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, 2002

                         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 [ ] No [X]

          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, 2002, 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, 2002 was 101,912.5.

<PAGE>

                                TABLE OF CONTENTS

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

   Item 1.  Business...........................................................3
   Item 2.  Properties........................................................11
   Item 3.  Legal Proceedings.................................................13
   Item 4.  Submission of Matters to a Vote of Security Holders...............14

Part II.......................................................................15

   Item 5.  Market for Registrant's Common Equity
            and Related Stockholder Matters...................................15
   Item 6.  Selected Financial Data...........................................16
   Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations.........................................18
   Item 7A. Quantative and Qualitative Disclosures about Market Risk..........27
   Item 8.  Financial Statements and Supplementary Data.......................29
   Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..........................................55

PART III......................................................................56

   Item 10.  Directors and Executive Officers.................................56
   Item 11.  Executive Compensation...........................................59
   Item 12.  Security Ownership of Certain Beneficial Owners and Management...64
   Item 13.  Certain Relationships and Related Transactions...................66
   Item 14.  Controls and Procedures..........................................70

PART IV.......................................................................71

   Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.71


                                     - 2 -
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                                     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 October 7, 2002,  the Company  acquired the assets of  Industrial  Protective
Products,  Inc.  ("IPP") of Wilmington,  Massachusetts  for  approximately  $1.2
million.  IPP will be operated within the Safety Prescription Eyewear segment of
the Company.

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 70  countries  under its
well-known  brand  names:  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 2002 and fiscal 2001, and approximately 72% in fiscal 2000.

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 2002 and fiscal 2001
and approximately 13% in fiscal 2000.

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 problems in other manufacturers'  products.  Specific
product  applications  for  Specialty  Composites'  materials,   technology  and
engineering  expertise include thermal acoustic systems in business and regional
jet  aircraft;  protective  and  performance-enhancing  components  in precision
electronic equipment; thermal and acoustic treatments for heavy-duty trucks; and
treatments to control


                                     - 3 -
<PAGE>

noise,  vibration  and  shock  in a wide  range  of  industrial  and  commercial
equipment.  Specialty Composites also produces specially formulated foam used in
the  manufacture of the Safety Products  segment's  polyvinyl  chloride  ("PVC")
earplugs.  Specialty Composites accounted for approximately 13% of the Company's
net sales in fiscal 2002 and fiscal 2001, and approximately 15% in fiscal 2000.

Products - Safety Products Segment

Within  Safety  Products,  the  Company  classifies  its  products  in five main
categories:  hearing protection and communication headsets; eye protection; 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(R)  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  disposable PVC earplugs are
available  corded  and  uncorded  and in a  variety  of  packaging  options.  In
addition,  the  Company  manufactures  a full  line of  disposable  polyurethane
earplugs, including its E-Z-Fit(R), TaperFit(R), and E-A-Rsoft(R) 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.  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 protection is used in work  environments
where a number of hazards  present a danger to the eyes 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 under the AOSafety(R)  brand. The basic categories of  non-prescription
eyewear  protection  products  are  non-prescription  (or  "plano")  eyewear and
goggles:

     Plano  (Non-prescription)  Eyewear. Plano eyewear accounts for the majority
     of the  Company's  sales in this  category and  encompasses a full range of
     protective needs including visitor spectacles,  over-the-glass, single lens
     and dual lens  products.  Within these  categories are a variety of styles,
     frame colors and lens options in addition to a number of adjustability  and
     comfort  options.  Many of these  AOSafety(R)  products  feature  our DX(R)
     coating,  combining  the benefits of chemical and scratch  resistance  with
     anti-fog.  X-SeriesTM,  MetaliksTM and X.SportTM eyewear offer modern sport
     styling with numerous comfort features. NuvoTM eyewear has the classic dual
     lens look  reinterpreted  for  today's  worker.  Lexa(R)  eyewear  blends a
     wrapping,  single  lens  with  a  lightweight,  frameless  design.  Visitor
     spectacles  and  over-the-glass  products are  represented by Seepro(R) and
     Tourguard(R) eyewear.

     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 offers a variety of vented and non-vented
     goggles  with  varying  fields  of view  including  Dust  GoggleGearTM  for
     Lexa(R),  Splash  GoggleGearTM for Lexa(R) and Centurion(R),  all under the
     AOSafety(R)  brand.  The Company also  carries  goggles for  protection  in
     foundry and welding applications.

Face and Head Protection:  Face and head protection is used in work environments
where a number of hazards present a danger to the face and head, including dust,
flying particles, metal fragments, chemicals, extreme glare,


                                     - 4 -
<PAGE>

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 Company offers a wide
     variety  use  specific   faceshield  windows  under  both  AOSafety(R)  and
     Peltor(R) brands.  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.  The XLR8(R) line of hard hats represents the
     latest design and functionality under the AOSafety(R) brand.

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)
under  the  AOSafety(R)  brand.  Pleats  PlusTM  offers  the  latest  design  in
particulate   respirators.   QuickLatch(R)   half  mask  respirators   offer  an
innovative,  patented  on-and-off  latching system that can be accomplished with
just one hand.

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, flagging tape, and safety cones.

Products - Safety Prescription Eyewear Segment

The Com pany'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
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:


                                     - 5 -
<PAGE>

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  significantly  expanded  its sales
coverage,  including a dedicated  effort to serve the  specialty  communications
earmuff  market.  The Company  also  produces  versions of the PVC plug for many
international airlines for inclusion in their amenity kits.

     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 annual  purchase levels while  encouraging  support across the full
     product  line.  Dialog  distributors  qualify for annual  volume and growth
     rebates,  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,  Sweden,  and France, and sales offices in the U.K.,
     Sweden, Norway, 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  over 1000  industrial  distributors,  and Peltor
     Communications  products sold to the military,  sport  shooting,  and rally
     sports  market  segments.  Through  a  recent  acquisition  of  Lunette  de
     Protection  Essilor  (Leader  Industries),  AOSafety  is now the number one
     prescription eyewear brand in France.

     International.  The Company exports its products around the world, and this
     channel is managed through  independent  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   utilizes  an  inside  sales  and  marketing   team,   independent
manufacturers  representatives  and select distributors to identify global sales
opportunities  in  target  markets  for  Specialty   Composites'   products  and
technologies.  Once  such  applications  have  been  identified,  the  Company's
marketing,  sales and  technical  staffs  work  closely  with  customer  product
development  teams to  provide  the  customer  with  cost-effective,  integrated
solutions for noise,  vibration,  shock,  cushioning  and/or comfort  management
problems.  Currently,  Specialty Composites' marketing efforts are aimed at four
key, strategic segments worldwide:  aircraft,  precision  electronic  equipment,
heavy-duty trucks and original equipment manufacturing (OEM).

     Aircraft Market.  Specialty Composites provides integrated thermal acoustic
     systems for aircraft  manufacturers  and refurbishers  worldwide.  Designed
     primarily  for  business  and  regional  jets,  the  systems  include  high
     performance,  weight-efficient,  multi-function composites that the Company
     has  developed   specifically   to  meet  the   requirements   of  aircraft
     applications.

     Precision Equipment Market. This global market has increasingly  focused on
     compact  designs  and  highly  portable  devices.   Specialty   Composites'
     engineering expertise and advanced energy-control  materials and technology
     are critical to customers'  product  development,  helping in the design of
     quieter, more rugged, more


                                     - 6 -
<PAGE>

     accurate and faster devices. Key applications include portable and desk top
     computers,  hand held devices,  disk drives,  data servers and data storage
     units.

     Heavy-duty  Truck  Market.  Focusing  mainly  on  Class 5  through  Class 8
     vehicles,  Specialty  Composites'  strategy in the truck market has been to
     assist  manufacturers in meeting  regulatory pass-by noise standards and in
     differentiating   vehicles   on  the  basis  of  interior   noise   levels.
     Incorporating  acoustical  foams,  barriers  and  multi-function  composite
     products,  thermal and acoustic treatment packages are designed for maximum
     performance and minimum installation labor.

     Industrial and OEM Market. Specialty Composites'  energy-control technology
     base,  broad product line and depth of  engineering  experience  enable the
     Company to provide highly effective, targeted solutions to manufacturers in
     a wide range of  industries,  ranging  from noise  control  treatments  for
     pumps, generators and compressors, to vibration damping and shock isolation
     in garage door openers, laboratory centrifuges and high-speed printers.

Research and Development

The Company has a strong  emphasis on new product  development,  innovation  and
protection of intellectual property in each of its three business segments.

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.  The Company
also  operates  sound  chambers and testing  facilities in the United States and
Sweden that measure the performance of its materials and designs. With these and
other  capabilities,  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 as extensive  facilities are operated for the design and testing
of these products. 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  resources with the Safety Products  Segment in the areas of
coating  technology,  automation and manufacturing  process  improvements.  This
segment works  extensively  with outside  suppliers for  development  of frames,
lenses and coatings.

Research and Development - Specialty Composites Segment

Specialty  Composites'  research and  development  efforts  focus on  developing
proprietary  materials and enhancing  existing  products in order to meet market
and customer needs  identified by the Company's  marketing,  sales and technical
staffs.  Products such as VersaDamp(TM)  thermoplastic  elastomers and Confor(R)
environmentally  friendly,  energy-absorbing  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  polycarbonates,   propionates,   polyols,  plasticizers,   substrates,
pre-polymers,  isocyanates  and  adhesives.  The eyewear frames are for both the
non-prescription and SRx products.


                                     - 7 -
<PAGE>

The Company has 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 with potential risk of price volatility  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 limited  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 has also attained QS
9000 certification for the Specialty  Composites  operations in Indianapolis and
Newark. 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. The economies of scale present in this operation are unique
in the hearing  protection  products industry and management  believes that they
offer the  Company a  competitive  advantage  in  lowering  costs.  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.
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


                                     - 8 -
<PAGE>

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.  European  orders  are  filled  from
distribution  facilities near Manchester,  U.K. and in Varnamo,  Sweden.  The UK
facility services all of Europe with the exception of the Nordic countries.  The
French eyewear market is serviced from the recently acquired  Joinville facility
near Paris.

Manufacturing and Distribution Operations - Safety Prescription Eyewear Segment

The SRx production  operations  are comprised of two  facilities  located in the
U.S.,  one in Canada and two 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 both  Poynton,  England and
Joinville,  France,  the Company has small SRx laboratories that serve primarily
the  U.K.  and  French  market,  respectively.  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  polyurethanes.  This  facility also
houses  technical  support   functions,   including  research  and  development,
applications engineering, sales and marketing administration,  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. Product  development
for this facility is onsite.

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, 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 that 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.

Several  manufacturers  compete in noise and vibration  control,  but few if any
competitors offer the complete range of technology and energy-control  materials
as Specialty  Composites.  Thus the Company is able to  differentiate  itself by
bundling its  technology,  engineering  and wide ranges of products  into energy
control  solutions or systems that add value to  customers'  products and supply
chain management. In markets where technology is of particular value,


                                     - 9 -
<PAGE>

Specialty  Composites  is  able  to  command  better  margins,  but  price  is a
significant  factor in other  highly  competitive  markets  sectors in which the
Company participates.

Employees

As of September  30,  2002,  the Company had 1,510  employees,  of whom 915 were
primarily engaged in manufacturing, 406 in sales, marketing and distribution, 52
in research and development and 137 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  72  members  of  the  International   Union  of  Electronic,
Electrical,  Salaried,  Maritime  and  Furniture  Workers  (out of a total of 85
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 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.

