesses in the healthcare,  manufacturing,  retailing, communications and oil
field services.  In addition to Cluett American Group,  Mr. Marsal has served as
CEO  of  Republic  Health  Corporation  (renamed  OrNda  HealthCorp.),   Anthony
Manufacturing  and Gitano. He also serves on the boards of Timex Corporation and
Cluett  American  Corporation.  He became a director  of the  Company in October
1998.

William E.  Kassling  has been  Chairman and Chief  Executive  Officer of Wabtec
Corporation  since 1990.  Between  1984 and 1990,  Mr.  Kassling  served as Vice
President,  Group Executive for the Railway Products Group of American  Standard
Incorporated.  Prior to 1984, he held various  operating and strategic  planning
assignments  with  American   Standard,   Clark  Equipment  Company  and  Boston
Consulting  Group. Mr. Kassling earned an MBA from the University of Chicago and
a BS in industrial management from Purdue University.  In addition to Aearo, Mr.
Kassling is a board member of Pittsburgh  Penguins and  Scientific  Atlanta.  He
became a director of the Company in July 1998.

William J. Brady,  Vice  President  and General  Manager of Cabot's  Fumed Metal
Oxides  business.  He also  oversees  Cabot's Ink Jet Colorants  business  unit,
Corporate New Business Development, and Logistics function. Bill joined Cabot in
1986 and has held various  positions in the United  States of America and Japan.
Prior to Cabot, he was a research chemist with Sterling Drug Company.

Margaret J. Hanratty, is the former Vice President and Treasurer of Cabot and
served previously as Director of Corporate Development. Prior to joining Cabot
in 1990, she served as Vice President, Mergers and Acquisitions for The First
Boston Corporation. She became a director of the Company in July 1995.

John D. Curtin,  Jr.  retired as President  and Chief  Executive  Officer of the
Company in February  1998. Mr. Curtin was named Chief  Executive  Officer of the
Company in April  1994,  became a  director  of the  Company  in July 1995,  and
assumed the role as President in February  1997. Mr. Curtin joined Cabot in 1989
as Chief  Financial  Officer.  Prior to joining  Cabot he was  President,  Chief
Executive   Officer   and   Director   of   Curtin  &  Co.,   Inc.,   a  private
investment-banking firm. Mr. Curtin is also a trustee of Eastern Enterprises and
a director of Imperial Holly Corporation.

The number of directors of the Company is fixed at nine.  Under a  stockholders'
agreement among Aearo,  Vestar,  Cabot, and the Management  Investors dated July
11, 1995 (the "Stockholders' Agreement"), Vestar has the right to designate five
directors,  Cabot has the right to designate two  directors,  and the Management
Investors have the right to designate two directors.  Messrs. Alpert, O'Connell,
Nagle, Kassling and Marsal are the directors designated by Vestar. Mr. Brady and
Ms.  Hanratty are the directors  designated by Cabot.  Mr. McLain and Mr. Curtin
are currently the directors designated by the Management Investors. See Item 13,
"Certain   Relationships  and  Related   Transactions  --  Stock  Ownership  and
Stockholders'  Agreement  --  Election  and Removal of  Directors."  The term of
office for each director  ends when his or her  successor  elected at the annual
meeting of stockholders or upon his or her removal or resignation.

The Board of Directors has established an audit committee consisting of Margaret
J. Hanratty and Norman W. Alpert (the "Audit  Committee").  The Audit  Committee
recommends  the  firm  to be  appointed  as  independent  accountants  to  audit
financial  statements and to perform services related to the audit,  reviews the
scope and results of the audit with the  independent  accountants,  reviews with
management  and the  independent  accountants  the  Company's  annual  operating
results, considers the adequacy of the internal accounting procedures, considers
the effect of such procedures on the  accountants'  independence and establishes
policies for business values, ethics and employee relations.

                                      -55-
<PAGE>

Officers and directors of Aearo and the Subsidiary are not subject to Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

                                      -56-
<PAGE>

Item 11. Executive  Compensation

The compensation of executive officers of the Company is determined by the Board
of Directors.  The following  table sets forth  certain  information  concerning
compensation  received  by the Chief  Executive  Officer and the other four most
highly-compensated  executive  officers  of the  Company  serving  at the end of
fiscal  2001 (the  "Named  Executive  Officers")  for  services  rendered to the
Company in all  capacities  (including  service as an  officer or  director)  in
fiscal 2001.

                                                Summary Compensation Table
                                                   Annual Compensation
<TABLE>
<CAPTION>

                                                                  Fiscal                                  All Other Annual
                                                                  Year         Salary         Bonus         Compensation
<S>                                                               <C>       <C>    <C>    <C>    <C>    <C>
Michael A. McLain
      Chief Executive Officer, President, and Chairman of the
Board of Directors                                                2001      $    496,667  $      56,250   $     84,977(1)
                                                                  2000      $    473,784  $     286,738   $     64,989
                                                                  1999      $    439,754  $     191,309   $     56,416
D. Garrad Warren, III
Senior Vice President, North American Industrial Safety Sales
and Managing Director, Europe                                     2001      $    240,833  $      21,870   $     43,316(2)
                                                                  2000      $    192,500  $     106,764   $    195,386
                                                                  1999      $          -  $           -   $           -
M. Rand Mallitz
      Vice President and Senior Vice President       Specialty
      Composites                                                  2001      $    205,267  $      18,594   $     25,180(3)
                                                                  2000      $    197,000  $      99,975   $     24,906
                                                                  1999      $    187,500  $      69,552   $     19,069
Joseph C. Marlette
      Senior Vice President, Manufacturing and  Research and
Development                                                       2001      $    190,000  $      18,900   $     46,981(4)
                                                                  2000      $    191,784  $      99,138   $     29,101
                                                                  1999      $    174,754  $      64,658   $     17,856
James H. Floyd
      Senior Vice President, Logistics and Information
      Technology, Managing Director, International   and
      Business Director, Consumer                                 2001      $    195,066  $      17,784   $     42,122(5)
                                                                  2000      $    187,624  $      77,976   $     26,791
                                                                  1999      $    174,754  $      44,892   $     16,856
</TABLE>

1.   Includes contributions made on behalf of Mr. McLain to the Company's 401(k)
     Savings Plan ($5,100); to the Company's Cash Balance Plan ($10,426); to the
     Company's  Supplemental  Executive  Retirement Plan ($46,006);  and company
     match and interest to the Company's Deferred Compensation Plan ($23,445).

2.   Includes contributions made on behalf of Mr. Warren to the Company's 401(k)
     Savings Plan ($7,200); to the Company's Cash Balance Plan ($10,426); to the
     Company's  Supplemental  Executive  Retirement Plan ($877); and interest to
     the Company's Deferred Compensation Plan ($24,813).

3.   Includes  contributions  made on behalf  of Mr.  Mallitz  to the  Company's
     401(k) Savings Plan ($5,202); to the Company's Cash Balance Plan ($10,426);
     and to the Company's Supplemental Executive Retirement Plan ($9,552).

4.   Includes  contributions  made on behalf of Mr.  Marlette  to the  Company's
     401(k) Savings Plan ($3,300);  to the Company's Cash Balance Plan ($9,786);
     to the Company's  Supplemental  Executive  Retirement  Plan  ($9,051);  and
     company  match and interest to the  Company's  Deferred  Compensation  Plan
     ($24,844).

5.   Includes  contributions made on behalf of Mr. Floyd to the Company's 401(k)
     Savings Plan ($2,395); to the Company's Cash Balance Plan ($10,426); to the
     Company's  Supplemental  Executive  Retirement  Plan ($7,079);  and company
     match and interest to the Company's Deferred Compensation Plan ($22,222).

                                      -57-
<PAGE>

The following  table sets forth  information  concerning the number and value of
unexercised  options to purchase Aearo Common Stock held by the Named  Executive
Officers  at the end of  fiscal  2001.  None  of the  Named  Executive  Officers
exercised any stock options during fiscal 2001.

<TABLE>
<CAPTION>

                             Shares                                                      Value of Outstanding
                          Acquired On                    Number of Beneficial            In-the-money Options
                            Exercise                  Options at Fiscal Year-end        At Fiscal Year-end (1)
                                          Value
Name                                     Realized    Exercisable    Unexercisable    Exercisable    Unexercisable
------------------------- ------------- ----------- -------------- ---------------- -------------- -----------------
<S>                           <C>          <C>          <C>              <C>        <C>            <C>
Michael A. McLain             --           --            --              1,100      $        --    $         --
D. Garrad Warren, III         --           --            --              1,250               --              --
M. Rand Mallitz               --           --            --                256               --
Joseph C. Marlette            --           --            --                300               --              --
James H. Floyd                --           --            --                300               --              --
</TABLE>

1.   There was no public  market for the Aearo Common Stock as of September  30,
     2001.  Accordingly,  these values have been  calculated  on the basis of an
     assumed fair market value of $600 per share as established by the Company's
     Board of Directors.

Director Compensation

Directors  (other  than two  Directors  unaffiliated  with Cabot or Vestar  (the
"Outside  Directors")) serve without  compensation  (other than reimbursement of
expenses) in connection with rendering  services as such. The Outside  Directors
receive $10,000 annually for their service as Directors and an additional $2,500
per  meeting,   plus  reimbursement  of  expenses.   In  connection  with  their
appointment,  Outside Directors  appointed in prior fiscal years have been given
the opportunity to purchase a limited number of shares of Aearo Common Stock. No
Outside  Directors  were  appointed  to the Board during  fiscal  2001.  Outside
Directors may also elect to participate in the Deferred Compensation Plan.

Employee Stock and other Benefit Plans

Stock Purchase Plan. In connection with the Formation  Acquisition,  the Company
adopted the Cabot Safety  Holdings  Corporation  1995 Stock  Purchase  Plan,  as
amended  and  restated  (the  "Stock  Purchase  Plan"),  in order  to  encourage
ownership  of  Aearo  Common  Stock  by  selected  officers  and  employees  and
independent  directors of the Company.  Under the Stock  Purchase  Plan,  15,000
shares of Aearo  Common Stock have been  reserved for purchase by the  Company's
executive  officers and other senior  members of management as determined by the
Board of  Directors.  As of December 1, 2001,  13,375 of such shares were issued
and outstanding.

