AEARO COMPANY


                     NONQUALIFIED DEFERRED COMPENSATION PLAN


                           (Effective August 5, 1999)



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                              AEARO COMPANY
                  NONQUALIFIED DEFERRED COMPENSATION PLAN

                             TABLE OF CONTENTS

Article   Section                                                           Page

I.        Purpose and Effective Date...........................................1
            1.01         Title.................................................1
            1.02         Purpose...............................................1
            1.03         Effective Date........................................1

II.       Definitions and Construction of the Plan Document....................2
            2.01         Base Pay..............................................2
            2.02         Beneficiary...........................................2
            2.03         Board.................................................2
            2.04         Board Member..........................................2
            2.05         Board Member Fees.....................................2
            2.06         Bonus.................................................2
            2.07         Bookkeeping Account...................................2
            2.08         Change in Control.....................................2
            2.09         Code..................................................2
            2.10         Company...............................................3
            2.11         Deferral Agreement....................................3
            2.12         Deferral Amount.......................................3
            2.13         Deferred Compensation.................................3
            2.14         Election Date.........................................3
            2.15         Executive.............................................3
            2.16         Matching Contributions................................3
            2.17         Operating Board.......................................3
            2.18         Participant...........................................4
            2.19         Plan..................................................4
            2.20         Plan Administrator....................................4
            2.21         Plan Year.............................................4
            2.22         Salary Deferral.......................................4
            2.23         Savings Plan..........................................4
            2.24         Valuation Date........................................4
            2.25         Gender and Number.....................................4
            2.26         Titles................................................4

III.      Eligibility and Participation........................................5
          3.01           Eligibility...........................................5
          3.02           Participation.........................................5

IV.       Annual Deferrals.....................................................6
            4.01         Deferred Amounts......................................6
            4.02         Deferral Agreement....................................6
            4.03         No Deferral Without Agreement.........................7
            4.04         Duration of Deferral Agreement........................7
            4.05         Effect of Election....................................7

V.        Additional Deferrals.................................................8
            5.01         Deferred Compensation.................................8
            5.02         Deferral Agreement....................................8
            5.03         No Deferral Without Agreement.........................8
            5.04         Duration of Deferral Agreement........................8
            5.05         Effect of Election....................................8

VI.       Deferral Account and Crediting.......................................9
          6.01           Bookkeeping Account...................................9
          6.02           Earnings..............................................9

VII.      Distribution........................................................10
            7.01         Amount of Benefits...................................10
            7.02         Method of Payment....................................10
            7.03         Time of Payment......................................10
            7.04         Participant's Death..................................11
            7.05         Form of Payment......................................11

VIII.     Vesting.............................................................12
            8.01         Vesting..............................................12
            8.02         Misconduct...........................................12

IX.       Accelerated Distributions...........................................13
           9.01          Hardship Distribution................................13
           9.02          Elective Accelerated Distribution....................13

X.        Beneficiary.........................................................14
           10.01         Beneficiary Designation..............................14
           10.02         Proper Beneficiary...................................14
           10.03         Minor or Incompetent Beneficiary.....................14

XI.       Administration of the Plan..........................................15
           11.01         Finality of Determination............................15
           11.02         Certificates and Reports.............................15
           11.03         Indemnification and Exculpation......................15
           11.04         Expenses.............................................15

XII.      Claims Procedure....................................................16
           12.01         WrittenClaim.........................................16
           12.02         Denied Claim.........................................16
           12.03         Review Procedure.....................................16
           12.04         Plan Administrator Review............................16

XIII.     Nature of Company's Obligations.....................................17
           13.01         Company's Obligation.................................17
           13.02         Creditor s Status....................................17
           13.03         Change of Control....................................17

XIV.       Miscellaneous......................................................18
           14.01         Written Notice.......................................18
           14.02         Change of Address....................................18
           14.03         Merger, Consolidation or Acquisition.................18
           14.04         Amendment and Termination............................18
           14.05         Employment...........................................18
           14.06         Nontransferability...................................18
           14.07         Legal Fees...........................................19
           14.08         Tax Withholding......................................19
           14.09         Applicable Law.......................................19
           14.10         Remedies.............................................19
           14.11         Beneficial Interest..................................19
           14.12         Construction.........................................19
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                                    ARTICLE I

                           PURPOSE AND EFFECTIVE DATE


1.01      Title  This  Plan  shall be known as the  Aearo  Company  Nonqualified
          Deferred Compensation Plan (hereinafter referred to as the "Plan").

1.02      Purpose The purpose of the Plan is to permit  eligible  members of the
          Operating Board and Board of Directors of the Company to defer current
          Base Pay and annual Bonus or directors  fees, and to provide  benefits
          to  such  employees  who,  due to the  application  of  United  States
          Internal  Revenue Code Sections 402(g) and  401(a)(17),  are precluded
          from receiving full benefits from the Aearo Company  Employees' 401(k)
          Savings Plan.

1.03      Effective  Date The Effective  Date of the Plan shall be the date this
          Plan is adopted by the Board of -------------- Directors and executed.