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.
<TABLE>

                                       Approximate
Location                               Square Feet      Function
<S>                                    <C>              <C>
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
Joinville-le-Pont, France                   13,000      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      Customer Service
Mississauga, Ontario, Canada                28,850      Manufacturing/Customer Service
Montreal, Quebec, Canada                     1,800      Customer Service
Anne Arundel County, Maryland                7,698      Customer Service
Anne Arundel County, Maryland                5,000      Customer Service
Birmingham, Alabama                          1,500      Customer Service
Brooklyn Park, Maryland                      1,200      Customer Service
Dundalk, Maryland                            1,050      Customer Service
Newport News, Virginia                       1,400      Customer Service
Richmond, Virginia                             (*)      Customer Service
York, Pennsylvania                             (*)      Customer Service
Sparrows Point, Maryland                       (*)      Customer Service
Cherry Hill, New Jersey                        (*)      Customer Service

SPECIALTY COMPOSITES

Indianapolis, Indiana                      156,000      Manufacturing/Distribution/Customer Service
Newark, Delaware                            79,650      Manufacturing/Distribution
Newark, Delaware                            75,200      Warehouse/Distribution
---------------------
</TABLE>

(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.


                                     - 11 -
<PAGE>

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.


                                     - 12 -
<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 are product  liability  matters
that  arise out of the use of  safety  eyewear  and  respiratory  product  lines
manufactured  by the  Company  as well as  products  purchased  for  resale.  In
addition,  the  Company  may be  contingently  liable  with  respect to numerous
lawsuits  involving  respirators  sold  by its  predecessors,  American  Optical
Corporation and Cabot  Corporation,  arising out of agreements entered into when
the AOSafety(R)  Division was sold by American  Optical  Corporation to Cabot in
April 1990 and when later sold by Cabot to the Company in 1995.  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,  Cabot,  American Optical Corporation and a
prior owner of American  Optical  Corporation.  Liability is allocated among the
parties  based on the number of years each Company  owned the AOSafety  Division
and the alleged  years of exposure of the  individual  plaintiff.  The Company's
share of the  contingent  liability is further  limited by an agreement  entered
into  between the Company and Cabot on July 11, 1995,  as amended in 2002.  This
agreement  provides  that, so long as the Company pays to Cabot an annual fee of
$400,000,  Cabot will retain responsibility and liability for, and indemnify the
Company against,  asbestos and  silica-related  legal claims asserted after July
11, 1995 and alleged to have arisen out of the use of respirators  while exposed
to asbestos or silica prior to January 1, 1997. To date, the Company has elected
to pay the  annual  fee.  The  Company  could  potentially  be liable  for these
exposures  if the  Company  elects  to  discontinue  its  participation  in this
arrangement,  or if Cabot is no  longer  able to meet its  obligations  in these
matters.  With these  arrangements in place,  however,  the Company's  potential
liability  is  limited  to  exposures  alleged  to have  arisen  from the use of
respirators while exposed to asbestos or silica on or after January 1, 1997. The
Company  also  may be  responsible  for  certain  claims  relating  to  acquired
companies other than the  AOSafety(R)  Division that are not covered by, and are
unrelated to, the agreement with Cabot. The Company retains  responsibility  and
liability  for all other  product  liability  claims and  accordingly  maintains
insurance protection for claims other than asbestosis and silicosis.

At September 30, 2002,  the Company has recorded  liabilities  of  approximately
$4.8 million, which represents reasonable estimates of its probable liabilities,
for product  liabilities  substantially  related to asbestos and  silica-related
claims  as  determined  by the  Company  in  consultation  with  an  independent
consultant.  The accrual does not include  estimates for  insurance  recoveries.
This reserve is re-evaluated  periodically and additional  charges or credits to
operations may result as additional  information  becomes available.  Consistent
with the current environment being experienced by companies involved in asbestos
and  silica-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
and  silica-related  litigation  could increase the Company's cost over time. In
light of these and other uncertainties inherent in making long-term projections,
the Company has determined that the five-year  period through fiscal 2007 is the
most reasonable time period for projecting  asbestos and  silica-related  claims
and defense costs.  It is possible that the Company may incur  liabilities in an
amount in excess of amounts  currently  reserved.  However,  taking into account
currently available information, historical experience, and the Cabot agreement,
but  recognizing  the inherent  uncertainties  in the  projection  of any future
events, it is management's  opinion that these suits or claims should not result
in final  judgments or settlements  in excess of the Company's  reserve that, in
the  aggregate,  would  have  a  material  effect  on  the  Company's  financial
condition, liquidity or results of operations.


                                     - 13 -
<PAGE>

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

On September 7, 2002, 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, 2003 with a
total of 101,562.5  votes in favor,  no votes in opposition  and 350  abstention
votes. The stockholders  voted to elect the following  directors for the ensuing
year  with a total  of  101,562.5.5  votes in  favor  of each  director  and 350
abstention votes for each director:  Norman W. Alpert,  Bryan P. Marsal, John D.
Curtin, Jr., William E. Kassling,  Michael A. McLain, Arthur J. Nagle, Daniel S.
O'Connell, John A. Shaw and William J. Brady.


                                     - 14 -
<PAGE>

                                     PART II

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

As of December 1, 2002 there were outstanding  101,912.5 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, 2002 there were 33  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 effectuate the Formation Acquisition,  the Company 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
credit agreement and Senior Subordinated Notes and is subordinated to payment of
dividends on the Aearo Preferred Stock. See Note 7 to the Consolidated Financial
Statements.


                                     - 15 -
<PAGE>

Item 6.  Selected Financial Data

The selected historical financial data as of and for the periods ended September
30, 1998, 1999, 2000, 2001, and 2002 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>

                                                                    Years Ended September 30,
                                               1998            1999          2000           2001            2002
                                        -----------      ----------    ----------     ----------      ----------
  <S>                                     <C>            <C>           <C>           <C>             <C>
 Income Statement Data:
 Net Sales--

       Safety Products                  $     217.1      $    212.7    $    219.7     $    206.3      $    208.5
       Safety Prescription Eyewear             36.4            35.5          39.9           39.1            40.8
       Specialty Composites                    39.7            42.9          45.9           38.5            37.6
                                        -----------      ----------    ----------     ----------      ----------
          Total net sales                     293.2           291.1         305.5          283.9           286.9
 Cost of Sales                                163.1           156.7         160.8          155.2  (4)      150.4   (5)
                                        -----------      ----------    ----------     ----------      ----------
       Gross profit                           130.1           134.4         144.7          128.7           136.5
 Operating Expenses--
       Selling and administrative              90.4            87.5          95.6           87.3            91.9
       Research and technical service           4.7             4.7           5.5            5.2             5.7
       Amortization expense                     6.8             6.8           6.9            6.5             6.3
       Other charges (income), net             (0.3)            0.8          (0.3)           0.7             1.5
       Restructuring charge                    11.6  (3)          -             -            9.1  (4)       (0.1)  (5)
                                        -----------      ----------    ----------     ----------      ----------
       Operating income                        16.9            34.6          37.0           19.9            31.2
       Interest expense, net                   26.1            24.3          24.4           23.7            20.1
                                        -----------      ----------    ----------     ----------      ----------
       Income (loss) before
       income taxes                            (9.2)           10.3          12.6           (3.8)           11.1
       Provision for (benefit from)
       income taxes                             2.2             3.2           3.6           (1.9)            1.8
                                        -----------      ----------    ----------     ----------      ----------
 Net income (loss)                      $     (11.4)     $      7.1    $      9.0     $     (1.9)     $      9.3
                                        ===========      ==========    ==========     ==========      ==========
 Other Data:

 EBITDA (1)                             $      47.1      $     51.0    $     54.6     $     48.1      $     48.5

 Depreciation and amortization                 20.3            18.3          18.7           18.7            17.3

 Capital expenditures                           5.8             8.4           9.6            7.8             9.7

 Ratio of earnings to fixed
 charges (2)                                      -             1.4           1.5              -             1.5

 Balance Sheet Data (at period-end):
 Total assets                          $      293.0       $   282.3    $    266.8     $    261.3      $    270.2
 Debt                                         233.2           214.8         199.8          202.2           195.6
 Stockholders' equity                          11.1            16.5          15.8            9.9            21.5
</TABLE>


                                     - 16 -
<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,  and excludes
     unusual credits of $0.6 million for the year ended September 30, 2002.

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, 1998 and 2001 were
     inadequate  to cover  fixed  charges  by $9.2  million  and  $3.8  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).

5.   During fiscal 2002, the Company  reversed $0.6 million of reserves  related
     to  the  September  30,  2001  restructuring   provision.   The  adjustment
     represents  a change in  estimate  of the plan for the  disposal of certain
     items of inventory and the closure of its  Ettlingen,  Germany  plant.  The
     inventory  provision of $0.5 million was  classified  as cost of sales with
     the remaining $0.1 million classified as operating expenses.


                                     - 17 -
<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

The following discussion provides a summary of major developments  affecting the
Company over the past few years.

The Company  benefited from new product  launches  including the Lexa(R) product
line first  introduced in 1998, which continued with very positive growth during
1999.  In  addition,  new  hearing  products  introduced  during  1999  included
E-A-Rsoft(TM),   Yellow  Neons(R),   SuperFit(R),   and  several  new  Peltor(R)
communication  products.  New eyewear products  introduced  during 1999 included
Nassau Rave(R) and new safety prescription eyewear frames.

During  fiscal year 2000,  the Company  achieved  record sales and EBITDA levels
with sales increasing 4.9%,  despite a stronger US dollar,  which had the affect
of  depressing  reported  sales by  approximately  $6.4  million.  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 negative currency impact as well as 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 credit agreement
with a new  $135.0  million  credit  agreement  and ended the year with  undrawn
revolver commitments of approximately $30.0 million, an available U.K. overdraft
facility of $5.0 million and cash of $18.2  million.  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 terrorist  events of September 11, 2001,  coupled with the  previously  weak
economy,  made for a challenging start for fiscal year 2002. Sales for the first
quarter  were off 9.8%  versus the prior year due to the  resulting  significant
slowdown  in the  manufacturing  sectors  of the  economy  in which the  Company
markets  its  products.   The  following   three  quarters   showed   comparable
improvements  with sales down only 4.5% in the second  quarter  and then up 6.0%
and 12.7% in quarters three and four.

Despite the  difficult  economy in fiscal 2002,  the Company was able to improve
performance  through continued reliance on its strategy of ongoing  productivity
improvements,  global new product  development and value-creating  acquisitions.
Productivity  improvements  in  purchasing  and  manufacturing  as  well  as the
benefits of the restructuring


                                     - 18 -
<PAGE>

program implemented toward the end of fiscal 2001 allowed the Company to improve
gross profits to 47.4% of net sales (up 130 basis  points).  The  initiatives on
global new  product  development  resulted in the  Company  launching  36 new or
improved  product  lines  including the  Quick-Latch(R)  respiratory  line,  the
X-Factor(TM) eyewear line for the Consumer channel, and PU shaped earplugs under
the  EARsoft(R)  name.  In addition,  the Company also released new and improved
Peltor  passive  muffs as well as the new and improved  Comtac(TM)  and PowerCom
Plus(TM)  communication  muffs. In addition,  the difficult  economy did provide
acquisition  opportunities  and the  Company  was able to  complete  four  value
creating  acquisitions  during  the  fiscal  year.  All four  acquisitions  were
"tuck-in"  acquisitions  that were made with  cash and are,  in the  opinion  of
management,  highly  accretive.  These  acquisitions  are in the Company's  core
product  offerings  and enhance  the  Company's  global  eyewear  positions.  In
prescription  eyewear the Company  added to SRx's number one global market share
position  under its  single  AOSafety(R)  brand  name,  and in  non-prescription
eyewear  the  Company  acquired  an  eyewear  line that was  restaged  under the
X-Series(TM) line which is being expanded through the  International,  Consumer,
European and North  American  channels.  The overall result was that the Company
ended its fiscal  year with  improved  EBITDA of $48.5  million,  as compared to
$48.1 million in the previous fiscal year, with undrawn revolver  commitments of
approximately  $30.0  million,  an  available  U.K.  overdraft  facility of $5.0
million and cash of $14.5 million.

Critical Accounting Policies

The Company's  discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting  principles  generally accepted
in the United  States of America  ("GAAP").  GAAP requires the use of estimates,
judgments  and  assumptions   that  affect  the  reported   amounts  of  assets,
liabilities,  revenues and expenses.  The Company  believes its use of estimates
and  underlying  accounting  assumptions  adhere  to GAAP  and are  consistently
applied.  The Company  revises its estimates and  assumptions as new information
becomes available.