Aearo  Common  Stock  acquired  under  the Stock  Purchase  Plan is  subject  to
forfeiture  through  various  puts and calls.  In the event of death,  permanent
disability or  retirement,  which  retirement  occurs at age 65 or older with at
least 3 years of service,  such stock may be put to the Company by the holder at
fair market value and the Company has a call on such stock at the same price. In
the event of  termination  for cause,  the  Company  has a call at the lesser of
initial cost and fair market value.  In the event of  termination by the Company
other than for cause and in the case of voluntary resignation, the Company has a
call (i) with respect to a percentage of such stock equal to the number of years
elapsed since the Formation Acquisition  multiplied by 20% at fair market value,
and (ii) with  respect to the  remainder  of such stock at the lesser of initial
cost and fair  market  value.  Shares  repurchased  by the  Company  are held in
reserve,  and may be issued to existing  and future  employees  or  non-employee
directors.  These  puts  and  calls  expire  (i) on the  date on  which  certain
financial performance benchmarks (which, following an initial public offering of
the Aearo Common  Stock,  depend in part on the future market value of the Aearo
Common Stock) are achieved by the Company or (ii) the fifth  anniversary  of the
Formation  Acquisition.  Each Management Investor is also required to be a party
to the Stockholders'  Agreement. See Item 13, "Certain Relationships and Related
Transactions -- Stockholders' Agreement."

                                      -58-
<PAGE>

Stock Option Plans. In June 1996, the Company's  Board of Directors  adopted and
the  stockholders  subsequently  approved the  Executive  Stock Option Plan (the
"Executive  Plan")  under which  5,000  shares of Aearo  Common  Stock have been
reserved for issuance.  In July 1997, the Company's  Board of Directors  adopted
and the stockholders subsequently approved the 1997 Stock Option Plan (the "1997
Option Plan") under which 10,000 shares of Aearo Common Stock have been reserved
for issuance. Under the 1997 Option Plan non-qualified and qualified options may
be granted to employees of the Company.

Each of the  Executive  Plan  and the  1997  Option  Plan is  administered  by a
committee of the Board of Directors consisting of all non-employee directors. As
of September 30, 2001,  non-qualified options to acquire 8,199 shares at a price
of $600 per  share,  and 3,872  shares  at a price of $800 per  share  have been
granted to officers and key employees of the Company  under the Company's  stock
option plans and 2,929 options  remain  available for issuance;  of  outstanding
options,  3,206.25 in the  aggregate  have been granted to  executive  officers,
including Mr. McLain (1,100 options), Mr. Warren (1,250 options), Mr. Floyd (300
options),  Mr.  Marlette (300 options) and Mr.  Mallitz  (256.25  options).  The
options  will vest and become  exercisable  upon the earlier of: (i) the date on
which  certain  financial  performance  benchmarks  (which depend in part on the
future  market value of the Aearo Common  Stock) are achieved by the Company and
(ii) the tenth  anniversary  of the date of grant.  The option term is 10 years;
provided,  however, that unexercised options expire earlier in certain instances
of termination of employment of the option holder and may expire in the event of
a merger or liquidation of the Company or a sale of substantially all the assets
of the Company.  Aearo Common Stock  acquired upon  exercise of options  granted
under  the  Executive   Plan  or  1997  Option  Plan  is  subject  to  the  same
restrictions,  including  puts and calls and  drag-along  rights as Aearo Common
Stock acquired under the Stock Purchase Plan. See "Stock Purchase Plan."

The  following  table sets forth certain  information  relating to option grants
pursuant  to the  Executive  Plan and the 1997  Option  Plan for the year  ended
September 30,2001.

<TABLE>
<CAPTION>
                                                                                    Potential Realizable Value at
                                                                                    Assumed Annual Rates of Stock
                                                                                    Price Appreciation for Option
                                                                                               Term (1)
                                          % of Total
                                        Options
                         Number of    Granted in     Exercise
                         Underlying   the Fiscal      Price      Expiration
Name                      Options        Year        ($/Shr)        Date

                                                                                  5% ($)            10% ($)
                                                                                  ------            -------
<S>                          <C>          <C>          <C>          <C>  <C>      <C>              <C>
D. Garrad Warren, III        500          20.0         800          10/1/10       65,398           307,384
</TABLE>

(1)  Potential Realizable Value is based on assumed growth rates for the 10-year
     option term (5% annual  growth  results in a stock price of $930.80 and 10%
     annual growth rate results in a stock price of $1,414.77).

Annual Bonus.  The Company  provides  performance-based  compensation  awards to
executive officers and key employees for achievement during each year as part of
an annual  bonus plan.  Such  compensation  awards are a function of  individual
performance and consolidated  corporate results.  Business unit performance also
is a factor in determining compensation awards with respect to key employees who
are not executive officers.  The specified qualitative and quantitative criteria
employed by the Board of  Directors of the Company in  determining  bonus awards
varies for each individual and from year to year.

Supplemental  Severance Pay Plan. The Company has adopted a severance pay policy
providing certain executive officers and key employees with salary  continuation
in the event of a termination.  The plan generally provides for one month's base
pay for each full year of service with a minimum  amount payable of three months
and a maximum amount payable of twelve months.

Deferred Compensation Plan. The Company has adopted a Deferred Compensation Plan
which is a  non-qualified  savings  plan  under the IRS code and which  provides
executive  officers and paid  directors the  opportunity to defer the receipt of
base salary and/or bonus.  The plan is effective for fiscal years beginning with
fiscal year 2000 and provides  unfunded  deferred  compensation  payments upon a
participant's retirement or termination from the Company.  Participant deferrals
are credited  annually  with amounts  based upon  long-term  bond rates and with
amounts  replicating  the Company  match in the 401(k) for  savings  from income
above the qualified plan limits.

                                      -59-
<PAGE>

401(k) Plan. The Company has adopted a savings plan (the "Savings Plan"),  which
is qualified under Section 401(a) and 401(k) of the Code. All regular  employees
of the  Company in the United  States of America  normally  scheduled  to work a
minimum of 1,000 hours per year are eligible to  participate in the Savings Plan
immediately. For each employee who elects to participate in the Savings Plan and
makes a contribution thereto, the Company will make a matching contribution. The
Company matches 50.0% of the first 6.0% of compensation contributed. The maximum
contribution  for any  participant  for any year is 15.0% of such  participant's
eligible compensation, not to exceed the 401(k) plan elective deferral limit set
forth by the IRS.  Contributions  to the Savings Plan will be  invested,  as the
employee directs, in any combination of investment options.

Employment  Contracts  and  Termination  of  Employment  and   Change-In-Control
Arrangements.  Effective January 23, 1998, the Company entered into an agreement
with Michael A. McLain which covers the terms and conditions of his  employment.
It  contains a  provision  for  separation  benefits in the event of a change of
control or other termination not related to performance.

Pension Plans.  The Company has adopted a cash balance pension plan.  Under such
plan,  the Company  will  provide  participants  with annual  credits of 4.0% of
eligible  compensation up to the Social Security Wage Base as set forth annually
by the  Social  Security  Administration  and  Department  of  Health  and Human
Services.  An additional annual credit of 4.0% of eligible compensation from the
Social Security Wage Base up to the Qualified Plan Compensation  Limit set forth
by the Internal Revenue Service (IRS) is provided.  All balances in the accounts
of  participants  will be credited with interest  based on the prior year's U.S.
Treasury  bill rate.  At  retirement,  participants  eligible  for  benefits may
receive  the  balance  standing  in their  account in a lump sum or as a monthly
pension having equivalent actuarial value.

Additionally,  the Company has adopted a supplemental executive retirement plan,
which is a  non-qualified  plan  under  the  Internal  Revenue  Code,  and which
provides unfunded deferred  compensation  benefits to certain  individuals whose
salary  exceeds  the  Qualified  Plan  Compensation  Limit set forth by the IRS.
Pursuant  to  the  plan,   participants  are  credited   annually  with  amounts
representing  8% of  compensation  in excess of the Qualified Plan  Compensation
Limit.

The following table sets forth, for the Named Executive Officers,  the estimated
annual benefits payable upon retirement at normal  retirement age, from both the
qualified  and  non-qualified  pension  plans  assuming  in each  case that such
officer elects payment over time rather that in a lump sum:
<TABLE>
<CAPTION>

Name and Principal Position                                                              Annual Benefits Payable
-------------------------------------------------------------------------------------- -----------------------------
<S>                                                                                    <C>
                                                                                       $     137,978
Michael A. McLain
      Chief Executive Officer, President, and Chairman of the Board of Directors
                                                                                       $     38,286
D. Garrad Warren, III
Senior Vice President,  North American Industrial Safety Sales and Managing Director,
Europe
                                                                                       $     28,232
M. Rand Mallitz
      Vice President Aearo and Senior Vice President Specialty Composites
                                                                                       $     15,008
Joseph C. Marlette
      Senior Vice President, Manufacturing and Research and Development
                                                                                       $     46,494
James H. Floyd
      Senior Vice President, Logistics and Information Technology,   Managing
Director, International and Business Director, Consumer
</TABLE>


Compensation Committee Interlocks and Insider Participation

The  Company  has a  Compensation  Committee  of the Board of  Directors.  As of
December 1, 2001,  the committee  consists of Messrs.  Alpert and McLain and Ms.
Hanratty, three directors of the Company. Mr. McLain is also the Chief Executive
Officer  and  President  of the  Company  as well as  Chairman  of the  Board of
Directors.  This committee makes all executive officer  compensation  decisions,
with  Mr.  McLain  abstaining  with  respect  to  decisions  affecting  his  own
compensation, and reviews them with the full Board of Directors of the Company.

                                      -60-
<PAGE>

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management The
following  table sets forth certain  information  with respect to the beneficial
ownership of Aearo Common Stock,  including  beneficial ownership by each person
or entity known by the Company to own  beneficially  5% or more of the Company's
voting capital stock, by the Directors,  the Named Executive Officers and all of
the  Company's  Directors  and  executive  officers as a group as of December 1,
2001. All of the Subsidiary's  issued and outstanding  capital stock is owned by
Aearo.