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                                   ARTICLE II

                DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT


2.01      Base Pay "Base Pay" shall mean regular salary payable to an Executive,
          exclusive  of  any  Bonus  or  special   payments  and   exclusive  of
          reimbursements or other expense allowances,  fringe benefits (cash and
          non-cash), moving expenses and welfare benefits. Base Pay does include
          any amount  deferred under this Plan pursuant to Article IV or Article
          V, any elective  deferral as defined in Section  402(g)(3) of the Code
          and amounts  excludible  from an  Executive's  gross income under Code
          Section 125.

2.02      Beneficiary  "Beneficiary"  shall mean the natural  person or persons,
          trust or the estate of a Participant  designated by the Participant to
          receive any benefits under this Plan.

2.03      Board "Board" shall mean the Board of Directors of Aearo Company.

2.04      Board Member "Board  Member" shall mean any member of the Board who is
          not an employee of the Company.

2.05      Board   Member  Fees  "Board   Member  Fees"  shall  mean  the  annual
          remuneration  paid to a Board  Member  and  any  fees  paid to a Board
          Member for attending Board meetings.

2.06      Bonus "Bonus"  shall mean the annual bonus paid to an Executive  under
          the Aearo Company Annual Incentive Plan.

2.07      Bookkeeping Account "Bookkeeping  Account" shall mean the hypothetical
          account established as a bookkeeping record for each Participant under
          this Plan and shall  include  one (1) or more  subaccounts  to reflect
          amounts  credited  to a  Participant  under  each  Deferral  Agreement
          pursuant to the terms of this Plan.

2.08      Change in Control  "Change in Control"  shall mean,  prior to the time
          the Company has publicly traded common securities,  (a) the occurrence
          of (1)  the  sale of more  than  fifty  percent  (50%)  of the  voting
          securities in the Company to a third party (other than Vestar  Capital
          Partners, L.P. ("Vestar") or an affiliate of Vestar or an entity under
          the control of Vestar);  (2) the sale of all or  substantially  all of
          the assets of the  Company to a third  party  (other than Vestar or an
          affiliate of Vestar or an entity under the control of Vestar);  or (3)
          a  merger,   recapitalization,   reorganization   or  other  corporate
          restructuring  (any of the foregoing  referred to a "Transaction") and
          (b) following  such  Transaction,  Vestar or an affiliate of Vestar no
          longer has the authority (by virtue of voting securities  ownership or
          by  agreement  with  other  voting  securities  owners) to elect or to
          designate  the  election of members of the Board (or of the  governing
          board of the entity  resulting  from such  Transaction)  or the entity
          controlling the Company (or such resulting entity).

2.09      Code "Code" shall mean the Internal  Revenue Code of 1986,  as amended
          from time to time.
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2.10      Company "Company" shall mean Aearo Company, a Delaware corporation.

2.11      Deferral  Agreement  "Deferral  Agreement" shall mean the written form
          which is  submitted  to the Plan  Administrator  before  the  relevant
          Election Date which indicates  whether the Executive wishes to defer a
          portion of his Base Pay and/or Bonus and indicates the portion of Base
          Pay and/or Bonus to be deferred.  The  Deferral  Agreement  shall also
          state that the Executive will  automatically  defer into this Plan any
          amounts he cannot defer into the Savings  Plan due to the  application
          of Code Sections 401(k),  401(m),  402(g), and 401(a)(17).  A Deferral
          Agreement  shall also mean the written  form which is submitted to the
          Plan  Administrator  before the relevant Election Date which indicates
          whether the Board Member wishes to defer a portion of his Board Member
          Fees and indicates the portion of Board Member Fees to be deferred. No
          Deferral Agreement shall be effective until acknowledged,  in writing,
          by the Company.

2.12      Deferred  Amount  "Deferred  Amount"  shall  mean  the  portion  of  a
          Participant's  Base Pay or Bonus and,  in the case of a Board  Member,
          Board Member Fees that has been deferred  pursuant to the Plan for any
          Plan Year of part thereof.

2.13      Deferred Compensation  "Deferred  Compensation" shall mean such amount
          that is  credited  to an  Executive  Bookkeeping  Account  pursuant to
          Section 5.01 of the Plan.

2.14      Election Date "Election Date" shall mean the date  established by this
          Plan as the date before which an Executive or Board Member must submit
          a valid Deferral Agreement to the Plan  Administrator.  The applicable
          Election Dates are as follows:

               (a) thirty (30) days after  adoption  of the Plan for  Executives
          and Board Members who are eligible to participate at the time the Plan
          is adopted;

               (b) thirty (30) days after a newly  eligible  Executive  or Board
          Member first becomes eligible to participate in the Plan; or

               (c)  if (a) or (b) do  not  apply,  September  30  preceding  the
          beginning  of a Plan Year or such earlier  date as  determined  by the
          Plan Administrator.

2.15      Executive  "Executive" shall mean any member of the Operating Board of
          the Company.

2.16      Matching  Contributions   "Matching   Contributions"  shall  mean  the
          contributions  made  by the  Company  on  behalf  of  any  Participant
          pursuant to the Savings Plan.