The  Company  believes  that of its  significant  accounting  policies  (see the
accompanying  Notes to the  Consolidated  Financial  Statements)  the  following
policies involve a higher degree of judgment and/or complexity.

Income  Taxes - The  Company  accounts  for  income  taxes  in  accordance  with
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income Taxes",  which requires deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between book and
tax  bases of  recorded  assets  and  liabilities.  SFAS No.  109 also  requires
deferred  tax assets be reduced by a  valuation  allowance  if it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.  Recognition  of a  deferred  tax  asset is  dependent  on  generating
sufficient future taxable income in the United States prior to the expiration of
the tax loss and credit carryforwards, which expire over various periods ranging
from 2010 to 2021. In its evaluation of the adequacy of the valuation allowance,
the Company  assesses prudent and feasible tax planning  strategies.  Due to the
uncertainties  of realizing these tax benefits,  the Company has recorded a full
valuation allowance against these losses and credit carryforwards.  The ultimate
amount of deferred tax assets  realized could be different from those  recorded,
as influenced by potential  changes in enacted tax laws and the  availability of
future taxable income.

Product Liabilities -The Company has established  reserves for potential product
liabilities that arise out of the use of the Company's  products.  A significant
amount of judgment is required to quantify the  Company's  ultimate  exposure in
these  matters and the  valuation  of reserves is  estimated  based on currently
available  information,  historical experience and from time to time the Company
may seek the assistance of an independent consultant. While the Company believes
that the  current  level of reserves is  adequate,  changes in the future  could
impact these determinations.

Restructuring - The Company recorded an unusual charge in fiscal 2001 based on a
restructuring   plan  to  improve  its   competitive   position  and   long-term
profitability.  The  provision  recorded  was based on estimates of the expected
costs  associated  with site  closures,  consolidation  of products  and product
lines, disposal of assets, contract terminations or other costs directly related
to the  restructuring.  To the extent that actual  costs may differ from amounts
recorded,  revisions to the estimated reserves would be required. A reduction of
$0.6  million was made during  fiscal 2002 to account for new  information  made
available during the year.

Impairment  of  Long-Lived  Assets - The Company  evaluates  long-lived  assets,
including other  intangibles  and related  goodwill,  of  identifiable  business
activities for impairment when events or changes in circumstances  indicate,  in
management's  judgment,  that  the  carrying  value  of such  assets  may not be
recoverable. Cash flows used in the potential impairment evaluation are based on
management's  estimates and  assumptions.  Changes in business  conditions could
potentially require future adjustments to asset valuations.

Revenue  Recognition  - The  Company  recognizes  revenue  when  title  and risk
transfer  to the  customer,  which is  generally  when the product is shipped to
customers. At the time revenue is recognized, certain provisions may also


                                     - 19 -
<PAGE>

be recorded including an allowance for doubtful accounts. Allowance for doubtful
accounts  is  generally  based on a  percentage  of aged  receivables.  However,
management  judgment is involved with the final  determination  of the allowance
based on several  factors  including  specific  analysis of a  customers  credit
worthiness,  historical  bad debt  experience,  changes in payment  history  and
general economic and market trends.

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.
<TABLE>
                                          Years Ended September 30,
                                     ----------------------------------
                                       2000         2001         2002
                                     --------    ---------   ----------
<S>                                    <C>          <C>          <C>
Net sales:
   Safety Products                       71.9  %     72.7  %      72.7  %
   Safety Prescription Eyewear           13.1        13.8         14.2
   Specialty Composites                  15.0        13.5         13.1
                                     ---------   ---------   ----------
   Total net sales                      100.0       100.0        100.0
   Cost of sales                         52.6        54.7         52.4
                                     ---------   ---------   ----------
   Gross profit                          47.4        45.3         47.6
   Selling and administrative            31.3        30.8         32.0
   Research and technical services        1.8         1.8          2.0
   Amortization expense                   2.2         2.3          2.2
   Other charges (income), net            0.0         0.0          0.5
   Restructuring charge                   0.0         3.2          0.0
                                     ---------   ---------   ----------
   Operating income                      12.1  %      7.2  %      10.9  %
                                     =========   =========   ==========
</TABLE>

Fiscal 2002 Compared to Fiscal 2001

Net Sales.  Net sales in the year ended  September  30, 2002  increased  1.1% to
$286.9  million from $283.9  million in the year ended  September 30, 2001.  The
increase in sales was primarily driven by new product launches and acquisitions.
The Safety  Products  segment  net sales in the year ended  September  30,  2002
increased 1.1% to $208.5 million from $206.3 million in the year ended September
30, 2001. The Safety Products  segment  included  approximately  $5.3 million of
sales from the  acquisition  of Leader  Industries in January  2002.  The Safety
Prescription  Eyewear  segment  net sales in the year ended  September  30, 2002
increased  4.3% to $40.8 million from $39.1 million in the year ended  September
30, 2001. The Safety  Prescription  Eyewear segment included  approximately $2.5
million of sales from the  acquisition  of Iron Age Vision in December  2001 and
Chesapeake  Optical in May 2002. The Specialty  Composites  segment net sales in
the year ended  September  30, 2002  decreased  2.3% to $37.6 million from $38.5
million in the year ended September 30, 2001. The decrease was primarily  driven
by volume declines in the industrial equipment market segment.

Gross Profit.  Gross profit in the year ended  September 30, 2002 increased 6.1%
to $136.5  million  from $128.7  million in the year ended  September  30, 2001.
Gross profit as a percentage  of net sales in the year ended  September 30, 2002
improved  by 2.3% basis  points to 47.6% as  compared to 45.3% in the year ended
September  30,  2001.  The  increase  in  gross  margin  was  primarily  due  to
productivity  improvements  and the  impact of the  restructuring  plan that was
charged during the year ended September 30, 2001.

Selling and Administrative Expenses.  Selling and administrative expenses in the
year ended September 30, 2002 increased 5.3% to $91.9 million from $87.3 million
in the year ended  September  30, 2001.  The  increase is  primarily  due to the
impact of the  acquisitions  in  addition  to  increased  spending  in sales and
marketing to support new product launches and build brand  recognition.  Selling
and  administrative  expenses  as a  percentage  of net sales in the year  ended
September 30, 2002 were 32.0%, compared to 30.8% in the year ended September 30,
2001.

Research and Technical Services.  Research and technical services expense in the
year ended  September 30, 2002  increased 9.6% to $5.7 million from $5.2 million
in the year ended September 30, 2001. The increase is primarily due to increased
spending for new product  development.  Research and technical services expenses
as a  percentage  of net sales in the year ended  September  30,  2002 were 2.0%
compared to 1.8% in the year ended September 30, 2001.


                                     - 20 -
<PAGE>

Other Charges  (Income),  Net. Other charges  (income),  net was expense of $1.5
million  for the year ended  September  30,  2002 as compared to expense of $0.7
million for the year ended  September 30, 2001. The $1.5 million expense for the
year ended  September  30, 2002 was  primarily  attributed  to foreign  currency
transaction and hedge losses of  approximately  $0.8 million and $0.5 million of
asset write-offs. The $0.7 million expense for the year ended September 30, 2001
was primarily  attributed to foreign  currency  transaction  and hedge losses of
approximately  $0.8 million.  The foreign currency  transaction and hedge losses
were largely due to a weakening  U.S.  dollar,  mainly in the second half of the
fiscal year, as compared to European currencies.  This currency shift,  although
unfavorable to other charges  (income),  net, was favorable to overall operating
income.

Restructuring Charge. 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
included 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.  On  September  30,  2002,  the
Company  revised  its  estimate  relating to the  disposal  of certain  items of
inventory and to the closure of its  Ettlingen,  Germany  operation and adjusted
the  restructuring  provision  by  $0.6  million,  of  which  $0.5  million  was
classified  as cost of sales  relating to  inventory.  As of September 30, 2002,
there is approximately $4.2 million accrued relating to the restructuring.

Operating  Income.  Primarily  as a  result  of  the  factors  discussed  above,
operating  income  increased  $11.3 million or 56.8% in the year ended September
30, 2002 from $19.9  million in the year ended  September  30,  2001.  Operating
income as a  percentage  of net sales in the year ended  September  30, 2002 was
10.9% as compared to 7.0% in the year ended September 30, 2001.

Interest Expense,  Net.  Interest  expense,  net in the year ended September 30,
2002  decreased  15.3% to $20.1  million  from  $23.7  million in the year ended
September  30,  2001.  The  decrease is  attributed  to lower  weighted  average
borrowings and lower interest rates during the year ended  September 30, 2002 as
compared to the year ended September 30, 2001.

Income (Loss) Before  Provision for (Benefit  From) Income Taxes.  Income before
provision for income taxes  increased $14.9 million to $11.1 million in the year
ended  September  30, 2002  compared to a loss of $3.8 million in the year ended
September 2001. Income before provision for income taxes excluding restructuring
charges  increased $2.8 million to $10.5 million in the year ended September 30,
2002 compared to $7.6 million in the year ended September 30, 2001.

Provision for (Benefit From) Income Taxes. The provision for income taxes in the
year ended  September  30, 2002 was $1.8  million  compared to a benefit of $1.9
million in the year ended  September 30, 2001. The Company's  effective tax rate
was lower than the statutory rate due to a decrease in the valuation  allowance.
The  valuation  allowance  at  September  30,  2002  and  2001  relates  to  the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss carryforwards.

Net Income (Loss).  For the year ended September 30, 2002, the Company  recorded
net income of $9.3  million as  compared  to a net loss of $1.9  million for the
year ended September 30, 2001.


                                     - 21 -
<PAGE>

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)
<TABLE>
                                                                           Change
                                   Years Ended September 30,       Favorable/(Unfavorable)
                                       2001        2002            Amount          Percent
                                     -------   ------------      ------------ ------------
<S>                                   <C>       <C>                   <C>             <C>
Operating Income
Add Backs:                            19,914         31,159            11,245         56.5 %
   Depreciation                       10,123         10,958               835          8.2
   Amortization of Intangibles         6,530          6,293              (237)        (3.6)
   Non-operating costs (income), net      44            690               646           --
   Unusual Charges                    11,441           (600)          (12,041)      (105.2)
                                     -------   ------------       ----------- ------------
EBITDA                                48,052         48,500               448          0.9 %
                                     =======   ============       =========== ============
By Segment
   Safety Products                    39,844         42,326             2,482          6.2 %
   Safety Prescription Eyewear         2,237          1,621              (616)       (27.5)
   Specialty Composites                1,409          3,433             2,024        143.5
   Reconciling Items                   4,562          1,120            (3,442)       (75.4)
                                     -------   ------------       ----------- ------------
                                      48,052         48,500               448          0.9 %
                                     =======   ============       =========== ============
</TABLE>

EBITDA for the year ended  September 30, 2002 was $48.5 million,  which was $0.4
million  higher than the year ended  September  30, 2001.  This increase was the
result of the Company's continued strategy of ongoing productivity,  new product
development  and  value  creating   acquisitions  despite  a  weak  economy  and
increasing costs for items such as insurance and employee  benefits.  The Safety
Products  segment EBITDA for the year ended September 30, 2002 increased 6.2% to
$42.3  million from $39.8  million in the year ended  September  30,  2001.  The
increase was primarily due to  acquisitions,  new product launches and increased
productivity.  The Safety Prescription Eyewear segments EBITDA in the year ended
September 30, 2002 decreased 27.5% to $1.6 million from $2.2 million in the year
ended  September 30, 2001.  This decrease was primarily due to higher  operating
expenses  and  integration  costs for  acquisitions.  The  Specialty  Composites
segment EBITDA for the year ended  September 30, 2002  increased  143.5% to $3.4
million from $1.4 million in the year ended September 30, 2001. The increase was
primarily  driven  by  productivity  improvements,  improved  product  mix,  the
positive  impacts of the 2001  restructuring  plan and lower operating  expenses
partially offset by lower sales volume.  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.