<TABLE>
<CAPTION>
                                                                      Number of Shares of            Percentage of
Name and Address of Beneficial Owner                                   Aearo Common Stock         Outstanding Shares
<S>                                                                    <C>                           <C>
Vestar Equity Partners, L.P. (1)                                        42,500                        41.6%
     245 Park Avenue
     New York, New York 10167
                                                                        42,500                        41.6%
Cabot CSC Corporation (2)
     Two Seaport Lane, Suite 1300
     Boston, Massachusetts 02210

Norman W. Alpert (3)                                                    42,500                        41.6%
Daniel S. O'Connell (3)                                                 42,500                        41.6%
Arthur J. Nagle (3)                                                     42,500                        41.6%
William J. Brady (4)                                                    42,500                        41.6%
Margaret J. Hanratty (4)                                                42,500                        41.6%
Michael A. McLain                                                       4,050                         3.97%
John D. Curtin, Jr.                                                     3,713                         3.64%
Joseph P. Marlette                                                      1,000                         *
James H. Floyd                                                          1,000                         *
M. Rand Mallitz                                                         950                           *
D. Garrad Warren, III                                                   600                           *
Bryan P. Marsal                                                         250                           *
William E. Kassling                                                     250                           *
Directors and executive officers as a group (16 persons)(5)             98,363                        96.4%
</TABLE>

-------------------------------------
* Less than 1%.

1.   The  general  partner  of  Vestar  is  Vestar  Associates  L.P.,  a limited
     partnership  whose  general  partner  is  Vestar   Associates   Corporation
     ("V.A.C.").  In such capacity,  V.A.C. exercises sole voting and investment
     power with  respect to all of the shares held of record by Vestar.  Messrs.
     Alpert,  O'Connell  and  Nagle,  who  are  directors  of the  Company,  are
     affiliated  with Vestar in the  capacities  described  under  "Management--
     Directors  and  Executive   Officers"  and  are   stockholders   of  V.A.C.
     Individually,  no  stockholder,  director or officer of V.A.C. is deemed to
     have or share such voting or  investment  power  within the meaning of Rule
     13d-3 under the Exchange  Act.  Accordingly  no part of the shares of Aearo
     Common  Stock  owned of record by Vestar is  beneficially  owned by Messrs.
     Alpert, O'Connell or Nagle or any other stockholder, director or officer of
     V.A.C.

                                      -61-
<PAGE>

2.   The board of  directors  of Cabot CSC  Corporation  controls the voting and
     investment  of  the  shares  of  Aearo  Common  Stock  held  by  Cabot  CSC
     Corporation.  Cabot CSC Corporation is a wholly-owned  subsidiary of Cabot.
     Cabot  appoints  the  directors  of Cabot  CSC  Corporation  and  exercises
     ultimate  voting and  investment  power with  respect to all shares held of
     record by Cabot CSC  Corporation.  Cabot is a publicly  held  company  and,
     accordingly, no single stockholder,  director or officer of Cabot is deemed
     to have or share such voting or investment power within the meaning of Rule
     13d-3 under the Exchange Act.  Accordingly,  no part of the shares of Aearo
     Common Stock owned of record by Cabot CSC Corporation is beneficially owned
     by any stockholder, director or officer of Cabot.

3.   Messrs.  Alpert,  O'Connell  and Nagle are  affiliated  with  Vestar in the
     capacities described under "Directors and Executive Officers." Ownership of
     Aearo Common Stock for these  individuals  includes  42,500 shares of Aearo
     Common Stock included in the above table  beneficially  owned by Vestar, of
     which  such  persons  disclaim  beneficial  ownership.  Each such  person's
     business  address is c/o Vestar  Equity  Partners,  L.P. at the address set
     forth above.

4.   Mr. Brady and Ms.  Hanratty are  affiliated  with Cabot,  the parent of Old
     Cabot Safety  Corporation,  in the capacity  described under "Directors and
     Executive  Officers." Ownership of Aearo Common Stock for these individuals
     includes  42,500  shares of Aearo Common Stock  included in the above table
     beneficially owned by Old Cabot Safety  Corporation,  of which such persons
     disclaim beneficial  ownership.  Each such person's business address is c/o
     Cabot CSC Corporation Two Seaport Lane, Suite 1300, Boston, MA 02210.

5.   Cabot,   Vestar  and  the   Management   Investors   have  entered  into  a
     Stockholders'  Agreement, the terms of which are described more fully under
     Item 13, "Certain Relationships and Related Transactions -- Stock Ownership
     and Stockholders' Agreement." Does not include 3,725 shares of Aearo Common
     Stock held by Management Investors who are not executive officers.

                                      -62-
<PAGE>

Item 13.  Certain Relationships and Related Transactions

The Asset Transfer Agreement

The Company is a party to an asset transfer  agreement dated as of June 13, 1995
with  Cabot  and  certain  of  its  subsidiaries  (including  Old  Cabot  Safety
Corporation)  (the "Asset Transfer  Agreement")  entered into in connection with
the Formation  Acquisition.  The Asset  Transfer  Agreement  contains  customary
representations,   warranties   and   covenants.   Cabot  and   certain  of  its
subsidiaries,  on the one hand, and Aearo and the Subsidiary on the other,  have
also  agreed to  indemnify  and hold each  other and their  affiliates  harmless
against  certain  breaches of  representations  or covenants  and certain  other
liabilities.

The Company  has the right to pay an annual fee of $400,000 to Old Cabot  Safety
Corporation,  and has  elected to make this  payment,  with the result  that Old
Cabot Safety  Corporation  will retain  responsibility  and  liability  for, and
indemnify the Company against,  certain legal claims alleged to arise out of the
use of  respirators  sold  prior to June  1995.  The  Company  has the  right to
discontinue  the  payment  of such  annual  fee at any time,  in which  case the
Company will assume  responsibility for and indemnify Cabot and Old Cabot Safety
Corporation with respect to such claims.


Stock Ownership and Stockholders' Agreement

As of September 30, 2001,  Cabot owns 41.6% of common stock (42,500  shares) and
50% of redeemable  preferred stock (22,500 shares),  Vestar owns 41.6% of common
stock (42,500 shares) and 50% of redeemable  preferred stock (22,500 shares) and
the Management Investors and certain other employees of the Company own 16.8% of
common stock (17,087.5 shares).  Vestar,  Cabot and the Management Investors are
parties  to  a  stockholders'  agreement  (the  Stockholders'  Agreement).   The
Stockholders'  Agreement  contains  stock  transfer  restrictions,  as  well  as
provisions  granting certain tag-along rights,  drag-along rights,  registration
rights and participation rights.

The preferred  stock is cumulative  redeemable  $.01 par value stock.  Dividends
accrue whether or not dividends are declared or funds are available at an annual
rate of 12.5%,  compounded quarterly.  To date, no dividends have been declared.
Accrued  dividends  may be paid in cash or in  additional  shares  of  preferred
stock.  Shares  are  redeemable  for  cash  at  any  time,  subject  to  certain
exceptions,  at the option of the  Company at a  redemption  price  equal to the
actual or implied  purchase price ($45 million) plus a redemption  payment based
on the dividend  rate. As of September  30, 2001,  the  redemption  value of the
preferred stock is $96,801,000.

Aearo Company is permitted to pay cash dividends to Aearo  Corporation for taxes
and expenses in the  ordinary  course of  business.  The maximum  amount of cash
dividends  paid to Aearo  Corporation  for  ordinary  business  expenses may not
exceed  $1,000,000  in any fiscal  year.  As long as no event of  default  would
result,  Aearo  Corporation  and Aearo  Company are  permitted to pay  dividends
consisting of shares of qualified  capital stock,  as defined in the Senior Bank
Facilities,  and Aearo  Corporation may redeem or purchase shares of its capital
stock held by former  employees of Aearo  Corporation or any of its subsidiaries
following  the  termination  of their  employment,  provided  that the aggregate
amount paid by Aearo  Corporation  with respect to such purchases or redemptions
does not  exceed  $5.0  million  in any  fiscal  year and  $7.5  million  in the
aggregate.  Aearo Company may pay cash  dividends to Aearo  Corporation  for the
latter  purpose.  Additionally,  Aearo  Corporation  may  pay  dividends  on its
preferred stock in additional shares of preferred stock.

Election and Removal of Directors. The Stockholders' Agreement provides that the
Board of Directors of the Company shall consist of nine members. Currently there
are nine  directors  serving.  The  parties  agreed to vote all  shares of Aearo
Common Stock owned or  controlled by them so as to elect as members of the Board
of  Directors  persons  designated  as  follows:  (i)  Vestar  designates  three
directors so long as the Vestar  Relative  Percentage  (as defined  below) is at
least 75% or Vestar and its affiliates beneficially own on a fully diluted basis
at least 21,250  shares of Aearo Common Stock (50% of the shares of Aearo Common
Stock acquired by them in the Formation