2.17      Operating  Board  "Operating  Board"  shall  mean the  group of senior
          management  employees of the Company as  designated by the Board to be
          the Operating Board.
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2.18      Participant  "Participant"  means an Executive or Board Member who has
          deferred a portion of his Base Pay or Bonus or, in the case of a Board
          Member, Board Member Fees pursuant to the terms of this Plan and whose
          benefits  hereunder have not yet been paid in full.  Participant shall
          also mean any  Executive  who  participates  in the plan  pursuant  to
          Section 5.01 of the Plan.

2.19      Plan  "Plan"  shall  mean  the  Aearo  Company  Nonqualified  Deferred
          Compensation  Plan as described in this instrument and as amended from
          time to time.

2.20      Plan Administrator  "Plan  Administrator"  shall mean the Compensation
          Committee  of the Board or such person or persons  designated  by such
          Committee from time to time.

2.21      Plan Year "Plan  Year" shall mean the  12-month  period  beginning  on
          October 1 of each calendar  year;  provided,  however,  that the first
          Plan Year shall be from date of  adoption  of this Plan by the Company
          to September 30, 1999.

2.22      Salary Deferral "Salary  Deferral" shall mean the amount elected by an
          Executive as pre-tax contributions to the Savings Plan

2.23      Savings Plan "Savings Plan" means the Aearo Company  Employees' 401(k)
          Savings Plan, as amended from time to time.

2.24      Valuation   Date   "Valuation   Date"  shall  mean,  for  purposes  of
          determining the value of any Participant's  Bookkeeping  Account,  the
          last day of any Plan Year or such other date or dates as determined by
          the Plan Administrator.

2.25      Gender and Number Wherever the context so requires, masculine pronouns
          include the feminine and singular words shall include the plural.

2.26      Titles  Titles of the  Articles of this Plan are  included for ease of
          reference  only and are not to be used for the  purpose of  construing
          any portion or provision of this Plan document.

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                                   ARTICLE III

                          ELIGIBILITY AND PARTICIPATION


3.01      Eligibility   Any   Executive   or  Board   Member  is  eligible   for
          participation in this Plan; provided, however, that no Executive shall
          be eligible  for  participation  in this Plan unless he qualifies as a
          member  of a select  group of  management  or as a highly  compensated
          employee  of the  Company as those  terms are  defined or  interpreted
          under Title I of the Employee Retirement Security Act of 1974 (ERISA).

3.02      Participation  An Executive or Board Member shall become a Participant
          in the plan upon  completion and submission to the Plan  Administrator
          of a duly executed Deferral  Agreement.  Notwithstanding the above, an
          Executive  may become a  Participant  in the Plan  pursuant to Section
          5.01  of the  Plan  regardless  of  whether  he  executes  a  Deferral
          Agreement  for any Plan  Year in cases  where  Matching  Contributions
          cannot  be made to the  Savings  Plan due to the  application  of Code
          Section 401(a)(17).

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                                   ARTICLE IV

                                ANNUAL DEFERRALS

4.01      Deferred Amounts Each Participant in the Plan may have a percentage of
          his Base Pay or Bonus or, in the case of a Board Member,  Board Member
          Fees, deferred in accordance with the following limits:

                    (a) The  amount  of Base Pay  deferred  must be at least ten
          percent  (10%)  and not  more  than  fifty  percent  of  (50%)  of the
          Executive's current Base Pay.

                    (b) The  amount of Bonus  deferred  must be at least  twenty
          five percent (25%) and not more than one hundred  percent of (100%) of
          the Executive's Bonus for such Plan Year.

                    (c) The  amount of Board  Member  Fees  deferred  must be at
          least twenty five percent (25%) and not more than one hundred  percent
          of (100%) of the Board Member's Fees for such Plan Year.

4.02      Deferral Agreement

                    (a) An  eligible  Executive  or  Board  Member  electing  to
          participate in the Plan must submit his written Deferral  Agreement to
          the Plan  Administrator  on or before the  applicable  Election  Date.
          Valid Deferral Agreements entered into under the conditions of Section
          2.14(a) or 2.14(b) of the Plan filed by the  applicable  Election Date
          shall cause Base Pay, or in the case of a Board  Member,  Board Member
          Fees, earned in the remainder of the Plan Year such Deferral Agreement
          is made to be  deferred.  Deferral  Agreements  entered into under the
          conditions of Section  2.14(c) of the Plan filed by September 30 shall
          cause Base Pay or in the case of a Board Member, Board Member Fees, to
          be deferred beginning with Base Pay or Board Member Fees earned on and
          after October 1 of the next Plan Year.  Once a Deferral  Agreement has
          been signed and approved by the Company,  the Deferred  Amount may not
          be reduced, except as provided in Article VIII.