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


                                     - 22 -
<PAGE>

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.  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 restructuring  charges of $2.4
million  related to the provision for  inventory as discussed  below.  The gross
profit  percentage in the year ended September 30, 2001 excluding  restructuring
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.

Restructuring Charge. 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 completed during fiscal 2003
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.


                                     - 23 -
<PAGE>

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.

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. The Company's  effective tax
rate was  lower  than the  statutory  rate due to a  decrease  in the  valuation
allowance. The valuation allowance at September 30, 2001 and 2000 relates to the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss carryforwards.

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)
<TABLE>
                                                                        Change
                                       Years Ended September 30, Favorable/(Unfavorable)
                                          2000         2001        Amount      Percent
                                     ------------  ------------  -----------  -----------
<S>                                       <C>            <C>        <C>           <C>
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 (income), net          692            44        (648)      (93.6)

    Unusual Charges                             -        11,441      11,441        ---
                                     ------------  ------------  ----------  ----------
EBITDA                                     54,618        48,052      (6,566)      (12.0) %
                                     ============  ============  ==========  ==========
By Segment
   Safety Products                         48,775        39,844      (8,931)      (18.3) %
   Safety Prescription Eyewear              4,008         2,237      (1,771)      (44.2)
   Specialty Composites                     3,531         1,409      (2,122)      (60.1)
   Reconciling Items                       (1,696)        4,562       6,258      (369.0)
                                     ------------  ------------   ---------  ----------
                                           54,618        48,052      (6,566)      (12.0) %
                                     ============  ============   =========  ==========
</TABLE>

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


                                     - 24 -
<PAGE>

charges,  was 16.9% as compared to 17.9% in the year ended  September  30, 2000.
The  Safety  Products  segment  EBITDA  for the year ended  September  30,  2001
decreased  18.3% to $39.8 million from $48.9 million in the year ended September
30, 2000.  The decrease was  primarily  due to the  significant  slowdown in the
manufacturing  sector of the economy and the negative impact of foreign exchange
on operating  results.  The Safety  Prescription  Eyewear segments EBITDA in the
year ended  September 30, 2001 decreased 44.2% to $2.2 million from $4.0 million
in the year ended  September  30,  2000.  This  decrease  was  primarily  due to
unfavorable  product mix and reduced sales volume due to the weak  economy.  The
Specialty  Composites  segment  EBITDA for the year  ended  September  30,  2001
decreased  60.1% to $1.4 million  from $3.5 million in the year ended  September
30, 2000. The decrease was primarily due to reduced sales volume due to the weak
economy. 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.

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 is 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 Company's revenues or results of operations.

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.

The Company's debt structure includes:  (a) $98.0 million of Senior Subordinated
Notes (Notes) due 2005, which are publicly held and are redeemable at the option
of the Company, in whole or in part, at various redemption prices, and (b) up to
an aggregate  of $135.0  million  under a credit  agreement  with various  banks
comprised of (i) a secured term loan facility  consisting of loans providing for
up to $100.0 million of term loans  (collectively the Term Loans) with a portion
of the Term Loans  denominated in foreign  currencies,  (ii) a secured revolving
credit facility (Revolving Credit Facility) providing for up to $30.0 million of
revolving  loans for  general  corporate  purposes,  and (iii) a U.K.  overdraft
facility of up to an  equivalent  of $5.0  million in Great  Britain  Pounds for
working   capital   requirements  as  needed   (collectively   the  Senior  Bank
Facilities). The amount outstanding on the Term Loans at September 30, 2002, was
approximately  $93.9 million.  No amounts were  outstanding  under the Revolving
Credit  Facility or the U.K.  overdraft  facility.  At September  30, 2002,  the
Company's committed lines of credit totaled approximately $34.0 million.

Under the terms of both the  Senior  Bank  Facilities  and the Notes  indenture,
Aearo  Company is  required  to comply  with  certain  financial  covenants  and
restrictions.  Aearo Company was in compliance with all financial  covenants and
restrictions at September 30, 2002.

During the first  quarter  of fiscal  2002,  the  Company's  Board of  Directors
authorized  management  to  repurchase,  from  time to time,  a  portion  of the
Company's  12.5%  Notes,  subject to market  conditions  and other  factors.  No
assurances can be given as to whether or when or at what price such  repurchases
will  occur.  Subsequently,  pursuant  to a first  amendment  to the Senior Bank
Facilities, the Company purchased and retired $2.0 million of the Notes.


                                     - 25 -
<PAGE>

Maturities  under the  Company's  Term Loans are:  $12.5 million in fiscal 2003,
$16.7 million in fiscal 2004 and $64.7 million in fiscal 2005. 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  additional  principal  payments  in respect of the Term Loans
until maturity in 2005.  The Company is required to make interest  payments with
respect  to both  the  Senior  Bank  Facilities  and the  Notes.  The  Company's
Revolving Credit Facility and Term Loans mature in March 2005.

The  Company's  net cash  provided by  operating  activities  for the year ended
September  30, 2002 totaled  $26.6  million as compared to $21.5 million for the
year ended September 30, 2001. The increase of $5.1 million was primarily due to
a $3.3  million  increase in net income  adjusted  for cash and non cash charges
(depreciation,  amortization,  deferred  taxes and other) and a $1.7 million net
change in assets  and  liabilities.  The  Company's  net  changes  in assets and
liabilities was primarily  driven by a $3.2 million increase in accounts payable
and accrued liabilities, a $1.5 million increase in other, net, partially offset
by a $3.0 million reduction of cash from accounts receivables and inventory.

The Company  typically  makes  capital  expenditures  related  primarily  to the
maintenance and improvement of manufacturing facilities.  The Company spent $8.2
million  for  capital  expenditures  for the year ended  September  30,  2002 as
compared to $7.8 million for capital  expenditures  for the year ended September
30, 2001 and $9.6 million for the year ended  September 30, 2000.  The Company's
capital spending is of a relatively short duration, with the complete commitment
process typically involving less than one year.

Net cash used by  investing  activities  was $17.7  million  for the year  ended
September 30, 2002 as compared to $7.8 million for the year ended  September 30,
2001.  The increase of $9.9 million in net cash used by investing  activities is
primarily  attributed to the acquisitions of Iron Age Vision for $0.8 million in
December 2001, the acquisition of Leader  Industries for $5.1 million in January
2002 and the  acquisition  of  Chesapeake  Optical for $3.6 million in May 2002.
These amounts are inclusive of acquisition fees and restructuring costs.

Net cash used by financing  activities for the year ended September 30, 2002 was
$10.7 million  compared with net cash provided by financing  activities  for the
year ended  September 30, 2001 of $1.6  million.  The change of $12.3 million is
primarily  due to the  repayment of Term Loans in the year ended  September  30,
2002  compared to the prior year when the Company  refinanced  its prior  credit
agreement.  The Company has no financing  arrangements involving special purpose
entities.

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  particular,  during  fiscal 2001 and 2002,  the Company was  affected by the
significant  slowdown in the manufacturing  sector of the economies in which the
Company  markets  its  products  that began in earnest  during the first  fiscal
quarter of fiscal 2001,  exacerbated  by the impact of the  terrorist  events of
September 11, 2001.  As a result,  it is expected that the Company will continue
to operate in a challenging  sales  environment.  The Company expects to arrange
for new  financing of both the Senior Bank  Facilities  and the Notes before the
maturity of the Senior Bank Facilities in March 2005. There can be no assurances
that any  additional  financing or other sources of capital will be available to
the Company at acceptable  terms, or at all. The inability to obtain  additional
financing  would  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.


                                     - 26 -
<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 derivatives
are for purposes other than trading.  The Company adopted the provisions of 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 risks  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.  As a result of the  acquisition  of Peltor,  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.

To mitigate the effects of changes in foreign  currency  rates on  profitability
the Company executes two hedging programs,  one for transaction  exposures,  and
the other for cash flow exposures in European  operations.  The Company utilizes
forward  foreign  currency  contracts  for  transaction  as well  as  cash  flow
exposures.  For the year ended September 30, 2002, net  transaction  losses were
$0.2 million and cash flow hedge  losses were $0.6  million.  In  addition,  the
Company  limits the foreign  exchange  impact on the balance  sheet with foreign
denominated debt in Great Britain Pound Sterling, Euros and Canadian dollars.

SFAS No. 133  requires  that every  derivative  instrument  be  recorded  in the
balance sheet as either an asset or liability  measured at its fair value. As it
relates to cash flow  exposures  in  European  operations,  the  Company  had no
forward foreign currency contracts as of September 30, 2002.

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 on its floating rate debt.

The Company has  approximately  $25.0  million of variable  rate debt  protected
under an interest rate collar arrangement  through September 30, 2003. The floor
is set at 2% and the cap at 6.25%. The fair value of the collar at September 30,
2002 was $0.1  million.  The Company  has not  elected to take hedge  accounting
treatment  for the interest  rate collar as defined under SFAS No. 133 and, as a
result, any fair value adjustment is charge directly to other  income/(expense).
Approximately  $141,000 was expensed  during the fiscal year ended September 30,
2002.

The  Company is of the opinion  that it is well  positioned  to manage  interest
exposures  in the short term.  The Company  continues to monitor  interest  rate
movements and has mitigated  the risks of potential  interest rate  fluctuations
through the use of the aforementioned interest rate instruments.

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.  The  Company is also
exposed to market  risks for  electricity,  fuel oil and natural gas consumed in
its  operations.  Items with potential risk of price  volatility 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 Far East sources where resource availability,


                                     - 27 -
<PAGE>

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


                                     - 28 -
<PAGE>

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Independent Auditor's Report..................................................30
Report of Independent Public Accountants......................................31
Consolidated Balance Sheets...................................................32
Consolidated Statements of Operations.........................................33
Consolidated Statements of Stockholders' Equity...............................34
Consolidated Statements of Cash Flows.........................................35
Notes to Consolidated Financial Statements....................................36


                                     - 29 -
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of Aearo Corporation:

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Aearo
Corporation and  subsidiaries as of September 30, 2002 and 2001, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the years ended  September  30,  2002 and 2001.  Our audits  also  included  the
financial  statement  schedule  listed in the Index at Item 15. 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 audits. The
financial  statements and financial  statement schedule of Aearo Corporation for
the year ended  September  30,  2000,  were  audited by other  auditors who have
ceased  operations.  Those auditors  expressed an  unqualified  opinion on those
financial  statements  and  financial  statement  schedule in their report dated
December 15, 2000.

We conducted our audits 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  audits  provide  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
as of September 30, 2002 and 2001, and the results of their operations and their
cash flows for the years 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 2002 and
2001 consolidated  financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Indianapolis, Indiana
December 4, 2002


                                     - 30 -
<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

The report of Arthur Andersen LLP ("Andersen") is a copy of a report  previously
issued report covering  fiscal years 2001 and 2000. The predecessor  auditor has
not reissued its report.