                                      -63-
<PAGE>

Acquisition),  (ii)  Cabot  may  designate  two  directors  so long as the Cabot
Relative  Percentage  (as  defined  below)  is at  least  75% or  Cabot  and its
affiliates own  beneficially  on a fully diluted basis at least 21,250 shares of
Aearo Common Stock (50% of the shares of Aearo Common Stock  acquired by them in
the Formation Acquisition),  (iii) Vestar may designate two additional directors
who are not partners,  officers or employees of any of Vestar or its  affiliates
so long as the  Vestar  Relative  Percentage  is as least 75% or Vestar  and its
affiliates beneficially own at least 31,875 shares of Aearo Common Stock (75% of
the shares of Aearo Common Stock acquired by them in the Formation Acquisition),
provided  that Vestar must notify Cabot in writing in advance of the  identities
of these director nominees and obtain Cabot's approval thereof, which may not be
unreasonably  withheld,  and (iv) the  Management  Investors  may  designate two
directors so long as the Management  Investors  together own  beneficially  on a
fully  diluted  basis at least 3,750  shares of Aearo  Common  Stock (25% of the
shares  of Aearo  Common  Stock  acquired  by all  Management  Investors  in the
Formation  Acquisition),  provided  that  the two  designees  of the  Management
Investors  must be initial  designees as of the closing date, and in the case of
subsequent designees other than the initial designees, shall be officers serving
in similar  capacities.  The  foregoing  provisions  relating to the election of
directors terminate in the event that both Cabot and its affiliates,  on the one
hand, and Vestar and its  affiliates,  on the other hand, own on a fully diluted
basis fewer than 4,250  shares of Aearo Common Stock (10% of the shares of Aearo
Common Stock  acquired by them in the Formation  Acquisition).  The term "Vestar
Relative Percentage" means a percentage  reflecting (a)(i) $31 million plus (ii)
the amount paid for capital  stock of Aearo by Vestar and its  Affiliates  after
the Formation Acquisition less (iii) the value (based on price per share) of all
shares of Aearo Common Stock and Aearo  Preferred  Stock  acquired by Vestar and
its  affiliates in the Formation  Acquisition  and no longer held by them,  less
(iv) the value of all shares of the Aearo Common Stock and Aearo Preferred Stock
acquired by Vestar and its  affiliates  after the Formation  Acquisition  and no
longer held by them,  as a percentage of (b) the amount  calculated  pursuant to
clause (a) for Cabot and its affiliates for such date. The term "Cabot  Relative
Percentage" has a correlative meaning focused on Cabot's remaining investment in
Aearo capital stock relative to Vestar's.  Messrs.  Alpert,  O'Connell and Nagle
were  designated  by Vestar as described in clause (i) above,  Mr. Brady and Ms.
Hanratty  were  designated  by Cabot as described in clause (ii) above,  Messrs.
Kassling and Marsal were designated by Vestar as described in clause (iii) above
and Mr. McLain and Mr. Curtin were  designated  by the  Management  Investors as
described in clause (iv) above.  All directors  can be removed,  with or without
cause, and replaced by the stockholders who have the right to designate them.

Tag-along  Rights.  So long as a public offering of Aearo Common Stock shall not
have  occurred and subject to certain  exceptions,  with respect to any proposed
transfer of Aearo Common Stock or Aearo  Preferred  Stock by Vestar,  other than
transfers to affiliates,  each other  stockholder will have the right to require
that the proposed  transferee  purchase a certain percentage of the shares owned
by such stockholder at the same price and upon the same terms and conditions.

Drag-along Rights. The Stockholders'  Agreement provides that, so long as Vestar
and its affiliates beneficially own at least 21,250 shares of Aearo Common Stock
(50% of the  shares of Aearo  Common  Stock  acquired  by them in the  Formation
Acquisition)  or the  Vestar  Relative  Percentage  is at least  75%,  if Vestar
receives  an offer  from a third  party to  purchase  all but not less  than all
outstanding  shares of Aearo  Common  Stock and Aearo  Preferred  Stock and such
offer is accepted by Vestar, then each party to the Stockholders' Agreement will
transfer  all shares of Aearo Common  Stock and Aearo  Preferred  Stock owned or
controlled  by such  party on the  terms of the  offer so  accepted  by  Vestar,
provided that all such transfers occur on substantially  identical terms and the
number of shares to be acquired by the third  party after  giving  effect to all
such transfers would be sufficient  under the certificate of  incorporation  and
by-laws of the Company,  any applicable  agreements and applicable law to permit
such third party to eliminate all remaining  minority interests through a merger
opposed by such minority interests.  These so-called  "drag-along" rights do not
apply to sales in a public offering or to stock that has been sold by a party to
the Stockholders' Agreement in a public offering or pursuant to Rule 144.

If  Vestar  intends  to  transfer  Aearo  Common  Stock to a third  party in any
transaction in which these drag-along rights are invoked, Vestar must give Cabot
30 days'  advance  written  notice and, at the request of Cabot must discuss the
possibility  of Cabot,  in lieu of the third party,  acquiring such Aearo Common
Stock,  provided that this  provision  does not obligate  Cabot to purchase such
Aearo  Common Stock or Vestar to sell such Aearo Common Stock either to Cabot or
to the third party.

Other  Voting  Matters.  So long as the  drag-along  rights are in  effect,  the
parties to the Stockholders' Agreement are obligated to vote all shares of Aearo
Common  Stock  owned or  controlled  by them to  ratify,  approve  and adopt the
following  actions to the extent that they are adopted and approved by the Board
of Directors:  (i) any merger or

                                      -64-
<PAGE>
consolidation  involving the Company that is, in substance,  an  acquisition  of
another  company by the Company or a sale of the Company and in either case does
not affect in any way the  relative  rights of Cabot and Vestar or result in any
benefit to Vestar other than the benefits to it as a stockholder  of the Company
equal to the benefits received by other stockholders,  share for share, and (ii)
any amendment to the  certificate of  incorporation  of the Company whereby such
amendment does not adversely  affect such stockholder in a manner different from
that in which any other  stockholder  is affected.  In addition,  so long as the
voting agreements  providing for the election of directors remain in effect, the
parties to the Stockholders'  Agreement agreed not to vote to approve, ratify or
adopt any  amendment  to the by-laws of the Company  unless  such  amendment  is
expressly authorized by the Stockholders'  Agreement or recommended by the Board
of Directors.

Transfers of Common Stock.  Subject to certain  limitations,  transfers of Aearo
Common Stock and Aearo Preferred Stock by parties to the Stockholders' Agreement
are restricted  unless the transferee  agrees to become a party to, and be bound
by, the Stockholders' Agreement, provided that such restrictions do not apply to
sales in a public  offering or pursuant  to Rule 144.  In  addition,  subject to
certain  limitations,  Cabot and the Management investors agreed not to transfer
their shares of Aearo Common Stock or Aearo  Preferred  Stock  without the prior
written consent of Vestar.  Under certain  circumstances,  the transfer of Aearo
Common Stock or Aearo Preferred Stock by Vestar,  Cabot and their  affiliates is
permitted.

Participation  Rights. Under certain  circumstances,  if Aearo proposes to issue
any capital stock to Vestar, Cabot or any of their respective  affiliates,  each
other stockholder shall have the opportunity to purchase such capital stock on a
pro rata basis.

Approval of Affiliate  Transactions.  The Stockholders'  Agreement provides that
the Company shall not, and shall cause its  subsidiaries  not to, enter into any
transaction  with any affiliate of the Company unless such transaction (i) is on
fair and reasonable  terms no less  favorable to the Company or such  subsidiary
than  it  could  obtain  in a  comparable  arm's  length  transaction,  (ii)  is
contemplated by the Stockholders' Agreement, the Asset Transfer Agreement or the
management advisory agreement among the Company and Vestar and Cabot or (iii) is
for the payment of reasonable and customary  regular fees to outside  directors.
In no event will the Company issue Aearo Common Stock or other equity securities
to  Vestar  or  Cabot  or any  affiliate  of the  Company,  subject  to  certain
limitations, below the fair market value of such shares of Aearo Common Stock or
equity securities.

Registration  Rights.  The  Stockholders'  Agreement  provides that,  subject to
certain  limitations,  upon a written  request by Vestar or a written request by
Cabot (but only in the event that a period of one year or more has elapsed since
a public  offering of Aearo Common Stock without Cabot having an  opportunity to
participate),  the Company will use its best efforts to effect the  registration
of all or part of the Aearo Common Stock owned by such  requesting  stockholder,
provided  that (i) the  Company  will not be  required  to effect  more than one
registration within any 360 day period and (ii) neither Vestar nor Cabot will be
entitled to request more than two registrations. Under certain circumstances, if
the Company proposes to register shares of Aearo Common Stock, it will, upon the
written  request of any  stockholder,  use all reasonable  efforts to effect the
registration of such stockholders' Aearo Common Stock.

Termination.  The Stockholders'  Agreement will terminate as to any Aearo Common
Stock or Aearo Preferred  Stock,  subject to certain  limitations,  on the date,
such Aearo  Common  Stock is sold in a public  offering or pursuant to Rule 144.
The rights of Vestar  will  terminate  under the  Stockholders'  Agreement  when
Vestar and its affiliates own no Aearo Common Stock, common stock equivalents or
Aearo Preferred  Stock.  The rights of Cabot under the  Stockholders'  Agreement
will  terminate on the earliest date when Cabot or its  affiliates  own no Aearo
Common Stock, common stock equivalents or Aearo Preferred Stock.

Management Advisory Agreement. In connection with the Formation Acquisition, the
Company became a party to a management  advisory agreement with Vestar and Cabot
(the  "Management  Advisory  Agreement"),  pursuant  to  which  the  Company  is
obligated to pay an annual management fee in an aggregate amount with respect to
each  fiscal  year equal to the  greater of (i)  $400,000  and (ii) 1.25% of the
consolidated net income of the Company before cash interest, taxes, depreciation
and  amortization for such fiscal year to be shared by Cabot and Vestar based on
their  relative  equity  ownership  of the Company.  Pursuant to the  Management
Advisory  Agreement,  each of Vestar  and  Cabot  received  $363,976  (including
$22,613 to each party as an  advisory  fee  adjustment

                                      -65-
<PAGE>

relative to fiscal year 2000) with respect to 2001,  $342,838 (including $24,080
to each party as an advisory fee  adjustment  relative to fiscal year 1999) with
respect to 2000,  $352,806  (including  $58,144 to each party as an advisory fee
adjustment  relative to fiscal year 1998) with respect to fiscal 1999,  $217,063
(including a $19,456  reduction to each party as an advisory fee  adjustment for
fiscal 1997) with respect to fiscal 1998,  $311,949  (including  $55,975 to each
party as an advisory  fee  adjustment  relative to fiscal  1996) with respect to
fiscal 1997. Messrs. Alpert,  O'Connell and Nagle, three of the directors of the
Company,  are affiliated with Vestar in the capacities  described under Item 10,
"Directors and Executive Officers" and,  accordingly,  benefit from any payments
received by Vestar.  Mr. Brady and Ms.  Hanratty,  two of the  directors for the
Company,  are affiliated  with Cabot in the capacities  described under Item 10,
"Directors and Executive Officers" and, accordingly, benefit indirectly from any
payments received by Cabot.