                    (b) In the case of Bonuses, the following rules shall apply:

                    (i) In the case of a valid Deferral  Agreement  entered into
                    under the conditions of Section 2.14(a),  the deferral shall
                    relate to bonuses  earned in the Plan Year ending  September
                    30, 1999

                    (ii) In the case of valid Deferral  Agreements  entered into
                    under the conditions of Section 2.14(b),  the deferral shall
                    relate to bonuses earned in the Plan Year which includes the
                    Election Date
<PAGE>
                    (iii) In the case of a valid Deferral Agreement entered into
                    under the conditions of Section 2.14(c),  the deferral shall
                    relate to Bonuses  earned in the Plan Year  beginning  after
                    the Election Date

                    (c) Each  Deferral  Agreement  shall  prescribe  the date of
          distribution and form of payment  applicable to amounts deferred under
          that Deferral Agreement.  If the Deferral Agreement does not specify a
          date of  distribution,  then  the  date of  distribution  shall be the
          earlier of the Executive's termination of employment or death.

4.03      No Deferral  Without  Agreement A Participant  who has not submitted a
          valid Deferral Agreement to the Plan Administrator before the relevant
          Election  Date may not defer any amounts under this Article IV for the
          applicable Plan Year.

4.04      Duration of Deferral Agreement Deferral Agreements are irrevocable and
          remain in effect for the Plan Year for which they apply. A Participant
          must file a new Deferral  Agreement for any subsequent  Plan Year. The
          terms of any Deferral  Agreement  may, but need not be, similar to the
          terms of any prior Deferral Agreement.

4.05      Effect of Election An election  under this  Article IV shall in no way
          affect any election made by the Executive under Article V.
<PAGE>
                                    ARTICLE V

                              ADDITIONAL DEFERRALS

5.01      Deferred  Compensation  With  respect to any  Executive in the Savings
          Plan,  a portion of the  Executive's  compensation  shall be  deferred
          which shall be in addition to any deferral that the Executive may have
          elected to defer pursuant to Article IV. The amount of such additional
          deferral  shall be an amount  that is  determined  by  crediting  on a
          monthly  basis  the  amount  of  Matching   Contributions  and  Salary
          Deferrals that cannot be made to an Executive's account in the Savings
          Plan as a result of (a) application to that Executive of Code Sections
          401(k),  401(m),  402(g) and  401(a)(17)  and (b) the deferral to this
          Plan. For purposes of this Section 5.02, "compensation" shall have the
          same meaning as such term is defined in the Savings Plan.

5.02      Deferral Agreement For purposes of this Article V, the amount credited
          on behalf of any Executive to take into account Salary  Deferrals that
          cannot be made to the Savings  Plan  because of the  limitation  under
          Code  Section  402(g)  and/or  401(a)(17)  must be made  pursuant to a
          Deferral  Agreement which conforms with the requirements  described in
          Section  4.02 of this Plan.  In order to receive  credits  pursuant to
          such Deferral  Agreement,  an Executive  shall be required to make the
          maximum  employee  pre-tax  contribution to the  Executive's  accounts
          under the Savings Plan as permitted by the Code and the Savings Plan.

5.03      No Deferral  Without  Agreement An Executive  who has not  submitted a
          valid Deferral Agreement to the Plan Administrator before the relevant
          Election  Date may not defer any amounts  under this Article V for the
          applicable Plan Year.

5.04      Duration of Deferral Agreement Deferral Agreements are irrevocable and
          remain in effect for the Plan Year for which they apply.  An Executive
          must file a new Deferral  Agreement for any subsequent  Plan Year. The
          terms of any Deferral  Agreement  may, but need not be, similar to the
          terms of any prior Deferral Agreement.

5.05      Effect of Election An  election  under this  Article V shall in no way
          affect any election made by the Executive under Article IV
<PAGE>

                                   ARTICLE VI

                         DEFERRAL ACCOUNT AND CREDITING

6.01      Bookkeeping Account The Deferred Amount pursuant to a written Deferral
          Agreement  or Deferred  Compensation  under  Section  5.01 of the Plan
          shall  be  credited  to  a  separate   Bookkeeping  Account  for  each
          Participant.   Deferred  Amounts  under  subsequent  written  Deferral
          Agreements by a  Participant  or Deferred  Compensation  under Section
          5.01 of the Plan shall be credited to separate  subaccounts within the
          Participant's  Bookkeeping Account.  Matching  Contributions  credited
          under Section 5.021 shall always be credited to a separate  subaccount
          to reflect vesting..

6.02      Earnings On each Valuation Date each Participant's Bookkeeping Account
          shall be credited with an amount equal to the earnings that would have
          been realized if the amount in such Participant's  Bookkeeping Account
          at the  beginning  of the Plan  Year,  plus fifty  percent  (50%) of a
          Participant's  Deferred Amounts or Deferred  Compensation  credited in
          the Plan  Year,  less any  distributions  made in the Plan  Year,  had
          earned one hundred  twenty  percent  (120%) of the total return of the
          Lehman Brothers  Long-Term  Treasury Bond Index (Index) for the twelve
          (12) month period ending on the Valuation  Date.  Where a distribution
          occurs during the Plan Year,  the  Participant's  Bookkeeping  Account
          shall be credited with additional earnings equal to one hundred twenty
          percent  (120%) of the total return of the Index based upon the period
          from the last Valuation Date to the date of distribution.