                                     - 31 -
<PAGE>

                       AEARO CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in Thousands, Except Share Amounts)
<TABLE>
                                                                   September 30,     September 30,
                                                                        2001              2002
                                                                  ---------------   ---------------
                             ASSETS
<S>                                                               <C>               <C>
Current Assets:
   Cash and cash equivalents                                      $        18,233   $        14,480
   Accounts receivable (net of reserve for doubtful accounts
     of $831 and $1,524, respectively)                                     42,428            46,478
   Inventories                                                             29,564            33,161
   Deferred and prepaid expenses                                            2,325             3,449
                                                                  ---------------   ---------------
     Total current assets                                                  92,550            97,568
                                                                  ---------------   ---------------
Long Term Assets:
   Property, plant and equipment, net                                      47,003            48,096
   Intangible assets, net                                                 118,200           121,979
   Other assets                                                             3,549             2,526
                                                                  ---------------   ---------------
     Total Assets                                                 $       261,302   $       270,169
                                                                  ===============   ===============
                          LIABILITIES
Current Liabilities:
   Current portion of long-term debt                              $         8,393   $        12,847
   Accounts payable and accrued liabilities                                34,812            36,410
   Accrued interest                                                         2,691             2,568
   U.S. and foreign income taxes                                            2,265             1,156
                                                                  ---------------   ---------------
     Total current liabilities                                             48,161            52,981
                                                                  ---------------   ---------------

   Long-term debt                                                         193,836           182,715
   Deferred income taxes                                                      383               800
   Other liabilities                                                        9,066            12,129
                                                                  ---------------   ---------------
     Total Liabilities                                                    251,446           248,625
                                                                  ---------------   ---------------
                 COMMITMENTS AND CONTINGENCIES
Preferred stock, $.01 par value-
   (Redemption value of $96,801 and $109,480, respectively)
     Authorized - 200,000 shares
     Issued and outstanding - 45,000 shares                                     -                 -
Stockholders' Equity:
   Common stock $.01 par value-
     Authorized -- 200,000 shares
     Issued and outstanding -- 102,088 and 101,913                              1                 1
   Additional paid-in-capital                                              32,374            32,254
   Retained earnings (deficit)                                             (2,494)            6,825
   Accumulated other comprehensive loss                                   (20,025)          (17,536)
                                                                  ---------------   ---------------
     Total Stockholders' Equity                                             9,856            21,544
                                                                  ---------------   ---------------
     Total Liabilities and Stockholders' Equity                   $       261,302   $       270,169
                                                                  ===============   ===============
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                     - 32 -
<PAGE>


                       AEARO CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             (Dollars in Thousands)
<TABLE>
                                                                    Years Ended September 30,
                                                           2000                2001                2002
                                                     -----------------    --------------       -------------
<S>                                                  <C>                  <C>                  <C>
Net sales                                            $      305,475       $      283,862       $     286,867
Cost of sales                                               160,759              152,849             150,897
Unusual charges (income)                                          -                2,364                (500)
                                                     --------------       --------------       -------------
   Gross profit                                             144,716              128,649             136,470

Selling and administrative                                   95,560               87,286              91,903
Research and technical services                               5,528                5,162               5,740
Amortization expense                                          6,859                6,530               6,293
Other charges (income), net                                    (242)                 680               1,475
Unusual charges (income)                                          -                9,077                (100)
                                                     --------------       --------------       -------------
   Operating income                                          37,011               19,914              31,159
   Interest expense, net                                     24,387               23,666              20,055
                                                     --------------       --------------       -------------

   Income (loss) before provision for (benefit
        from) income taxes                                   12,624               (3,752)             11,104
   Provision for (benefit from) income taxes                  3,576               (1,872)              1,785
                                                     --------------       --------------       -------------
   Net income (loss)                                 $        9,048       $       (1,880)      $       9,319
                                                     ==============       ==============       =============
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                     - 33 -
<PAGE>

                       AEARO CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (Dollars in Thousands)
<TABLE>
                                                                                      Accumulated
                                      Preferred                      Additional  Accumulated     Other                Comprehensive
                                        Stock         Common Stock     Paid-in    Earnings   Comprehensive               Income
                                    Shares Amount    Shares  Amount    Capital   (Deficit)       Loss         Total      (Loss)
                                    ------ -------   ------- -------  ---------- ----------- -------------   -------  -------------
<S>                                 <C>              <C>     <C>     <C>          <C>        <C>            <C>        <C>
Balance, October 1, 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 loss                               -       -         -      -            -      (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

  Issuance of shareholder notes                                              (25)                                (25)

  Repurchase of common stock, net                       (175)     -          (95)                                (95)

  Foreign currency translation
  adjustment                             -       -         -      -            -           -           199       199  $        199

  Net minimum pension liability
  adjustment                                                                                         2,290     2,290         2,290

  Net income                             -       -         -      -            -       9,319             -     9,319         9,319
                                                                                                                      ------------
 Comprehensive income                                                                                                       11,808
                                                                                                                      ============
                                    ------ --------  ------- -------  ---------- ----------- -------------   -------
Balance, September 30, 2002         45,000        -  101,913 $    1   $   32,254 $     6,825 $     (17,536)  $21,544
                                    ====== ========  ======= =======  ========== =========== =============   =======
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                     - 34 -
<PAGE>


                       AEARO CORPORATION AND SUBSIDIRARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
<TABLE>
                                                                                         Years Ended September 30,
                                                                                2000          2001         2002
                                                                            -----------   ------------  -----------
<S>                                                                         <C>           <C>           <C>
Cash Flows from Operating Activities:
   Net income (loss)                                                        $     9,048   $    (1,880)  $     9,319
   Adjustments to reconcile net income (loss) to cash provided by operating
   activities --
     Depreciation                                                                10,056        10,123        10,958
     Amortization                                                                 8,616         8,543         7,848
     Deferred income taxes                                                         (196)         (101)          401
     Provision for restructuring charges                                              -        11,441          (600)
     Other non-cash items, net                                                      859        (2,993)          551
     Changes in assets and liabilities, net of effects of acquisitions--
         Accounts receivable, net                                                (2,812)        1,210           (25)
         Inventories                                                               (275)        1,758            (5)
         Accounts payable and accrued liabilities                                   633        (5,222)       (1,983)
         Other                                                                    1,631        (1,341)          112
                                                                            -----------  ------------   -----------
              Net cash provided by operating activities                          27,560        21,538        26,576
                                                                            -----------  ------------   -----------

Cash Flows from Investing Activities:
   Cash paid for acquisitions                                                    (4,465)            -        (9,515)
   Additions to property, plant and equipment                                    (9,552)       (7,799)       (8,232)
   Proceeds provided by disposals of property, plant and equipment                   34            38            13
                                                                            -----------  ------------   -----------
              Net cash used by investing activities                             (13,983)       (7,761)      (17,734)
                                                                            -----------  ------------   -----------

Cash Flows from Financing Activities:
   Repurchases of common stock, net                                                (286)            -           (95)
   Repayment (issuance) of shareholder notes                                        (67)          161           (25)
   Repayment of senior subordinated notes                                             -             -        (2,000)
   (Repayment of) proceeds from revolving credit facility, net                    4,150       (10,000)            -
   (Repayment of) proceeds from of term loans                                   (15,146)       11,700        (8,178)
   Repayment on Capital Lease Obligations                                             -             -          (143)
   Repayment of other long-term debt                                               (269)         (222)         (215)
                                                                            -----------  ------------   -----------
              Net cash (used in) provided by financing activities               (11,618)        1,639       (10,656)
                                                                            -----------  ------------   -----------

Effect of Exchange Rate Changes on Cash                                          (2,514)         (678)       (1,939)
                                                                            -----------  ------------   -----------

Net increase (decrease) in cash and cash equivalents                               (555)       14,738        (3,753)
Cash and cash equivalents, beginning of year                                      4,050         3,495        18,233
                                                                            -----------  ------------   -----------
Cash and cash equivalents, end of year                                      $     3,495  $     18,233   $    14,480
                                                                            ===========  ============   ===========
Non Cash Investing and Financing Activities:
Capital Lease Obligations                                                   $         -  $          -   $     1,421
                                                                            ===========  ============   ===========
Cash Paid for:
   Interest                                                                 $    22,637  $     22,023   $    18,697
   Income Taxes                                                             $     2,233  $      1,983   $     2,649
                                                                            ===========  ============   ===========
</TABLE>


                                     - 35 -
<PAGE>

                       AEARO CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation

     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") (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").  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 (the Senior Subordinated Notes) (see Note 7).

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.

     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  when  title  and  risk  transfer  to the
     customer,  which is generally when the product is shipped to customers.  At
     the time revenue is  recognized,  certain  provisions  may also be recorded
     including  an  allowance  for  doubtful  accounts.  Allowance  for doubtful
     accounts is generally based on a percentage of aged  receivables.  However,
     management  judgment  is  involved  with  the  final  determination  of the
     allowance  based  on  several  factors  including  specific  analysis  of a
     customers credit  worthiness,  historical bad debt  experience,  changes in
     payment history and general economic and market trends.

     Advertising

     The Company  expenses the costs of advertising as incurred.  These expenses
     were  approximately  $7.9 million,  $5.9 million,  and $6.1 million for the
     years ended September 30, 2000, 2001 and 2002, respectively.


                                     - 36 -
<PAGE>

     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

     Foreign Currency Translation:

     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 Transactions:

     Foreign  currency gains and losses arising from  transactions by any of the
     Company's  subsidiaries  are reflected in net income (loss).  For the years
     ended  September  30,  2000,  2001 and 2002 the  accompanying  consolidated
     statements of operations include  approximately $0.4 million, $0.4 million,
     and $0.2 million,  respectively,  of transaction  losses  included in other
     (income) charges, net.

     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,  the Company enters into forward
     foreign  currency   contracts.   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, 2002,  relative to these exposures,  the
     Company  had  forward  foreign  currency  contracts  open in the  following
     amounts:

<TABLE>

     Currency            Amount (000s)    Contract Position
     --------            -------------    -----------------
     <S>                 <C>              <C>
     British Pound            1,228              Buy
     Canadian Dollar          1,285              Sell
     Norwegian Krona          7,840              Sell
     Swedish Krona          103,834              Buy
     Swiss Franc                980              Buy
     Euro                     1,712              Sell
     Danish Krona             1,918              Sell
</TABLE>

     As of September 30, 2002,  the Company has recorded an  unrealized  gain of
     $0.1 million  associated with the above forward foreign  currency  contract
     commitments.

     In addition,  the Company enters into forward foreign currency 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, 2001 and 2002,  the  consolidated  statement  of
     operations  include  approximately  $0.2 million and $0.6 million of losses
     related to these instruments.

     As of September 30, 2002,  relative to these exposures,  the Company has no
     outstanding  forward  foreign  contracts.  The Company  does not enter into
     forward foreign 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


                                     - 37 -
<PAGE>

     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  $2.9
     million,  $2.4 million and $2.6 million for the years ended  September  30,
     2000, 2001 and 2002, 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,
     2002 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  determined that an information
     technology system that was under development was impaired. As a result, the
     Company wrote off approximately $0.5 million related to this system. During
     the  year  ended  September  30,  2001,  the  Company   identified  certain
     manufacturing assets in the Newark,  Delaware facility that were determined
     by  the  Company  to be  impaired.  As a  result,  the  Company  wrote  off
     approximately $2.9 million related to those assets (see Note 17) as part of
     its  restructuring  plan.  During the year ended  September  30, 2002, as a
     result  of  normal  product/equipment  obsolescence,  and  productivity  or
     capacity  enhancement  projects,  the Company wrote off approximately  $0.5
     million  of  manufacturing  assets  that  were  charged  to other  (income)
     charges,  net.  All  impairment  charges  are  recorded  to other  (income)
     charges, net in the consolidated statement of operations.

     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,  $2.0 million and $1.3 million for the years ended  September  30,
     2000, 2001 and 2002, respectively.


                                     - 38 -
<PAGE>

     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, the 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,  2002,  except for the Senior  Subordinated
     Notes,  for  which  the  Company  estimates  the  fair  market  value to be
     approximately $99.0 million at September 30, 2002.

     The Company has approximately $25.0 million of variable rate debt protected
     under an interest rate collar  arrangement  through September 30, 2003. The
     floor is set at 2% and the cap at 6.25%.  The fair  value of the  collar at
     September  30, 2002 was $0.1  million.  The Company has not elected to take
     hedge  accounting  treatment  for the interest rate collar as defined under
     SFAS No. 133 and, as a result, any fair value adjustment is charge directly
     to other  income/(expense).  Approximately $0.1 million was expensed during
     the fiscal year ended September 30, 2002.

     The Company also uses off-balance  sheet financial  instruments in the form
     of forward foreign currency  contracts.  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 the Company 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 with Accounting Principals Board ("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 $16.8  million,  $17.1 million and $17.2 million in
     fiscal 2000, 2001 and 2002, respectively. The Company recovers a portion of
     its  shipping  and  handling  costs from its  customers  and  records  this
     recovery in net sales.