Management  and  Director  Loans.  The  Company  has made  available  to certain
Management  Investors loans in order to provide such  Management  Investors with
funds to be  applied  to a portion of the  purchase  price of the  Common  Stock
purchased by such Management Investors under the Stock Purchase Plan. Such loans
(i) are secured by the Aearo Common Stock  purchased with the proceeds  thereof,
(ii) have a term of  between 5 and 10 years,  (iii) bear  interest  at an annual
rate between  6.31% and 7%, and (iv) are subject to mandatory  prepayment in the
event the employment of such Management  Investor  terminates.  At September 30,
2001, amounts outstanding in thousands of dollars were:
<TABLE>
<CAPTION>

                                     Amount Outstanding During     Aggregate Amount Outstanding at
 Management Investors                       Fiscal 2001                  September 30, 2001           Interest Rate
------------------------------------ --------------------------- ------------------------------------ ------------------
<S>                                  <C>                         <C>                                        <C>
  Michael A. McLain                  $          608              $               608                        6.31%
  D. Garrad (Gary) Warren, III                  270                              223                        7.00%
  Bryan J. Carey                                100                              100                        7.00%
  Rahul Kapur                                    96                               66                        7.00%
  Joseph P. Marlette                             96                               66                        7.00%
  James H. Floyd                                 96                               66                        7.00%
  M. Rand Mallitz                                76                               76                        7.00%
  James M. Phillips                              48                               33                        7.00%
  James D. Hall - Estate                         45                               45                        7.00%
</TABLE>


                                      -66-
<PAGE>

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a) Exhibits

Exhibit
Number Description

2.1    Asset Transfer Agreement,  dated as of June 13, 1995, among Aearo Company
       (formerly,  Cabot Safety  Corporation),  Cabot Canada Ltd.,  Cabot Safety
       Limited,  Cabot Corporation,  Aearo Corporation  (formerly,  Cabot Safety
       Holdings   Corporation),   and  Cabot  Safety   Acquisition   Corporation
       (Incorporated  by  reference  to  Exhibit  No.  2.1 to  the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.).

2.2    Trademark  Coexistence  Agreement,  dated July 11,  1995,  between  Cabot
       Corporation and Cabot Safety  Intermediate  Corporation  (Incorporated by
       reference to Exhibit No. 2.2 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).

2.3    Subscription  Agreement,  dated July 11, 1995,  between Aearo Corporation
       (formerly, Cabot Safety Holdings Corporation) and Vestar Equity Partners,
       L.P.  (Incorporated  by reference to Exhibit No. 2.3 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

2.4    Stockholders'  Agreement,  dated as of July 11, 1995, among Vestar Equity
       Partners, L.P., Cabot CSC Corporation, Aearo Corporation (formerly, Cabot
       Safety  Holdings  Corporation),  Cabot  Corporation,  and the  Management
       Investors   (Incorporated   by  reference  to  Exhibit  No.  2.4  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.).

2.5    Form of Executive Security Purchase Agreement, dated as of July 11, 1995,
       between Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation)
       and  the  Management  Investors  (Senior  Management).  (Incorporated  by
       reference to Exhibit No. 2.5 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation.)

2.6    Form of Executive Security Purchase Agreement, dated as of July 11, 1995,
       between Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation)
       and  the  Management  Investors  (Middle  Management).  (Incorporated  by
       reference to Exhibit No. 2.6 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation.)

2.7    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot  Safety  Acquisition  Corporation  and  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.7  to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

2.8    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot Safety Acquisition Corporation and Cabot Safety Acquisition Limited
       (UK).  (Incorporated  by reference to Exhibit No. 2.8 to the Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

2.9    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot Safety Acquisition  Corporation and Cabot Safety Canada Acquisition
       Ltd.  (Canada).  (Incorporated  by  reference  to  Exhibit  No.2.9 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

                                      -67-
<PAGE>

2.10   Bill of Sale and  Assignment,  dated as of July 11,  1995,  made by Aearo
       Company  (formerly,  Cabot Safety  Corporation),  Cabot Canada Ltd.,  and
       Cabot  Safety  Limited  in favor of Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot
       Safety  Intermediate  Corporation,  Cabot Safety Acquisition  Limited and
       Cabot  Safety  Canada  Acquisition  Ltd.  (Incorporated  by  reference to
       Exhibit No. 2.10 to the Registration Statement on Form S-4, No. 33-96190,
       of Aearo Company and Aearo Corporation.)

2.11   Assumption  Agreement,  dated as of July 11, 1995,  by Aearo  Corporation
       (formerly,  Cabot Safety Holdings Corporation),  Cabot Safety Acquisition
       Corporation,   Cabot  Safety  Intermediate   Corporation,   Cabot  Safety
       Acquisition  Limited and Cabot Safety Canada Acquisition Ltd. in favor of
       Cabot Corporation,  Aearo Company (formerly,  Cabot Safety  Corporation),
       Cabot Canada Ltd. and Cabot Safety Limited. (Incorporated by reference to
       Exhibit No. 2.11 to the Registration Statement on Form S-4, No. 33-96190,
       of Aearo Company and Aearo Corporation.)

2.12   Worldwide  Trademark  Assignment  dated July 11, 1995,  by Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.12 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.13   Worldwide  Copyright  Assignment  dated July 11, 1995,  by Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.13 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.14   Worldwide  Patent  Assignment  dated  July 11,  1995,  by  Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.14 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.15   Management  Advisory  Agreement  made as of July 11,  1995,  among  Aearo
       Company   (formerly,   Cabot  Safety   Corporation),   Aearo  Corporation
       (formerly,  Cabot Safety Holdings  Corporation),  Certain Subsidiaries of
       Aearo  Corporation,   Vestar  Capital  Partners  and  Cabot  Corporation.
       (Incorporated  by  reference  to  Exhibit  No.  2.15 to the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.)

2.16   Aearo  Corporation  (formerly,  Cabot Safety Holdings  Corporation)  1995
       Employee Stock Purchase Plan.  (Incorporated  by reference to Exhibit No.
       2.16 to the Registration  Statement on Form S-4, No.  33-96190,  of Aearo
       Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)

2.17   Assignment and Assumption  Agreement  dated July 11, 1995, by and between
       Aearo  Company  (formerly,  Cabot  Safety  Corporation)  and Cabot Safety
       Acquisition  Corporation  with Respect to the Installment  Sale Agreement
       dated  September  1, 1978 by and  between  the  Department  of  Community
       Affairs and Economic  Development  of the State of Delaware and Specialty
       Composites   Corporation   (Predecessor  to  Cabot  Safety   Corporation)
       Pertaining to Real Property Located in New Castle County,  Delaware,  Tax
       Parcel Number 11- 010.00-003  (Delaware IRB).  (Incorporated by reference
       to  Exhibit  No.  2.17 to the  Registration  Statement  on Form S-4,  No.
       33-96190, of Aearo Company and Aearo Corporation (formerly,  Cabot Safety
       Holdings Corporation).)

2.18   Assignment and Assumption  Agreement  dated July 11, 1995, by and between
       Cabot Corporation and Cabot Safety  Acquisition  Corporation with Respect
       to that  Certain Loan  Agreement  dated as of June 1, 1982 by and between
       the City of  Indianapolis,  Indiana and Cabot  Corporation  (Indianapolis
       IRB).  (Incorporated by reference to Exhibit No. 2.18 to the Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

                                      -68-
<PAGE>

2.19   Stock  Purchase  Agreement by and among Aearo  Company  (formerly,  Cabot
       Safety  Corporation),  Peltor  Holding AB, Leif  Palmaer  Invest AB, Leif
       Anderzon  Invest  AB and  Active  i Malmo  All,  dated  April  25,  1996.
       (Incorporated  by reference to Exhibit 2.1 to the Current  Report on Form
       8-K of Aearo Corporation  (formerly,  Cabot Safety Holdings  Corporation)
       dated May 30, 1996.)

2.20*  Stock  Purchase  Agreement by and among Aearo  Company  (formerly,  Cabot
       Safety  Corporation),  Eastern  Safety  Equipment  Co.,  Inc.,  Alfred H.
       Jacobson  and  William  Klein and Jack P. Hecht as  Trustees of a certain
       Trust, dated September 19, 1995.

2.21*  Amendment to  Stockholder's  Agreement  dated as of July 3, 1996,  by and
       among  Vestar  Equity  Partners,  L.P.,  Cabot  CSC  Corporation,   Aearo
       Corporation   (formerly,   Cabot  Safety  Holdings   Corporation)   Cabot
       Corporation, and certain other stockholders of Aearo Corporation.

2.22*  Amendment  to  Stock  Purchase  Agreement  by  and  among  Aearo  Company
       (formerly,  Cabot Safety  Corporation),  Peltor  Holding AB, Leif Palmaer
       Invest AB, Leif  Anderzon  Invest AB and Active i Malmo AB, dated May 15,
       1996.

3.1    Amended and Restated  Certificate of Incorporation  of Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation). (Incorporated by reference
       to Exhibit No.  3.(i).2 to the  Registration  statement  on Form S-4, No.
       33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
       Corporation.)

3.2    By-Laws  of  Aearo   Corporation   (formerly,   Cabot   Safety   Holdings
       Corporation).  (Incorporated  by reference to Exhibit No.  3(ii).2 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

4.1    Indenture  dated as of July 11, 1995  between  Aearo  Company  (formerly,
       Cabot Safety  Corporation),  Aearo  Corporation  (formerly,  Cabot Safety
       Holdings Corporation),  and Fleet National Bank of Connecticut (formerly,
       Shawmut   Bank   Connecticut,    National   Association),   as   Trustee.
       (Incorporated  by  reference  to  Exhibit  No.  4.1 to  the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.)

4.2    Form of Note.  (Incorporated  by  reference  to  Exhibit  No.  4.2 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

4.3    Form of Exchange Note.  (Incorporated  by reference to Exhibit No. 4.3 to
       the Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

4.4    Registration  Rights  Agreement,  dated as of July 11, 1995,  among Cabot
       Safety Acquisition Corporation, Aearo Corporation (formerly, Cabot Safety
       Holdings Corporation),  BT Securities Corporation and Chemical Securities
       Inc.  (Incorporated  by reference to Exhibit No. 4.4 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

4.5    First Supplemental  Indenture,  dated December 6, 1995.  (Incorporated by
       reference  to Exhibit No. 4.5 to the Annual  Report on Form 10-K of Aearo
       Corporation (formerly,  Cabot Safety Holdings Corporation) for the fiscal
       year ended September 30, 1995.)