<PAGE>

                                   ARTICLE VII

                                  DISTRIBUTION

7.01      Amount  of  Benefits  The  Company's   liability  to  any  Participant
          hereunder  shall  be an  amount  equal to the  Participant's  Deferred
          Amounts and vested  Deferred  Compensation  under  Section 5.01 of the
          Plan plus the deemed earnings under Section 6.02 of the Plan, less any
          payments to the  Participant  pursuant  to this Plan,  and such amount
          shall  be  the  amount  credited  to  each  Participant's  Bookkeeping
          Account.

7.02      Method of Payment Payment of benefits attributable to Deferred Amounts
          or Deferred  Compensation under Section 5.01 of the Plan shall be made
          either (a) in a single lump sum payment or (b) in annual  installments
          over a two (2) to ten (10) year period in  accordance  with the method
          of  payment  elected  in the  Deferral  Agreement  for each Plan Year.
          Installment  payments  may be  elected  only if they are to be paid at
          termination of employment.  Where there is a voluntary  termination of
          employment,  and there exist multiple prior Deferral  Agreements  with
          different  forms of payment  elected,  then the most  recent  Deferral
          Agreement  shall  govern  the  form  of  payment.  In the  case  of an
          involuntary termination of employment,  the Participant may make a one
          time irrevocable  election within 30 days after termination occurs and
          before benefits are paid of the method of payment.  Where  installment
          payouts are made,  the unpaid  balance shall be credited with earnings
          as  prescribed  in Section  6.02.  The second  and  subsequent  annual
          installments  shall  equal  the then  unpaid  balance  divided  by the
          remaining  number of annual  installment  payments.  In all cases, the
          election  as to form of payment  shall be made  before the  applicable
          Election Date;  provided,  however,  that a Participant may change the
          method  of  payment  one time per  Deferral  Agreement  as long as the
          Participant  notifies the Plan Administrator of his election to change
          the method of  payment  at least six (6)  months  prior to the date on
          which  payments are otherwise  scheduled to commence.  In the event an
          Executive  does not elect a method of  payment,  payment  of  benefits
          shall  be  made  in  a  single  lump  sum  immediately  following  the
          Executive's  termination of employment  with the Company or as soon as
          reasonably practicable thereafter.

7.03      Time of Payment Payment of benefits  attributable to Deferred  Amounts
          or Deferred Compensation under Section 5.01 of the Plan shall commence
          in  accordance  with the  commencement  date  elected in the  Deferral
          Agreement for each Plan Year but in no event later than termination of
          employment.  Deferrals  must  remain  in the Plan for at least 2 years
          before they can be  distributed,  except in the case of a distribution
          specified  in 9.01.  In all cases,  the election as to time of payment
          shall be made before the applicable Election Date; provided,  however,
          that a  Participant  may  again  defer  the  commencement  of  benefit
          payments  subsequent  to the date  elected in the  Deferral  Agreement
          (second  election)  one time  per  Deferral  Agreement  as long as the
          Participant  notifies the Plan  Administrator of his election to defer
          commencement  of benefit  payment at least six (6) months prior to the
          date on which  payments  are  otherwise  scheduled  to  commence,  and
          further provided,  that the deferral has lasted at least two (2) years
          at the time

<PAGE>

          of his second  election.  In the event an  Executive  does not elect a
          commencement  date, payment of benefits shall be made in a single lump
          sum immediately  following the  Executive's  termination of employment
          with the Company or as soon as reasonably practicable thereafter.

7.04      Participant's Death  Notwithstanding  Sections 7.02 and 7.03 above, in
          the event of the Participant's  death prior to the complete payment of
          an amount equal to the sum credited to the  Participant's  Bookkeeping
          Account,  payment  of  any  remaining  amount  shall  be  made  to the
          Participant's  Beneficiary  as  soon as  administratively  practicable
          after the Participant's death.

7.05      Form of Payment All payments hereunder shall be made in cash.

<PAGE>

                                  ARTICLE VIII

                                     VESTING


8.01      Vesting A Participant  is always one hundred  percent (100%) vested in
          his subaccounts representing deferrals of Base Salary, Bonus or Salary
          Deferrals.  Subject to the  provisions  of Section 8.02 a  Participant
          shall be vested in his Matching  Contributions  credited under Section
          5.01 when they  become  vested  under the terms of the  Savings  Plan.
          Non-vested  amounts  shall be forfeited and used by the Company in its
          discretion, when similar amounts are forfeited in the Savings Plan. If
          the  participant  reinstates  forfeitures  in the Savings Plan,  those
          forfeitures will also be reinstated in this Plan.

8.02      Misconduct  If the  Plan  Administrator  finds  that  any  Participant
          engages in conduct  detrimental to the best interest of the Company or
          misconduct  involving  dishonesty or moral  turpitude which results in
          detriment or financial loss to the Company or in malicious destruction
          of Company property, or is convicted of a felony committed and arising
          out of the Participant's employment, the Plan Administrator may direct
          forfeiture  of all of the  Participant's  subaccount  attributable  to
          Matching Contributions credited under Section 5.01.