     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


                                     - 39 -
<PAGE>

     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.  There
     were no forward foreign currency  contracts or interest rate derivatives at
     September  30,  2002 as  defined  under  SFAS No.  133.  For the year ended
     September  30, 2002 the Company  reclassified  into  earnings a net loss of
     $0.6  million  resulting  from the  exercise  of forward  foreign  currency
     contracts.  All forward  foreign  currency  contracts were determined to be
     highly effective whereby no ineffectiveness was recorded in earnings.

     The Company has approximately $25.0 million of variable rate debt protected
     under an interest rate collar  arrangement  through September 30, 2003. The
     floor is set at 2% and the cap at 6.25%.  The fair  value of the  collar at
     September  30, 2002 was $0.1  million.  The Company has not elected to take
     hedge  accounting  treatment  for the interest rate collar as defined under
     SFAS No. 133 and, as a result, any fair value adjustment is charge directly
     to other  income/(expense).  Approximately $0.1 million was expensed during
     the fiscal year ended September 30, 2002.

     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  $0.4 million
     for the year ended September 30, 2002.

     New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 142, "Goodwill and Other Intangibles".  SFAS No. 142 requires that upon
     adoption,  amortization of goodwill of approximately  $3.2 million annually
     will cease and  instead,  the carrying  value of goodwill be evaluated  for
     impairment on at least 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 evaluating
     the impact of the adopting  this  standard and has not yet  determined  the
     effect of adoption on its financial position or 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  accounting  standards
     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 required to adopt the provisions of this statement
     in October  2002.  The Company does not expect the adoption of SFAS No. 143
     to  have a  material  effect  on  its  financial  position  or  results  of
     operations.

     In August 2001, the FASB issued Statement of Financial Accounting Standards
     ("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  superceded  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 does not
     expect  the  adoption  of SFAS No.  144 to have a  material  effect  on its
     financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections".  This  statement  rescinds SFAS No. 4,  "Reporting  Gains and
     Losses from  Extinguishment  of Debt",  and an amendment of that Statement,
     SFAS  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
     Requirements".  This Statement also rescinds SFAS No. 44,  "Accounting  for
     Intangible  Assets of Motor  Carriers".  This Statement amends SFAS No. 13,


                                     - 40 -
<PAGE>

     "Accounting for Leases", to eliminate an inconsistency between the required
     accounting for sale-leaseback  transactions and the required accounting for
     certain lease  modifications that have economic effects that are similar to
     sale-leaseback  transactions.  This  Statement  also amends other  existing
     authoritative pronouncements to make various technical corrections, clarify
     meanings or describe  their  applicability  under changed  conditions.  The
     provisions of this  statement  related to the rescission of SFAS No. 4 will
     be applied in fiscal years  beginning after May 15, 2002. The Company is in
     the process of  evaluating  the impact of this  statement on its  financial
     statements  and  has not yet  determined  the  effect  of  adoption  on its
     financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
     with Exit or  Disposal  Activities".  This  statement  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit of  disposal
     activities and nullifies EITF No. 94-3, "Liability  Recognition for Certain
     Employee   Termination  Benefits  and  Other  Costs  to  Exit  an  Activity
     (Including  Certain Costs Incurred in a  Restructuring).  This statement is
     effective for exit or disposal activities that are initiated after December
     31, 2002,  with early  adoption  encouraged.  The Company is evaluating the
     impact of the adoption of these  standards and has not yet  determined  the
     effect of adoption on its financial position or results of operations.

3.   Inventories

     Inventories  consisted  of  the  following  at  September  30  (dollars  in
     thousands):
<TABLE>
                                                   2001                2002
                                        ---------------   -----------------
      <S>                              <C>                <C>
      Raw materials                    $          7,259   $           7,514
      Work in process                             8,364              10,196
      Finished goods                             13,941              15,451
                                       ----------------   -----------------
                                       $         29,564   $          33,161
                                       ================   =================
</TABLE>

4.   Property, Plant and Equipment

     Property,  plant and  equipment  consisted of the following at September 30
     (dollars in thousands):
<TABLE>
                                                   2001                2002
                                      -----------------  ------------------
     <S>                               <C>               <C>
     Land                              $          2,540  $            2,589
     Building and improvements                   19,650              20,774
     Machinery and equipment                     49,912              59,687
     Furniture and fixtures                      19,715              23,486
     Construction in progress                     7,015               4,670
                                       ----------------  ------------------
                                                 98,832             111,206
     Less - accumulated depreciation             51,829              63,110
                                       ----------------  ------------------
                                       $         47,003  $           48,096
                                       ================  ==================
</TABLE>

5.   Intangible Assets

     Intangible  assets  consisted of the  following at September 30 (dollars in
     thousands):
<TABLE>
                                                   2001                2002
                                      -----------------  ------------------
     <S>                              <C>                <C>
     Goodwill                         $          80,395  $           93,804
     Trademarks and trade names                  74,122              74,122
     Patents                                      1,638               1,916
     Non-compete agreement                          585                 701
     Other                                          215                 215
                                      -----------------  ------------------
                                      $         156,955  $          170,758
     Less - accumulated amortization             38,755              48,779
                                      -----------------  ------------------
                                      $         118,200  $          121,979
                                      -----------------  ------------------
</TABLE>


                                     - 41 -
<PAGE>

6.   Accounts Payable and Accrued Liabilities

     Accounts  payable and accrued  liabilities  consisted  of the  following at
     September 30 (dollars in thousands):
<TABLE>
                                                             2001         2002
                                                      -----------  -----------

    <S>                                               <C>          <C>
     Accounts payable - trade                         $    14,614  $    17,137
     Accrued liabilities --
          Employee compensation and benefits (Note 9)       8,743        9,189
          Restructuring reserve                             6,343        3,829
          Other                                             5,112        6,255
                                                      -----------  -----------
                                                      $    34,812  $    36,410
                                                      ===========  ===========
</TABLE>

7.   Debt

     The long-term  debt  consisted of the following at September 30 (dollars in
     thousands):
<TABLE>
                                                             2001         2002
                                                     ------------  -----------
     <S>                                             <C>           <C>
     Term loans, due 2002                            $      8,131  $        --
     Term loans, due 2003                                  12,196       12,529
     Term loans, due 2004                                  16,262       16,706
     Term loans, due 2005                                  63,047       64,641
     Senior subordinated notes, due 2005, 12.5%           100,000       98,000
     Mortgage note, due 1998 - 2006, 10.1%                  2,236        2,165
     Other                                                    357        1,521
                                                     ------------   ----------
                                                          202,229      195,562
     Less--Current portion of long-term debt                8,393       12,847
                                                    -------------   ----------
          Total                                     $     193,836   $  182,715
                                                    =============   ==========
</TABLE>

     Senior Bank Facilities

     The Company's debt structure  includes up to an aggregate of $135.0 million
     under a credit agreement with various banks comprised of (i) a secured term
     loan  facility  consisting of loans  providing for up to $100.0  million of
     term loans  (collectively  the Term Loans) with a portion of the Term Loans
     denominated in foreign currencies, (ii) a secured revolving credit facility
     (Revolving Credit Facility)  providing for up to $30.0 million of revolving
     loans for general corporate  purposes,  and (iii) a U.K. overdraft facility
     of up to an equivalent of $5.0 million in Great Britain  Pounds for working
     capital  requirements as needed  (collectively the Senior Bank Facilities).
     The  amount  outstanding  on the Term  Loans at  September  30,  2002,  was
     approximately   $93.9  million.  No  amounts  were  outstanding  under  the
     Revolving  Credit Facility or the U.K.  overdraft  facility.  The Revolving
     Credit  Facility  provides  for the  issuance  of  letters  of credit in an
     aggregate  face  amount of up to $10.0  million.  The 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 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 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.


                                     - 42 -
<PAGE>

     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 Term Loans and the revolving loans.

     Under the terms of the Senior Bank  Facilities,  the 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 the Company. The Senior Bank Facilities restrict, among other
     things,  the  incurrence  of additional  indebtedness,  creation of certain
     liens,  the payment of dividends on the Company's  Common  Stock,  sales of
     certain  assets and  limitations on  transactions  with  affiliates.  As of
     September 30, 2002,  Aearo Company was 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.

     During the first quarter of fiscal 2002,  the Company's  Board of Directors
     authorized  management to  repurchase,  from time to time, a portion of the
     Company's  12.5%  Senior  Subordinated  Notes  (Notes),  subject  to market
     conditions and other  factors.  No assurances can be given as to whether or
     when or at what price such repurchases will occur.  Subsequently,  pursuant
     to a first amendment to the Senior Bank Facilities,  the Company  purchased
     and retired $2.0 million of the Notes.

     Term Loans

     At September 30, 2002, the total balance  outstanding on the Term Loans was
     $93.9  million and interest  rates were 5.0% for the U.S.  Dollar Term Loan
     ($53.8 million US dollars  outstanding at September 30, 2002), 7.2% for the
     British  Pound  Term Loan  (15.8  million  British  Pounds  outstanding  at
     September  30,  2002),  6.5% for the Euro  Term  Loan  (11.5  million  Euro
     outstanding  at September  30,  2002),  and 6.2% for the Canadian Term Loan
     (6.2 million Canadian  dollars  outstanding at September 30, 2002). For the
     year ended  September 30, 2002,  the weighted  average  interest rates paid
     were 5.4%,  7.6% 6.7% and 5.9% for the U.S.  Dollar Term Loan,  the British
     Pounds  Term  Loan,  the  Euro  Term  Loan  and  the  Canadian  Term  Loan,
     respectively.

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

     Revolving Credit Facility

     At September 30, 2002, no amounts were  outstanding on the Revolving Credit
     Facility.  For the year  ended  September  30,  2002,  the  maximum  amount
     outstanding was $1.5 million,  the average was  approximately  zero and the
     weighted  average  interest  rate paid was 6.5%.  At  September  30,  2002,
     approximately  $29.0 million was available for  additional  borrowings  and
     $22.9 million to finance additional permitted acquisitions.

     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 was available for  additional  borrowings  and
     $30.0 million to finance additional permitted acquisitions.

     Senior Subordinated Notes

     In connection with the Formation  Acquisition,  Aearo Company issued $100.0
     million of Notes due 2005, which are unsecured  obligations of the 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 the Company, on or after July 15,
     2000. From and after July 15, 2000, the Notes will be subject to redemption
     at the option of the Company, in whole or in part, at various


                                     - 43 -
<PAGE>

     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, 2002, the Company was in
     compliance with the various covenants of the Notes agreement. The Notes are
     unconditionally  guaranteed on an unsecured,  senior  subordinated basis by
     Aearo Corporation.