10.1*  Credit Agreement,  dated as of July 11, 1995, and amended and restated as
       of May 30, 1996, among Aearo Corporation (formerly, Cabot Safety Holdings
       Corporation), Aearo Company (formerly, Cabot Safety Corporation), Certain
       of its  Subsidiaries,  Various  Banks,  and Bankers  Trust Company as Co-
       Arranger and Administrative Agent.

                                      -69-
<PAGE>

10.2*  Amended and Restated US Pledge  Agreement  dated as of July 11, 1995,  as
       made  by  Cabot  Safety   Acquisition   Corporation,   Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation),  Cabot Safety Intermediate
       Corporation  and CSC FSC,  Inc.,  in favor of  Bankers  Trust  Company as
       Collateral Agent for the Benefit of the Secured Creditors.

10.3*  Amended  and  Restated  Foreign  Pledge  Agreement  as of July 11,  1995,
       amended and  restated as of May 30,  1996,  made by Cabot  Safety  Canada
       Acquisition  Limited  and Cabot  Safety  Acquisition  Limited in favor of
       Bankers Trust Company as Collateral  Agent for the Benefit of the Secured
       Creditors.

10.4   Charge Over United Kingdom  Patents and  Trademarks  made the 11th Day of
       July,  1995,  by Cabot Safety  Intermediate  Corporation  and the Bankers
       Trust  Company  as  Collateral  Agent  for  Itself  and for  the  Secured
       Creditors.  (Incorporated  by  reference  to  Exhibit  No.  10.4  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.5*  Amended and Restated US Security  Agreement dated as of July 11, 1995, as
       amended  and  restated  as of  May  30,  1996,  among  Aearo  Corporation
       (formerly,  Cabot Safety Holdings Corporation),  Cabot Safety Acquisition
       Corporation,  Cabot Safety Intermediate  Corporation,  CSC FSC, Inc., and
       Bankers Trust Company as Collateral  Agent for the Benefit of the Secured
       Creditors.

10.6*  Amended and Restated  Canadian  Security  Agreement  dated as of July 11,
       1995, as amended and restated as of May 30, 1996, granted by Cabot Safety
       Canada  Acquisition   Limited  in  favor  of  Bankers  Trust  Company  as
       Collateral Agent for the Benefit of the Secured Creditors.

10.7   English Security  Agreement (The Debenture) made on the 11th Day of July,
       1995  between the Cabot  Safety  Acquisition  Limited  and Bankers  Trust
       Company as  Collateral  Agent for Itself and for the  Secured  Creditors.
       (Incorporated  by  reference  to  Exhibit  No.  10.7 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

10.8   Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee  (recorded in Marion  County,  Indiana)  pertaining  to Real
       Property  located  at  7911  Zionsville  Road,   Indianapolis,   Indiana.
       (Incorporated  by  reference  to  Exhibit  No.  10.8 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

10.9   Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee (recorded in New Castle County,  Delaware)  pertaining to l0
       Acre  Site  of  Unimproved  Land  adjacent  to  5457  West  79th  Street,
       Indianapolis,  Indiana. (Incorporated by reference to Exhibit No. 10.9 to
       the Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.10  Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee (recorded in New Castle County, Delaware) pertaining to Real
       Property located at 650 Dawson Drive, Newark, Delaware.  (Incorporated by
       reference to Exhibit No. 10.10 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

10.11  Aearo Company (formerly,  Cabot Safety Corporation) Employees' Retirement
       Account  Plan,  dated as of May l, 1990,  as  amended.  (Incorporated  by
       reference to Exhibit No. 10.11 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company and Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation).)

                                      -70-
<PAGE>

10.12  Fidelity Corporate (401(k)) Plan for Retirement, dated August l, 1993, as
       amended.   (Incorporated  by  reference  to  Exhibit  No.  10.12  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.13  Aearo Company (formerly, Cabot Safety Corporation) Supplemental Executive
       Retirement Plan, dated May l, 1993. (Incorporated by reference to Exhibit
       No. 10.13 to the  Registration  Statement on Form S-4, No. 33- 96190,  of
       Aearo  Company and Aearo  Corporation  (formerly,  Cabot Safety  Holdings
       Corporation).)

10.14  Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and Aearo Company
       (formerly,  Cabot Safety  Corporation),  pertaining to 8001-8003 Woodland
       Drive, Indianapolis,  Indiana, as amended.  (Incorporated by reference to
       Exhibit  No.  10.14  to the  Registration  Statement  on  Form  S-4,  No.
       33-96190, of Aearo Company and Aearo Corporation (formerly,  Cabot Safety
       Holdings Corporation).)

10.15  Sublease,  dated April 16, 1990, between American Optical Corporation and
       Aearo  Company  (formerly,  Cabot  Safety  Corporation),   pertaining  to
       Southbridge,   Massachusetts  manufacturing  facility.  (Incorporated  by
       reference to Exhibit No. 10.15 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company and Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation).)

10.16* Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation) Amended
       and Restated 1995 Employee and Non-Employee Director Stock Purchase Plan.

10.17* Form of Executive Security Purchase Agreement.

10.18* Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Executive
       Stock Option Plan.

10.19* Amended and Restated US Subsidiary Guaranty dated July 11, 1995 delivered
       by Cabot  Safety  Intermediate  Corporation,  CSC FSC,  Inc.  and Eastern
       Safety Equipment Co., Inc. in favor of Bankers Trust Company.

10.20* Aearo  Corporation  (formerly,  Cabot Safety Holdings  Corporation)  1996
       Stock Option Plan.

10.21* Form of Incentive  Stock  Option  Agreement  under the Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation) 1996 Stock Option Plan.

10.22* Form of Non-Qualified  Stock Option Agreement for Company Employees under
       the Aearo Corporation (formerly,  Cabot Safety Holdings Corporation) 1996
       Stock Option Plan.

10.25* Amended  and  Restated  US  Subsidiary  Guaranty  dated July 11,  1995 as
       amended  and  restated  as of May 30,  1996,  delivered  by Cabot  Safety
       Intermediate Corporation, CSC FSC, Inc. and Eastern Safety Equipment Co.,
       Inc. in favor of Bankers Trust Company.

10.26  Fourth  Amendment to Credit  Agreement,  dated as of December 4, 1998, by
       and among Aearo Corporation,  Aearo Company, certain of its Subsidiaries,
       Various  Banks,  and  Bankers  Trust  Company  as  Administrative   Agent
       (incorporated  by reference to the same numbered exhibit of the Company's
       Annual Report on 1998 10-K for the year ended September 30, 1998).

10.27  Aearo  Corporation  1997 Stock Option Plan  (incorporated by reference to
       the same numbered exhibit of the Company's Annual Report on 1998 10-K for
       the year ended September 30, 1998).

10.28  Fifth Amendment to Credit Agreement dated December 14, 2000, by and among
       Aearo Corporation,  Aearo Company,  certain of its Subsidiaries,  Various
       Banks, and Bankers Trust Company as Administrative Agent (incorporated by
       reference to same numbered exhibit of the Company's Annual Report on Form
       10-K for the year ended September 30, 2000).

12.1**   Statements re: Computation of Ratios.

21.1**   List of Subsidiaries.

24.1**   Powers of Attorney (see page 73 of this report).

                                      -71-
<PAGE>

*  Incorporated  by reference to the same numbered  exhibit to the  registration
statement on Form S-l, No.  333-05047,  of Aearo  Corporation  (formerly,  Cabot
Safety Holdings Corporation).

**    Filed herewith.
(a)   Exhibits
(b)   Financial Statement Schedules
(c)   Reports on Form 8-K

On October 11, 2000,  the Company filed a Current  Report on Form 8-K containing
its press  release  regarding  a  preliminary  injunction  issued by the federal
district court involving a trademark dispute.

On May 18, 2001,  the Company  filed a Current  Report on Form 8-K regarding the
dismissal of its former auditors.

On July 19, 2001,  the Company filed a Current  Report on Form 8-K regarding its
new Credit Facility.

On October 1, 2001, the Company filed a Current Report on Form 8-K regarding the
announcement of its restructuring.

On October 19, 2001,  the Company filed a Current Report on Form 8-K regarding a
slowdown in the market for its products and other matters.

                                      -72-
<PAGE>

                                   SCHEDULE II
                                AEARO CORPORATION

                                               VALUATION AND QUALIFYING ACCOUNTS
                                     For the years ended September 30, 1999,
                                     2000, and 2001
                                                     (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                         Additions
                                                Balance at       Provisions       Charged to
                                               beginning of      Charged to          Other       Net Deductions     Balance at
                                                  Period         Operations        Accounts      From Allowances   end of Period
                                              --------------- ------------------ -------------- ------------------ --------------
                                              --------------- ------------------ -------------- ------------------ --------------
Year ended September 30, 1999
<S>                                                <C>                 <C>             <C>            <C>                <C>
      Bad Debt Reserve                             1,239               594              -            (537)              1,296
      Sales Returns & Allowances Reserve             599                 -              -             (26)                573
      Restructure Reserve                          2,990                 -              -          (2,938)                 52

Year ended September 30, 2000
      Bad Debt Reserve                             1,296               366              -            (308)              1,354
      Sales Returns & Allowances Reserve             573               100              -                -                673
      Restructure Reserve                             52                 -              -             (33)                 19

Year ended September 30, 2001
      Bad Debt Reserve                             1,354               450              -            (973)                831
      Sales Returns & Allowances Reserve             673                 -          (378)                -                295
      Restructure Reserve                             19             6,324              -                -              6,343

</TABLE>

                                   SIGNATURES
      Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                     Aearo Corporation
Date:  December 16, 2001             By: /s/ Michael A. McLain
                                         ---------------------
                                     Michael A. McLain
                                     Chief Executive Officer, President,
                                     and Chairman of the Board
                                     of Directors