<PAGE>

                                   ARTICLE IX

                            ACCELERATED DISTRIBUTIONS


9.01      Hardship  Distribution  At the  request  of a  Participant  before the
          Executive's  termination  of  service  with  the  Company  or a  Board
          Member's termination of Board membership,  the Plan Administrator may,
          in its sole discretion,  accelerate and cause all or part of the value
          of a  Participant's  vested  Bookkeeping  Account  to be  paid  due to
          financial hardship as defined herein. An accelerated distribution must
          be limited to only that  amount  necessary  to relieve  the  financial
          hardship,  plus the after-tax  amount needed to pay federal,  state or
          local income taxes reasonably  anticipated to result from the payment.
          In the event the Plan  Administrator  determines  the  existence  of a
          financial hardship and decides in its sole and absolute  discretion to
          accelerate  payments  hereunder,  it  may  in its  sole  and  absolute
          discretion,  reduce  or  suspend  future  Deferred  Amounts  under the
          Participant's Deferral Agreement in effect during such Plan Year.

          "Financialhardship"  shall mean an immediate and heavy  financial need
          of the  Participant  which  cannot be  satisfied  from other
          reasonably  available  resources  and  which  are  caused by
          events that are beyond the control of the Participant.

9.02      Elective  Accelerated   Distribution  A  Participant  may  request  an
          elective  accelerated  distribution  of all or a portion of his vested
          Bookkeeping Account,  prior to the Executive's  termination of service
          with the Company or a Board Member's  termination of Board membership.
          This  distribution  may be  made  for  any  reason  or for no  reason.
          Provided however,  that any distribution made under this section shall
          be  reduced  by an amount of ten  percent  (10%) of the  amount of the
          distribution  requested,  with the reduction irrevocably forfeited and
          used by the Company in its discretion.

<PAGE>


                                    ARTICLE X

                                   BENEFICIARY


10.01     Beneficiary  Designation A Participant shall designate his Beneficiary
          to receive  benefits under the Plan by completing the appropriate form
          provided by the Plan  Administrator.  If more than one (1) Beneficiary
          is named, the shares and/or  percentage of each  Beneficiary  shall be
          indicated.   A  Participant   shall  have  the  right  to  change  the
          Beneficiary  by  submitting  to the Plan  Administrator  a Beneficiary
          Designation Form. However, no change of Beneficiary shall be effective
          until  acknowledged,   in  writing,  by  the  Plan  Administrator.   A
          Beneficiary  may be a natural person or a trust.  If no beneficiary is
          designated, then payments shall be made to the Participant's estate.

10.02     Proper  Beneficiary  If the  Company  has any  doubt as to the  proper
          Beneficiary to receive payments hereunder,  the Company shall have the
          right  to  withhold  such   payments   until  the  matter  is  finally
          adjudicated.  However,  any payment made by the Company, in good faith
          and in accordance  with this Plan,  shall fully  discharge the Company
          and the Plan Administrator  from all further  obligations with respect
          to that payment.

10.03     Minoror  Incompetent  Beneficiary In making any payments to or for the
          benefit  of  any  minor  or  an  incompetent  Beneficiary,   the  Plan
          Administrator,  in its sole and  absolute  discretion,  may (a) make a
          distribution  to a legal or natural  guardian  or other  relative of a
          minor or court appointed committee of such incompetent;  or (b) make a
          payment to any adult with whom the minor or incompetent temporarily or
          permanently resides. The receipt by a guardian, committee, relative or
          other person shall be a complete discharge to the Company and the Plan
          Administrator.  Neither the Plan  Administrator  nor the Company shall
          have  any  responsibility  to  see to the  proper  application  of any
          payments so made.

<PAGE>

                                   ARTICLE XI

                           ADMINISTRATION OF THE PLAN

11.01     Finality of Determination  Subject to the Plan, the Plan Administrator
          shall,  from time to time,  establish rules,  forms and procedures for
          the  administration of the Plan. Except as herein otherwise  expressly
          provided,   the  Plan  Administrator  shall  have  full  and  absolute
          discretion  to (i) construe and  interpret  the Plan,  (ii) decide all
          questions  arising with respect to the Plan,  and (iii)  determine the
          amount,  manner and time of payment of any benefits to any Participant
          or Beneficiary.  The respective decisions,  actions and records of the
          Plan  Administrator  shall be conclusive  and binding upon the Company
          and all persons having or claiming to have any right or interest in or
          under the Plan.

11.02     Certificates and Reports The Plan  Administrator  and the officers and
          directors   of  the   Company   shall  be  entitled  to  rely  on  all
          certificates,  opinions,  and  reports  made  by  any  duly  appointed
          accountants  and  consultants,  and on all opinions  given by any duly
          appointed  legal  counsel,  which legal counsel may be counsel for the
          Company.