     Maturities

     As of September 30, 2002, the scheduled  maturity of indebtedness  for each
     of the next five years and thereafter is as follows (dollars in thousands):

                     Amount
                  -----------
     2003         $    12,847
     2004              17,003
     2005             162,963
     2006               2,149
     2007                 262
     Thereafter           338
                  -----------
                  $   195,562
                  ===========

8.   Interest Expense, Net

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

                                       Years Ended September 30,
                                      2000            2001            2002
                           ---------------   -------------  --------------
     <S>                   <C>              <C>            <C>
     Expense               $        24,546    $     23,869   $      20,266
     Income                           (159)           (203)           (211)
                           ---------------   -------------  --------------
     Interest expense, net $        24,387    $     23,666   $      20,055
                           ===============   =============  ==============
</TABLE>


                                     - 44 -
<PAGE>

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 following  represents  information  summarizing  the Company's  defined
     benefit cash balance pension plan (dollars in thousands):
<TABLE>

                                                                          Years Ended September 30,
     Change in benefit obligation                                      2000                 2001                2002
                                                           ----------------     ----------------       -------------
     <S>                                                   <C>                  <C>                   <C>
      Benefit obligation at beginning of year              $          9,500      $         9,887      $       11,343
        Service cost                                                  1,299                1,336               1,286
        Interest cost                                                   668                  721                 790
        Plan amendments                                                   -                    -                  30
        Benefits paid                                                (1,299)                (993)             (1,581)
        Actuarial gain (loss)                                          (281)                 392               1,127
                                                           ----------------     ----------------      --------------
      Benefit obligation at end of year                    $          9,887     $         11,343      $       12,995
                                                           ----------------     ----------------      --------------
   Change in plan assets
      Fair value of plan assets at beginning of year       $          9,103     $         10,535      $        9,259
        Actual return of plan assets                                    960               (1,491)               (945)
        Employer contributions                                        1,771                1,208               1,223
        Benefits paid                                                (1,299)                (993)             (1,581)
                                                           ----------------     ----------------      --------------
      Fair value of plan assets at end of year             $         10,535     $          9,259      $        7,956
                                                           ----------------     ----------------      --------------
   Reconciliation of funded status
      Funded status                                        $            648     $         (2,084)     $       (5,039)
      Unrecognized prior service cost                                   103                   96                 117
      Unrecognized actuarial (gain) loss                             (3,442)                (572)              2,285
                                                           ----------------     ----------------      --------------
   Net pension liability included in accrued liabilities   $         (2,691)    $         (2,560)     $       (2,637)
                                                           ================     ================      ==============

   Amounts recognized in statement of financial position
     Prepaid benefit cost                                  $             --     $             --      $           --
     Accrued benefit liability                                       (2,691)              (2,560)             (4,860)
     Intangible asset                                                    --                   --                 116
     Accumulated other comprehensive income                              --                   --               2,107
                                                           ----------------     ----------------      --------------
   Net amount recognized                                   $         (2,691)    $         (2,560)     $       (2,637)
                                                           ----------------     ----------------      --------------

   Components of net periodic benefit cost
      Service cost                                         $          1,299     $          1,336      $        1,286
      Interest cost                                                     668                  721                 790
      Expected return on plan assets                                   (700)                (842)               (785)
      Unrecognized prior service cost                                     7                    7                   9
      Recognized actuarial gain                                        (130)                (145)                 --
                                                           ----------------     ----------------      --------------
      Net periodic benefit cost                            $          1,144     $          1,077      $        1,300
                                                           ================     ================      ==============
</TABLE>


                                     - 45 -
<PAGE>

     The weighted  average  assumptions used in determining net periodic benefit
     cost and the projected benefit obligation were as follows:
<TABLE>
                                                       Years Ended September 30,
                                                          2000    2001   2002
                                                       ------- ------- --------
     <S>                                                <C>     <C>    <C>
     Discount rate                                       7.75%   7.50%  6.75%
     Expected long-term rate of return of plan assets    8.00%   8.00%  8.50%
     Rate of compensation increase                       4.00%   4.00%  4.00%
                                                       ======= ======= ========
</TABLE>
     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.  The costs
     to the Company for the SERP Plan were  $127,000,  $148,000 and $111,000 for
     the years  ended  September  30,  2000,  2001 and 2002,  respectively.  The
     aggregate  liability for the SERP Plan was $462,000,  $524,000 and $486,000
     for the years ended September 30, 2000, 2001 and 2002, 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 60% 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  $857,000,
     $903,000  and  $866,000 for the years ended  September  30, 2000,  2001 and
     2002, 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,
     2000,  2001 and  2002,  the  Company  contributed  approximately  $198,000,
     $212,000, and $197,000, 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 annual  management fee is shared by
     Cabot and Vestar based on their  relative  equity  ownership of the Company
     and payments totaled approximately  $686,000,  $728,000 and $519,000 during
     the years ended September 30, 2000, 2001 and 2002, 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,
     2000, 2001 and 2002.

     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. Each
     such loans (i) is  secured  by Common  Stock  purchased  with the  proceeds
     thereof,  (ii) bears  interest  at an annual  rate  determined  pursuant to
     Section  7872(f)(2) of the Internal  Revenue Code,  and (iii) is subject to
     mandatory prepayment in the event the employment of the Management Investor
     terminates  or of  maturity.  The  aggregate  amount  of  these  loans  was
     approximately  $1,335,000  and  $1,363,000  at September 30, 2001 and 2002,
     respectively,  and is reflected as a reduction  of the  additional  paid-in
     capital account in the consolidated statements of stockholders' equity.


                                     - 46 -
<PAGE>

11.  Income Taxes

     Income (loss) before  provision for income taxes was as follows (dollars in
     thousands):
<TABLE>

                                                                    Years Ended September 30,
                                                             2000                2001              2002
                                              -------------------   -----------------    --------------
     <S>                                      <C>                   <C>                  <C>
     Domestic                                 $             6,157   $         (10,865)   $        4,762
     Foreign                                                6,467               7,113             6,342
                                              -------------------   -----------------    --------------
     Total                                    $            12,624   $          (3,752)   $       11,104
                                              ===================   =================    ==============
</TABLE>

     A summary of provision  (benefit) for income taxes was as follows  (dollars
     in thousands):
<TABLE>

                                                                    Years Ended September 30,
                                                             2000                2001              2002
                                              -------------------    ----------------   ---------------
     <S>                                      <C>                    <C>                <C>
     U.S. Federal and State:
     Current                                  $               163    $         (3,525)  $           125
     Deferred                                               1,940                   -               203
                                              -------------------    ----------------   ---------------
                                              $             2,103    $         (3,525)  $           328
                                              ===================    ================   ===============
    Foreign:
    Current                                                 1,581               1,957             1,226
    Deferred                                                 (108)               (304)              231
                                              -------------------    ----------------   ---------------
                                                            1,473               1,653             1,457
                                              -------------------    ----------------   ---------------
    Total                                     $             3,576    $         (1,872)  $         1,785
                                              ===================    ================   ===============
</TABLE>

    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):
<TABLE>

                                                                    Years Ended September 30,
                                                             2000            2001                  2002
                                              -------------------    -----------------  ---------------
    <S>                                       <C>                    <C>                <C>
    Computed tax expense (benefit) at the     $             4,293    $         (1,277)   $        3,740
        expected statutory rate
    State taxes, net of federal effect                         37                 (51)               82
    Foreign income taxed at different rates                  (192)             (1,172)             (166)
    Foreign dividends                                           -                   -               324
    Non-deductible goodwill amortization                      320                 308               309
    Non-deductible expenses                                   200                 267                99
    Increase (decrease) in valuation
         allowance                                           (493)                110            (2,302)
    Other, net                                               (589)                (57)             (301)
                                              -------------------    ----------------   ---------------
    Provision (benefit) for income taxes      $             3,576    $         (1,872)  $         1,785
                                              ===================    ================   ===============
</TABLE>

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

                                                                                 As of September 30,
                                                                                 2001              2002
      Deferred tax assets                                            ----------------  ----------------
     <S>                                                             <C>               <C>
     Pension and other benefits                                      $          2,086  $          1,862
     Property, plant and equipment                                             (3,441)           (3,158)
     Intangible assets                                                          1,716               459
     Restructuring charges                                                      2,079             1,349
     Inventory                                                                  1,202             1,147
     Net operating loss carryforwards - Foreign                                 2,538                --
     Net operating loss carryforwards -                                        10,474            11,298
          Domestic
     Accrued expenses and other                                                 1,233               345
                                                                     ----------------  ----------------
     Subtotal                                                                  17,887            13,302
     Valuation allowances                                                     (18,270)          (14,102)
                                                                     ================  ================
     Total deferred tax liability                                    $           (383)  $          (800)
                                                                     ================  ================
</TABLE>


                                     - 47 -
<PAGE>

     The  valuation  allowance  at  September  30, 2001 and 2002  relates to the
     uncertainty   of  realizing   the  tax  benefits  of  reversing   temporary
     differences  and net  operating  loss  carryforwards.  The gross  amount of
     domestic  net  operating  loss  carryforwards,  before the tax  effect,  is
     approximately  $30.8  million as of September  30, 2002.  The net operating
     loss carryforwards  expire at various periods ranging from 2010 to 2021. Of
     the valuation  allowance  recorded as of September 30, 2002,  approximately
     $6.7 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, 2002,  Cabot owns 41.7% of common stock (42,500 shares)
     and 50% of redeemable preferred stock (22,500 shares), Vestar owns 41.7% 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 16.6% of common stock (16,912.5 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  ($45.0
     million)  plus a  redemption  payment  based on the  dividend  rate.  As of
     September 30, 2002, the redemption  value of the preferred  stock is $109.5
     million.

     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. To date,  Aearo  Corporation has not paid dividends on
     either common or 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 were
     reserved  for  issuance.  During  the year ended  September  30,  2002,  an
     additional  1,800 shares were 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,  2002,  a  total  of  15,920  options  were
     outstanding  under the  Executive  Plan and 1997 Option Plan and a total of
     880 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


                                     - 48 -
<PAGE>

     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 income  (loss)  would  have been  reduced by $0.1
     million  and $0.2  million in the year ended  September  30, 2001 and 2002,
     respectively.

     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:
<TABLE>

                                                    2000       2001        2002
                                              ----------  ---------   ---------
    <S>                                       <C>         <C>          <C>
     Risk-free interest rate                       6.01%      5.22%       4.52%
     Expected life of options granted           10 years   10 years    10 years
     Expected volatility of underlying stock          0%         0%          0%
     Dividend yield                                   0%         0%          0%
</TABLE>

     Stock Option Activity

     Stock option data for the  Executive  Plan and the 1997 Option Plan for the
     years ended September 30, 2000, 2001 and 2002 were as follows:
<TABLE>

                                              Number      Weighted Average
                                            of Shares      Exercise Price
                                          ------------    -----------------
      <S>                                        <C>      <C>
      Outstanding, October 1, 1999               7,729    $             600
      Granted                                      750                  600
      Granted                                    1,466                  800
      Forfeited                                    (62)                 600

      Outstanding, September 30, 2000            9,883    $             630
      Granted                                    2,500                  800
      Forfeited                                   (218)                 600
      Forfeited                                    (94)                 800

      Outstanding, September 30, 2001           12,071    $             664
      Granted                                    4,274                  600
      Granted                                       31                  800
      Forfeited                                   (456)                 600
                                        --------------    -----------------
      Outstanding, September 30, 2002           15,920    $             649
                                        ==============    =================
</TABLE>

     The following table sets forth information regarding options outstanding at
     September 30, 2002:
<TABLE>

                                                                                                            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>                      <C>
        12,017        $       600.00                 -           $       600.00           6.74 years               N/A
         3,903        $       800.00                 -           $       800.00           7.78 years               N/A
</TABLE>



                                     - 49 -
<PAGE>

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  $6.4  million,  $7.5  million and $7.9 million for the years ended
     September 30, 2000,  2001 and 2002,  respectively.  Future  minimum  rental
     commitments under noncancelable  leases in effect at September 30, 2002 are
     as follows (dollars in thousands):

     2003            $        4,386
     2004                     3,845
     2005                     2,399
     2006                     3,050
     2007                       824
     Thereafter               1,341
                     --------------
     Total           $       15,845
                     ==============

     Contingencies

     Various  lawsuits  and claims  arise  against the  Company in the  ordinary
     course of its  business.  Most of these  lawsuits  and claims are  products
     liability  matters  that  arise  out  of  the  use of  safety  eyewear  and
     respiratory  product lines  manufactured by the Company as well as products
     purchased for resale. In addition,  the Company may be contingently  liable
     with  respect  to  numerous  lawsuits  involving  respirators  sold  by its
     predecessors,  American Optical Corporation and Cabot Corporation,  arising
     out of agreements  entered into when the  AOSafety(R)  Division was sold by
     American Optical  Corporation to Cabot in April 1990 and when later sold by
     Cabot to the Company in 1995. These lawsuits  typically involve  plaintiffs
     alleging  that they  suffer from  asbestosis  or  silicosis,  and that such
     condition  results in part from respirators that 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, Cabot, American Optical Corporation
     and a prior owner of American Optical  Corporation.  Liability is allocated
     among the  parties  based on the  number of years  each  Company  owned the
     AOSafety  Division  and the alleged  years of  exposure  of the  individual
     plaintiff.  The  Company's  share of the  contingent  liability  is further
     limited by an agreement  entered into between the Company and Cabot on July
     11, 1995, as amended in 2002. This agreement  provides that, so long as the
     Company  pays to  Cabot  an  annual  fee of  $400,000,  Cabot  will  retain
     responsibility  and  liability  for,  and  indemnify  the Company  against,
     asbestos and  silica-related  legal claims asserted after July 11, 1995 and
     alleged  to have  arisen  out of the use of  respirators  while  exposed to
     asbestos  or silica  prior to January 1, 1997.  To date,  the  Company  has
     elected to pay the annual fee. The Company could  potentially be liable for
     these exposures if the Company elects to discontinue its  participation  in
     this arrangement,  or if Cabot is no longer able to meet its obligations in
     these matters.  With these  arrangements in place,  however,  the Company's
     potential liability is limited to exposures alleged to have arisen from the
     use of respirators  while exposed to asbestos or silica on or after January
     1, 1997. The Company also may be responsible for certain claims relating to
     acquired companies other than the AOSafety(R) Division that are not covered
     by, and are unrelated to, the agreement with Cabot.