                                      -73-
<PAGE>

                               POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS,  that we, the undersigned officers and directors
of Aearo Corporation  hereby severally  constitute Michael A. McLain and Jeffrey
S. Kulka, and each of them singly,  our true and lawful attorney with full power
to him to sign for us and in our names in the capacities  indicated  below,  the
Annual  Report on Form 10-K filed  herewith and any and all  amendments  to said
Annual Report on Form 10-K, and generally to do all such things in our names and
in our  capacities  as officers and  directors to enable  Aearo  Corporation  to
comply with the  provisions  of the  Securities  Exchange  Act of 1934,  and all
requirements  of the Securities and Exchange  Commission,  hereby  ratifying and
confirming our  signatures as they may be signed by our said  attorney,  to said
Annual Report on Form 10-K and any and all amendments  thereto.  Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

Date: November 16, 2001      /s/ Michael A. McLain
                             ---------------------
                             Michael A. McLain
                             President, Chief Executive Officer and Chairman
                             (Principal Executive Officer)

Date: November 16, 2001      /s/ Jeffery S. Kulka
                             --------------------
                             Jeffrey S. Kulka
                             Vice President, Chief Financial Officer, Treasurer
                             and Secretary

Date: November 16, 2001      /s/ John D. Curtin
                             ------------------
                             John D. Curtin, Jr., Director

Date: November 16, 2001      /s/ Norman W. Alpert
                             --------------------
                             Norman W. Alpert, Director

Date: November 16, 2001      /s/ William J. Brady
                             --------------------
                             William J. Brady, Director

Date: December 10, 2001      /s/ Margaret J. Hanratty
                             ------------------------
                             Margaret J. Hanratty, Director

Date: November 16, 2001      /s/ Arthur J. Nagle
                             -------------------
                             Arthur J. Nagle, Director
Date: November 27, 2001      /s/ Daniel S. O'Connell
                             -----------------------
                             Daniel S. O'Connell, Director
Date: November 16, 2001      /s/ William Kassling
                             --------------------
                             William Kassling, Director
Date: November 16, 2001      /s/ Bryan Marsal
                             ----------------
                             Bryan Marsal, Director

SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS,  WHICH HAVE NOT REGISTERED  SECURITIES PURSUANT
TO SECTION 12 OF THE ACT

No annual report or proxy material relating to the Registrant's fiscal year
ended September 30, 2000 has been sent to security holders of the Registrant.


                                      -74-
<PAGE>

Exhibit
Number Description

2.1    Asset Transfer Agreement,  dated as of June 13, 1995, among Aearo Company
       (formerly,  Cabot Safety  Corporation),  Cabot Canada Ltd.,  Cabot Safety
       Limited,  Cabot Corporation,  Aearo Corporation  (formerly,  Cabot Safety
       Holdings   Corporation),   and  Cabot  Safety   Acquisition   Corporation
       (Incorporated  by  reference  to  Exhibit  No.  2.1 to  the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.).

2.2    Trademark  Coexistence  Agreement,  dated July 11,  1995,  between  Cabot
       Corporation and Cabot Safety  Intermediate  Corporation  (Incorporated by
       reference to Exhibit No. 2.2 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).

2.3    Subscription  Agreement,  dated July 11, 1995,  between Aearo Corporation
       (formerly, Cabot Safety Holdings Corporation) and Vestar Equity Partners,
       L.P.  (Incorporated  by reference to Exhibit No. 2.3 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

2.4    Stockholders'  Agreement,  dated as of July 11, 1995, among Vestar Equity
       Partners, L.P., Cabot CSC Corporation, Aearo Corporation (formerly, Cabot
       Safety  Holdings  Corporation),  Cabot  Corporation,  and the  Management
       Investors   (Incorporated   by  reference  to  Exhibit  No.  2.4  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.).

2.5    Form of Executive Security Purchase Agreement, dated as of July 11, 1995,
       between Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation)
       and  the  Management  Investors  (Senior  Management).  (Incorporated  by
       reference to Exhibit No. 2.5 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation.)

2.6    Form of Executive Security Purchase Agreement, dated as of July 11, 1995,
       between Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation)
       and  the  Management  Investors  (Middle  Management).  (Incorporated  by
       reference to Exhibit No. 2.6 to the  Registration  Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation.)

2.7    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot  Safety  Acquisition  Corporation  and  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.7  to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

2.8    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot Safety Acquisition Corporation and Cabot Safety Acquisition Limited
       (UK).  (Incorporated  by reference to Exhibit No. 2.8 to the Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

2.9    Assignment  and Assumption  Agreement,  dated as of July 11, 1995, by and
       between Aearo Corporation (formerly,  Cabot Safety Holdings Corporation),
       Cabot Safety Acquisition  Corporation and Cabot Safety Canada Acquisition
       Ltd.  (Canada).  (Incorporated  by  reference  to  Exhibit  No.2.9 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

                                      -75-
<PAGE>

2.10   Bill of Sale and  Assignment,  dated as of July 11,  1995,  made by Aearo
       Company  (formerly,  Cabot Safety  Corporation),  Cabot Canada Ltd.,  and
       Cabot  Safety  Limited  in favor of Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot
       Safety  Intermediate  Corporation,  Cabot Safety Acquisition  Limited and
       Cabot  Safety  Canada  Acquisition  Ltd.  (Incorporated  by  reference to
       Exhibit No. 2.10 to the Registration Statement on Form S-4, No. 33-96190,
       of Aearo Company and Aearo Corporation.)

2.11   Assumption  Agreement,  dated as of July 11, 1995,  by Aearo  Corporation
       (formerly,  Cabot Safety Holdings Corporation),  Cabot Safety Acquisition
       Corporation,   Cabot  Safety  Intermediate   Corporation,   Cabot  Safety
       Acquisition  Limited and Cabot Safety Canada Acquisition Ltd. in favor of
       Cabot Corporation,  Aearo Company (formerly,  Cabot Safety  Corporation),
       Cabot Canada Ltd. and Cabot Safety Limited. (Incorporated by reference to
       Exhibit No. 2.11 to the Registration Statement on Form S-4, No. 33-96190,
       of Aearo Company and Aearo Corporation.)

2.12   Worldwide  Trademark  Assignment  dated July 11, 1995,  by Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.12 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.13   Worldwide  Copyright  Assignment  dated July 11, 1995,  by Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.13 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.14   Worldwide  Patent  Assignment  dated  July 11,  1995,  by  Aearo  Company
       (formerly,   Cabot  Safety  Corporation)  to  Cabot  Safety  Intermediate
       Corporation.  (Incorporated  by  reference  to  Exhibit  No.  2.14 to the
       Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

2.15   Management  Advisory  Agreement  made as of July 11,  1995,  among  Aearo
       Company   (formerly,   Cabot  Safety   Corporation),   Aearo  Corporation
       (formerly,  Cabot Safety Holdings  Corporation),  Certain Subsidiaries of
       Aearo  Corporation,   Vestar  Capital  Partners  and  Cabot  Corporation.
       (Incorporated  by  reference  to  Exhibit  No.  2.15 to the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.)

2.16   Aearo  Corporation  (formerly,  Cabot Safety Holdings  Corporation)  1995
       Employee Stock Purchase Plan.  (Incorporated  by reference to Exhibit No.
       2.16 to the Registration  Statement on Form S-4, No.  33-96190,  of Aearo
       Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)

2.17   Assignment and Assumption  Agreement  dated July 11, 1995, by and between
       Aearo  Company  (formerly,  Cabot  Safety  Corporation)  and Cabot Safety
       Acquisition  Corporation  with Respect to the Installment  Sale Agreement
       dated  September  1, 1978 by and  between  the  Department  of  Community
       Affairs and Economic  Development  of the State of Delaware and Specialty
       Composites   Corporation   (Predecessor  to  Cabot  Safety   Corporation)
       Pertaining to Real Property Located in New Castle County,  Delaware,  Tax
       Parcel Number 11- 010.00-003  (Delaware IRB).  (Incorporated by reference
       to  Exhibit  No.  2.17 to the  Registration  Statement  on Form S-4,  No.
       33-96190, of Aearo Company and Aearo Corporation (formerly,  Cabot Safety
       Holdings Corporation).)

2.18   Assignment and Assumption  Agreement  dated July 11, 1995, by and between
       Cabot Corporation and Cabot Safety  Acquisition  Corporation with Respect
       to that  Certain Loan  Agreement  dated as of June 1, 1982 by and between
       the City of  Indianapolis,  Indiana and Cabot  Corporation  (Indianapolis
       IRB).  (Incorporated by reference to Exhibit No. 2.18 to the Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

2.19   Stock  Purchase  Agreement by and among Aearo  Company  (formerly,  Cabot
       Safety  Corporation),  Peltor  Holding AB, Leif  Palmaer  Invest AB, Leif
       Anderzon  Invest  AB and  Active  i Malmo  All,  dated  April  25,  1996.
       (Incorporated  by reference to Exhibit 2.1 to the Current  Report on Form
       8-K of Aearo Corporation  (formerly,  Cabot Safety Holdings  Corporation)
       dated May 30, 1996.)

                                      -76-
<PAGE>

2.20*  Stock  Purchase  Agreement by and among Aearo  Company  (formerly,  Cabot
       Safety  Corporation),  Eastern  Safety  Equipment  Co.,  Inc.,  Alfred H.
       Jacobson  and  William  Klein and Jack P. Hecht as  Trustees of a certain
       Trust, dated September 19, 1995.

2.21*  Amendment to  Stockholder's  Agreement  dated as of July 3, 1996,  by and
       among  Vestar  Equity  Partners,  L.P.,  Cabot  CSC  Corporation,   Aearo
       Corporation   (formerly,   Cabot  Safety  Holdings   Corporation)   Cabot
       Corporation, and certain other stockholders of Aearo Corporation.

2.22*  Amendment  to  Stock  Purchase  Agreement  by  and  among  Aearo  Company
       (formerly,  Cabot Safety  Corporation),  Peltor  Holding AB, Leif Palmaer
       Invest AB, Leif  Anderzon  Invest AB and Active i Malmo AB, dated May 15,
       1996.

3.1    Amended and Restated  Certificate of Incorporation  of Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation). (Incorporated by reference
       to Exhibit No.  3.(i).2 to the  Registration  statement  on Form S-4, No.
       33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
       Corporation.)