11.03     Indemnification  and  Exculpation The Company shall indemnify and hold
          harmless any person acting on behalf of or pursuant to  appointment by
          the Plan  Administrator  (hereinafter  referred to as  "designee")  in
          connection  with the  administration  of the Plan  against any and all
          expenses and liabilities arising out of his administration of the Plan
          or any action or failure to act by any such  designee,  except if such
          action or  failure  to act  constitutes  gross  negligence  or willful
          misconduct.   Expenses  against  which  any  such  designee  shall  be
          indemnified hereunder shall include, without limitation, the amount of
          any settlement or judgment,  costs,  counsel fees, and related charges
          reasonably  incurred  in  connection  with  a  claim  asserted,  or  a
          proceeding  brought or settlement  thereof.  The  foregoing  rights of
          indemnification  shall be in addition to any other rights to which any
          such designee may be entitled as a matter of law.

11.04     Expenses The expenses of administering  the Plan shall be borne by the
          Company.

<PAGE>
                                   ARTICLE XII

                                CLAIMS PROCEDURE


12.01     Written Claim Benefits shall be paid in accordance with the provisions
          of this Plan.  The  Participant,  or a designated  Beneficiary  or any
          other person claiming  through the  Participant,  shall make a written
          request for  benefits  under this Plan.  This  written  claim shall be
          mailed or  delivered  to the Plan  Administrator.  Such claim shall be
          reviewed by the Plan Administrator or his delegate.

12.02     Denied  Claim If the  claim is  denied,  in full or in part,  the Plan
          Administrator  shall provide a written  notice within ninety (90) days
          setting  forth the  specific  reasons  for denial  and any  additional
          material  or  information  necessary  to  perfect  the  claim  and  an
          explanation  of why such  material or  information  is  necessary  and
          appropriate  information and explanation of the steps to be taken if a
          review of the denial is desired.

12.03     Review  Procedure If the claim is denied and a review is desired,  the
          Participant (or Beneficiary) shall notify the Plan  Administrator,  in
          writing, within sixty (60) days (a claim shall be deemed denied if the
          Plan  Administrator  does not take any  action  within  the  aforesaid
          ninety (90) day period) after receipt of the written notice of denial.
          In requesting a review, the Participant or his Beneficiary may request
          a review of the Plan document or other pertinent documents with regard
          to the Plan, may submit any written  issues and comments,  may request
          an  extension  of time for  such  written  submission  of  issues  and
          comments and may request  that a hearing be held,  but the decision to
          hold a  hearing  shall  be  within  the  sole  discretion  of the Plan
          Administrator.

12.04     Plan  Administrator  Review The  decision  on the review of the denied
          claim shall be rendered by the Plan  Administrator  within  sixty (60)
          days  after the  receipt  of the  request  for  review  (or within one
          hundred  twenty  (120)  days  if  special  circumstances  exist).  The
          decision shall be written and shall state the specific reasons for the
          decision including  reference to the specific  provisions of this Plan
          on which the decision is based.

<PAGE>

                                  ARTICLE XIII

                         NATURE OF COMPANY'S OBLIGATION

13.01     Company's  Obligation The Company's payment  obligations in connection
          with Deferred Amounts or Deferred  Compensation  under this Plan shall
          be an  unfunded  and  unsecured  promise  to pay  the  benefit  due in
          accordance with the Plan and Deferral Agreement. The Company shall not
          be obligated under any  circumstances to set aside assets to discharge
          its financial  obligations  under this Plan,  except as provided under
          Section 13.03 of the Plan, in which event the Company shall  establish
          an  irrevocable  trust and  contribute  assets  to such  trust for the
          purpose of satisfying  its  obligations  under the Plan. The Company's
          payment obligations hereunder shall be discharged and satisfied to the
          extent proper  payments are made from such trust to a  Participant  or
          Beneficiary.

13.02     Creditor  Status Any assets which the Company may acquire or set aside
          to help cover its financial  liabilities  under the Plan are and shall
          remain  general  assets of the  Company  subject  to the claims of the
          creditors of the Company.  Neither the Company hereunder nor this Plan
          gives the Participant or any Beneficiary any ownership interest in any
          asset of the Company.  All rights of ownership in any such assets are,
          and remain, in the Company.

13.03     Change of Control In the event of a Change in Control, an amount equal
          to the Participant's Bookkeeping Account at the time of such Change in
          Control  shall  be paid to a  trustee  designated  in  advance  by the
          Company and such amounts shall be held in an irrevocable trust for the
          benefit  of  Participants  pursuant  to  the  terms  of the  Plan  and
          Participants' Deferral Agreements. Such trust shall be irrevocable and
          shall  provide  that the  trustee  shall make  payments of benefits in
          accordance with the Plan and the Deferral  Agreements,  and shall also
          provide that no assets of the trust may be used for any purpose  other
          than the payment of  benefits.  Provided  however,  that such  trust's
          assets shall be required to be delivered to the  Company's  trustee in
          bankruptcy pursuant to the terms of the trust.

<PAGE>
                                   ARTICLE XIV

                                  MISCELLANEOUS

14.01     Written  Notice Any notice which shall or may be given under this Plan
          or a Deferral  Agreement  shall be in  writing  and shall be mailed by
          United States mail,  postage prepaid.  If notice is to be given to the
          Company, such notice shall be addressed to the Company at:

                  5457 West 79th Street
                  Indianapolis, Indiana 46268
                  Attn.:  Vice-President, Human Resources

          or, if notice is to a Participant, addressed to the last known address
          shown on the Company's records.

14.02     Change of Address Any party may, from time to time, change the address
          to which notices shall be mailed by giving  written notice of such new
          address.

14.03     Merger,  Consolidation  or Acquisition  The Plan shall be binding upon
          the  Company,  its  assigns,  and any  successor  company  which shall
          succeed  to  substantially  all of its  assets  and  business  through
          merger,  acquisition or  consolidation,  and upon a  Participant,  his
          Beneficiary, assigns, heirs, executors and administrators.

14.04     Amendment  and  Termination  Except as  provided  herein,  the Company
          retains the sole and unilateral right to terminate,  amend,  modify or
          supplement  this Plan,  in whole or in part,  at any time.  This right
          includes  the right to make  retroactive  amendments.  However,  in no
          event shall the  Company  have the right to amend the Plan in a manner
          that (i)  reduces  the amount  credited,  including  earnings,  to any
          Participant's  Bookkeeping  Account,  as of the  later of the date the
          amendment is adopted or effective,  or (ii) reduces or eliminates  any
          benefit,  right or feature  which has  accrued  under the terms of the
          Plan with respect to all amounts  deferred or credited  under the Plan
          as of the later of the amendment's adoption or effective date.

14.05     Employment This Plan does not provide a contract of employment between
          the Company and the Participant,  and, except as provided in any other
          contractual  arrangement,  if  any,  between  a  Participant  and  the
          Company, the Company reserves the right to terminate the Participant's
          employment, for any reason, at any time, notwithstanding the existence
          of this Plan.

14.06     Nontransferability  Except insofar as prohibited by applicable law, no
          sale, transfer, alienation,  assignment, pledge,  collateralization or
          attachment  of  any  benefits  under  this  Plan  shall  be  valid  or
          recognized by the Company or the trustee of any related trust. Neither
          the Participant, his spouse, or designated Beneficiary, shall have any
          right to hypothecate,  mortgage, commute, modify or otherwise encumber
          in advance of any receipt of the benefits payable hereunder, nor shall
          any of said  benefits  be subject to  seizure  for the  payment of any

<PAGE>

          debts, judgments, alimony maintenance,  owed by the Participant or his
          Beneficiary,  or be  transferable  by operation of law in the event of
          bankruptcy, insolvency or otherwise.

14.07     Legal Fees All reasonable  legal fees incurred by any  Participant (or
          former  Participant)  to  successfully  enforce his valid rights under
          this Plan shall be paid by the  Company in  addition to sums due under
          this Plan.

14.08     Tax  Withholding  The Company may withhold from a payment any federal,
          state or local taxes  required by law to be withheld  with  respect to
          such payment.

14.09     Applicable Law This Plan shall be governed by the laws of the state of
          Indiana without respect to principles of conflicts of law.

14.10     Remedies  All  parties  shall  have the  right to  pursue  any and all
          remedies available under law or equity.

14.11     Beneficial Interest This Plan is established solely for the benefit of
          the Company,  its  successors  and assigns,  and the  Participants  as
          defined herein.  No person other than the Company and each Participant
          or, if applicable,  the Participant's Beneficiary may claim any rights
          or  benefits  under  this  Plan  nor may  seek to  enforce  any of the
          provisions of this Plan.

14.12     Construction The following principles apply to the construction of the
          Plan.

          (a)       Interpretation  of Plan The Company  has the sole  authority
                    and  discretion  to construe the language of the Plan and to
                    resolve all questions  concerning  eligibility for benefits,
                    plan administration and interpretation of the plan document.

          (b)       Amendment of  Qualified  Savings Plan If the Savings Plan is
                    amended  or  terminated,  this Plan must be  construed  in a
                    manner consistent with such amendment or termination.

          (c)       Invalidity  of Any  Provision In the event any  provision of
                    the Plan is  declared  to be  invalid,  in whole or in part,
                    such provision is null and void. The remaining provisions of
                    the Plan are unaffected and remain in full force and effect.
                    However,  the Company,  in its  discretion  may construe the
                    provision  in  such  a  manner  that  it  is  valid  in  the
                    jurisdiction where it is declared to be invalid.

          (d)       Enforceability  of Any  Provision  A  provision  of the Plan
                    which is invalid in any  jurisdiction  remains in effect and
                    is enforceable in all  jurisdictions  in which the provision
                    is valid.


<PAGE>

IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its
duly authorized officer on this _____ day of _______________, 19___, effective
as set forth herein.


                                              AEARO COMPANY


                                              By__________________________

ATTEST:


By:  ________________________________


[SEAL]