3.2    By-Laws  of  Aearo   Corporation   (formerly,   Cabot   Safety   Holdings
       Corporation).  (Incorporated  by reference to Exhibit No.  3(ii).2 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly, Cabot Safety Corporation) and Aearo Corporation.)

4.1    Indenture  dated as of July 11, 1995  between  Aearo  Company  (formerly,
       Cabot Safety  Corporation),  Aearo  Corporation  (formerly,  Cabot Safety
       Holdings Corporation),  and Fleet National Bank of Connecticut (formerly,
       Shawmut   Bank   Connecticut,    National   Association),   as   Trustee.
       (Incorporated  by  reference  to  Exhibit  No.  4.1 to  the  Registration
       Statement  on  Form  S-4,  No.  33-96190,  of  Aearo  Company  and  Aearo
       Corporation.)

4.2    Form of Note.  (Incorporated  by  reference  to  Exhibit  No.  4.2 to the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

4.3    Form of Exchange Note.  (Incorporated  by reference to Exhibit No. 4.3 to
       the Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

4.4    Registration  Rights  Agreement,  dated as of July 11, 1995,  among Cabot
       Safety Acquisition Corporation, Aearo Corporation (formerly, Cabot Safety
       Holdings Corporation),  BT Securities Corporation and Chemical Securities
       Inc.  (Incorporated  by reference to Exhibit No. 4.4 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety Corporation) and Aearo Corporation.)

4.5    First Supplemental  Indenture,  dated December 6, 1995.  (Incorporated by
       reference  to Exhibit No. 4.5 to the Annual  Report on Form 10-K of Aearo
       Corporation (formerly,  Cabot Safety Holdings Corporation) for the fiscal
       year ended September 30, 1995.)

10.1*  Credit Agreement,  dated as of July 11, 1995, and amended and restated as
       of May 30, 1996, among Aearo Corporation (formerly, Cabot Safety Holdings
       Corporation), Aearo Company (formerly, Cabot Safety Corporation), Certain
       of its  Subsidiaries,  Various  Banks,  and Bankers  Trust Company as Co-
       Arranger and Administrative Agent.

10.2*  Amended and Restated US Pledge  Agreement  dated as of July 11, 1995,  as
       made  by  Cabot  Safety   Acquisition   Corporation,   Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation),  Cabot Safety Intermediate
       Corporation  and CSC FSC,  Inc.,  in favor of  Bankers  Trust  Company as
       Collateral Agent for the Benefit of the Secured Creditors.

10.3*  Amended  and  Restated  Foreign  Pledge  Agreement  as of July 11,  1995,
       amended and  restated as of May 30,  1996,  made by Cabot  Safety  Canada
       Acquisition  Limited  and Cabot  Safety  Acquisition  Limited in favor of
       Bankers Trust Company as Collateral  Agent for the Benefit of the Secured
       Creditors.

                                      -77-
<PAGE>

10.4   Charge Over United Kingdom  Patents and  Trademarks  made the 11th Day of
       July,  1995,  by Cabot Safety  Intermediate  Corporation  and the Bankers
       Trust  Company  as  Collateral  Agent  for  Itself  and for  the  Secured
       Creditors.  (Incorporated  by  reference  to  Exhibit  No.  10.4  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.5*  Amended and Restated US Security  Agreement dated as of July 11, 1995, as
       amended  and  restated  as of  May  30,  1996,  among  Aearo  Corporation
       (formerly,  Cabot Safety Holdings Corporation),  Cabot Safety Acquisition
       Corporation,  Cabot Safety Intermediate  Corporation,  CSC FSC, Inc., and
       Bankers Trust Company as Collateral  Agent for the Benefit of the Secured
       Creditors.

10.6*  Amended and Restated  Canadian  Security  Agreement  dated as of July 11,
       1995, as amended and restated as of May 30, 1996, granted by Cabot Safety
       Canada  Acquisition   Limited  in  favor  of  Bankers  Trust  Company  as
       Collateral Agent for the Benefit of the Secured Creditors.

10.7   English Security  Agreement (The Debenture) made on the 11th Day of July,
       1995  between the Cabot  Safety  Acquisition  Limited  and Bankers  Trust
       Company as  Collateral  Agent for Itself and for the  Secured  Creditors.
       (Incorporated  by  reference  to  Exhibit  No.  10.7 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

10.8   Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee  (recorded in Marion  County,  Indiana)  pertaining  to Real
       Property  located  at  7911  Zionsville  Road,   Indianapolis,   Indiana.
       (Incorporated  by  reference  to  Exhibit  No.  10.8 to the  Registration
       Statement on Form S-4, No. 33-96190,  of Aearo Company  (formerly,  Cabot
       Safety  Corporation)  and  Aearo  Corporation  (formerly,   Cabot  Safety
       Holdings Corporation).)

10.9   Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee (recorded in New Castle County,  Delaware)  pertaining to l0
       Acre  Site  of  Unimproved  Land  adjacent  to  5457  West  79th  Street,
       Indianapolis,  Indiana. (Incorporated by reference to Exhibit No. 10.9 to
       the Registration  Statement on Form S-4, No.  33-96190,  of Aearo Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.10  Mortgage and Security Agreement, Assignment of Leases, Rents and Profits,
       Financing Statement,  and Fixture Filing made by Cabot Safety Acquisition
       Corporation, as Mortgagor, to Bankers Trust Company, as Collateral Agent,
       as Mortgagee (recorded in New Castle County, Delaware) pertaining to Real
       Property located at 650 Dawson Drive, Newark, Delaware.  (Incorporated by
       reference to Exhibit No. 10.10 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company (formerly,  Cabot Safety Corporation) and
       Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)

10.11  Aearo Company (formerly,  Cabot Safety Corporation) Employees' Retirement
       Account  Plan,  dated as of May l, 1990,  as  amended.  (Incorporated  by
       reference to Exhibit No. 10.11 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company and Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation).)

10.12  Fidelity Corporate (401(k)) Plan for Retirement, dated August l, 1993, as
       amended.   (Incorporated  by  reference  to  Exhibit  No.  10.12  to  the
       Registration  Statement  on Form  S-4,  No.  33-96190,  of Aearo  Company
       (formerly,  Cabot Safety  Corporation) and Aearo  Corporation  (formerly,
       Cabot Safety Holdings Corporation).)

10.13  Aearo Company (formerly, Cabot Safety Corporation) Supplemental Executive
       Retirement Plan, dated May l, 1993. (Incorporated by reference to Exhibit
       No. 10.13 to the  Registration  Statement on Form S-4, No. 33- 96190,  of
       Aearo  Company and Aearo  Corporation  (formerly,  Cabot Safety  Holdings
       Corporation).)

                                      -79-
<PAGE>

10.14  Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and Aearo Company
       (formerly,  Cabot Safety  Corporation),  pertaining to 8001-8003 Woodland
       Drive, Indianapolis,  Indiana, as amended.  (Incorporated by reference to
       Exhibit  No.  10.14  to the  Registration  Statement  on  Form  S-4,  No.
       33-96190, of Aearo Company and Aearo Corporation (formerly,  Cabot Safety
       Holdings Corporation).)

10.15  Sublease,  dated April 16, 1990, between American Optical Corporation and
       Aearo  Company  (formerly,  Cabot  Safety  Corporation),   pertaining  to
       Southbridge,   Massachusetts  manufacturing  facility.  (Incorporated  by
       reference to Exhibit No. 10.15 to the Registration Statement on Form S-4,
       No. 33-96190,  of Aearo Company and Aearo  Corporation  (formerly,  Cabot
       Safety Holdings Corporation).)

10.16* Aearo Corporation  (formerly,  Cabot Safety Holdings Corporation) Amended
       and Restated 1995 Employee and Non-Employee Director Stock Purchase Plan.

10.17* Form of Executive Security Purchase Agreement.

10.18* Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Executive
       Stock Option Plan.

10.19* Amended and Restated US Subsidiary Guaranty dated July 11, 1995 delivered
       by Cabot  Safety  Intermediate  Corporation,  CSC FSC,  Inc.  and Eastern
       Safety Equipment Co., Inc. in favor of Bankers Trust Company.

10.20* Aearo  Corporation  (formerly,  Cabot Safety Holdings  Corporation)  1996
       Stock Option Plan.

10.21* Form of Incentive  Stock  Option  Agreement  under the Aearo  Corporation
       (formerly, Cabot Safety Holdings Corporation) 1996 Stock Option Plan.

10.22* Form of Non-Qualified  Stock Option Agreement for Company Employees under
       the Aearo Corporation (formerly,  Cabot Safety Holdings Corporation) 1996
       Stock Option Plan.

10.25* Amended  and  Restated  US  Subsidiary  Guaranty  dated July 11,  1995 as
       amended  and  restated  as of May 30,  1996,  delivered  by Cabot  Safety
       Intermediate Corporation, CSC FSC, Inc. and Eastern Safety Equipment Co.,
       Inc. in favor of Bankers Trust Company.

10.26  Fourth  Amendment to Credit  Agreement,  dated as of December 4, 1998, by
       and among Aearo Corporation,  Aearo Company, certain of its Subsidiaries,
       Various  Banks,  and  Bankers  Trust  Company  as  Administrative   Agent
       (incorporated  by reference to the same numbered exhibit of the Company's
       Annual Report on 1998 10-K for the year ended September 30, 1998).

10.27  Aearo  Corporation  1997 Stock Option Plan  (incorporated by reference to
       the same numbered exhibit of the Company's Annual Report on 1998 10-K for
       the year ended September 30, 1998).

10.28  Fifth Amendment to Credit Agreement dated December 14, 2000, by and among
       Aearo Corporation,  Aearo Company,  certain of its Subsidiaries,  Various
       Banks, and Bankers Trust Company as Administrative Agent (incorporated by
       reference to same numbered exhibit of the Company's Annual Report on Form
       10-K for the year ended September 30, 2000).

12.1**   Statements re: Computation of Ratios.

21.1**   List of Subsidiaries.

24.1**   Powers of Attorney (see page 73 of this report).

*  Incorporated  by reference to the same numbered  exhibit to the  registration
statement on Form S-l, No.  333-05047,  of Aearo  Corporation  (formerly,  Cabot
Safety Holdings Corporation).

**Filed herewith DOCSC\704144.2