     At  September   30,  2002,   the  Company  has  recorded   liabilities   of
     approximately $4.8 million,  which represents  reasonable  estimates of its
     probable  liabilities,  for product  liabilities  substantially  related to
     asbestos  and  silica-related  claims  as  determined  by  the  Company  in
     consultation with an independent  consultant.  This reserve is re-evaluated
     periodically and additional  charges or credits to operations may result as
     additional  information  becomes  available.  Consistent  with the  current
     environment  being  experienced  by  companies  involved  in  asbestos  and
     silica-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 and  silica-related  litigation  could increase the
     Company's  cost  over  time.  In  light of these  and  other  uncertainties
     inherent in making long-term  projections,  the Company has determined that
     the five-year period through fiscal 2007 is the most reasonable time period
     for projecting asbestos and silica-related


                                     - 50 -
<PAGE>

     claims  and  defense  costs.  It is  possible  that the  Company  may incur
     liabilities in an amount in excess of amounts currently reserved.  However,
     taking into account currently available information, historical experience,
     and the Cabot agreement,  but recognizing the inherent uncertainties in the
     projection  of any future  events,  it is  management's  opinion that these
     suits or claims  should not result in final  judgments  or  settlements  in
     excess of the  Company's  reserve  that,  in the  aggregate,  would  have a
     material effect on the Company's financial condition,  liquidity or results
     of operations.

14.  Acquisitions

     On December 14, 2001,  the Company  acquired  Iron Age Vision from Iron Age
     Corporation of Pittsburgh, Pennsylvania. The acquisition has been accounted
     for as a  purchase  transaction  in  accordance  with  SFAS No.  141,  and,
     accordingly,   the  consolidated   financial  statements  for  the  periods
     subsequent  to December  14, 2001  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 December
     14, 2001. The purchase price of $0.9 million was,  inclusive of acquisition
     fees and costs to restructure operations, allocated based on the fair value
     of assets  acquired,  which  consisted  primarily of receivables  and fixed
     assets.  The excess of purchase  price over the fair market value of assets
     acquired of $0.5 million was allocated to goodwill.

     On January 21, 2002, the Company acquired the industrial safety business of
     Montreal,  Canada based Leader  Industries,  Inc. The  acquisition has been
     accounted for as a purchase  transaction  in accordance  with SFAS No. 141,
     and,  accordingly,  the consolidated  financial  statements for the periods
     subsequent  to January  21,  2002  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 January 21,
     2002. The purchase  price of $5.1 million , inclusive of  acquisition  fees
     and costs to restructure operations,  was allocated based on the fair value
     of assets acquired,  which consisted  primarily of inventory,  receivables,
     fixed assets and accrued liabilities. The excess of purchase price over the
     fair market  value of assets  acquired of $2.2  million  was  allocated  to
     goodwill.

     On  May 7,  2002,  the  Company  acquired  Chesapeake  Optical  Company  of
     Baltimore,  Maryland.  The acquisition has been accounted for as a purchase
     transaction  in  accordance  with  SFAS  No.  141,  and,  accordingly,  the
     consolidated financial statements for the periods subsequent to May 7, 2002
     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 May 7, 2002. The purchase price of $3.6
     million, inclusive of acquisition fees and costs to restructure operations,
     was allocated based on the fair value of assets  acquired,  which consisted
     primarily of inventory,  receivables, fixed assets and accrued liabilities.
     The excess of purchase price over the fair market value of assets  acquired
     of $2.9 million was allocated to goodwill.

     These operations have been included in consolidated  results from the dates
     of acquisition.  Had the acquisitions been consolidated at the beginning of
     the year prior to the acquisitions, they would not have materially affected
     results.

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.


                                     - 51 -
<PAGE>

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

                                                                    2000            2001             2002
                                                              -----------     -----------      -----------
     <S>                                                      <C>             <C>              <C>
     Safety Products                                          $   219,710     $   206,311      $   208,538
     Safety Prescription Eyewear                                   39,913          39,076           40,834
     Specialty Composites                                          45,852          38,475           37,495
                                                              -----------     -----------      -----------
     Total                                                    $   305,475     $   283,862      $   286,867
                                                              ===========     ===========      ===========
</TABLE>

     EBITDA by business  segment and  reconciliation  to income before provision
     for (benefit from) income taxes (dollars in thousands):
<TABLE>

                                                                     2000            2001            2002
                                                              -----------     -----------      ----------
     <S>                                                      <C>             <C>              <C>
     Safety Products                                          $    48,775     $    39,844      $   42,326
     Safety Prescription Eyewear                                    4,008           2,237           1,621
     Specialty Composites                                           3,531           1,409           3,433
     Reconciling items                                             (1,696)          4,562           1,120
                                                              -----------     -----------      ----------
          Total EBITDA                                        $    54,618     $    48,052      $   48,500
                                                              ===========     ===========      ==========

     Depreciation                                                  10,056          10,123          10,958
     Amortization of intangibles                                    6,859           6,530           6,293
     Non-operating costs (income)                                     692              44             690
     Unusual charges                                                               11,441            (600)
     Interest, net                                                 24,387          23,666          20,055
                                                             ------------     -----------     -----------
          Income before provision for/(benefit from)
          income taxes                                        $    12,624     $    (3,752)    $    11,104
                                                             ============     ===========     ===========
</TABLE>


     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 $3.5 million and $3.9 million for the years ended
     September 30, 2001 and 2002, 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):
<TABLE>

                                          2000            2001             2002
                                   -----------     -----------      -----------
     <S>                           <C>             <C>              <C>
     Safety Products               $     7,384     $     7,966      $     8,657
     Safety Prescription Eyewear           765             378              717
     Specialty Composites                1,907           1,779            1,584
                                   -----------     -----------      -----------
     Total                         $    10,056     $    10,123      $    10,958
                                   ===========     ===========      ===========
</TABLE>



                                     - 52 -
<PAGE>


     Identifiable assets by business segment (dollars in thousands):
<TABLE>

                                         2000             2001             2002
                                   ----------      -----------       ----------
     <S>                            <C>             <C>              <C>
     Safety Products               $  217,072      $   201,183      $   216,262
     Safety Prescription Eyewear       13,986           15,095           14,695
     Specialty Composites              23,730           18,918           18,891
     Reconciling items                 12,078           26,106           20,321
                                   ----------      -----------      -----------
     Total                         $  266,866      $   261,302      $   270,169
                                   ==========      ===========      ===========
</TABLE>

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

     Capital expenditures by business segment (dollars in thousands):
<TABLE>

                                         2000             2001             2002
                                   ----------      -----------      -----------
     <S>                           <C>             <C>              <C>
     Safety Products               $    7,628      $     5,788      $     7,921
     Safety Prescription Eyewear           37              425              499
     Specialty Composites               1,347            1,075              791
     Reconciling items                    540              511              442
                                   ----------      -----------      -----------
     Total                         $    9,552      $     7,799      $     9,653
                                   ==========      ===========      ===========
</TABLE>

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

     Net sales by principal geographic areas (dollars in thousands):
<TABLE>

                                         2000            2001              2002
                                  -----------     -----------       -----------
     <S>                           <C>             <C>               <C>
     United States of America     $   194,452     $   179,398       $   175,358
     Canada                            22,103          20,370            20,997
     United Kingdom                    16,635          13,501            13,115
     Germany                           11,449          11,447            10,984
     Sweden                            12,405          10,981            10,710
     France                             7,568           6,975            10,097
     Italy                              5,387           5,156             4,933
     All others                        35,476          36,034            40,673
                                  -----------     -----------      ------------
     Total                        $   305,475     $   283,862      $    286,867
                                  ===========     ===========      ============
</TABLE>

     The  sales  as shown  above  represent  the  value  of  shipments  into the
     customer's  country of residence.  For the years ended  September 30, 2000,
     2001 and 2002, no single customer accounted for more than 10% of sales.

     Net  identifiable   assets  by  principal   geographic  areas  (dollars  in
     thousands):
<TABLE>

                                         2000            2001              2002
                                  -----------     -----------      ------------
     <S>                          <C>             <C>              <C>
     United States of America     $   176,822     $   173,076      $    173,068
     Canada                             9,333           9,584            10,252
     United Kingdom                    17,708          19,304            18,426
     Germany                            1,451           2,138               144
     Sweden                            60,834          56,673            61,860
     All others                           718             527             6,419
                                  -----------     -----------      ------------
Total                             $   266,866     $   261,302      $    270,169
                                  ===========     ===========      ============
</TABLE>


                                     - 53 -
<PAGE>

16.  Quarterly Financial Data (Unaudited)

     The following table contains selected  unaudited  quarterly  financial data
     for fiscal years 2001 and 2002.
<TABLE>

                                                                QUARTERLY FINANCIAL DATA
                                                        (In Thousands, Except Per Share Amounts)
                                    --------------------------------------------------------------------------------
                                                 Fiscal Year                              Fiscal Year
                                                     2001                                     2002
                                    --------------------------------------- ----------------------------------------
                                     First     Second     Third    Fourth      First     Second    Third     Fourth
                                    -------  ---------  --------  --------   ---------  -------- ---------   -------
    <S>                             <C>      <C>        <C>      <C>        <C>        <C>       <C>       <C>
    Net Sales                       $68,365  $  74,039   $72,138  $ 69,320    $ 61,644   $70,683   $76,435   $78,105
    Cost of Sales                    37,553     39,116    39,007    39,537      32,928    37,360    40,024    40,085
                                    -------  ---------   -------  --------   ---------  --------  --------   -------

      Gross Profit                   30,812     34,923    33,131    29,783      28,716    33,323    36,411    38,020
    Unusual Charge                        -          -         -     9,077           -         -         -      (100)

    Income (Loss) before provision
    for (benefit from) income taxes  (2,320)     3,619     5,466   (10,517)       (188)    2,580     3,132     5,580

      Net Income (Loss)              (2,387)     3,035     5,012    (7,540)       (711)    2,017     2,282     5,731
</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  included  cash  charges  totaling  $2.3 million
     consisting  of $1.8 million for  severance  and related  costs to cover the
     reduction  of 5% of the  Company's  work force and $0.5  million  for other
     costs associated with this plan. The  restructuring  also included non-cash
     charges totaling $9.1 million consisting of $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.

     During 2002, the Company  reversed $0.6 million of reserves  related to the
     September 30, 2001  restructuring  provision.  The adjustment  represents a
     change  in  estimate  of the  plan for the  disposal  of  certain  items of
     inventory  and the closure of its  Ettlingen,  Germany  plant.  The portion
     related to inventory of $0.5 million was classified as reduction in cost of
     sales with the remaining $0.1 million classified as operating expenses.

     The following table displays the activity and balances of the restructuring
     reserve  account  as of and for the  year  ended  September  30,  2002  (in
     thousands):
<TABLE>

                              September 30,                             September 30,
                                 2001          Charges    Adjustments        2002
                             -------------   -----------  -----------   ------------
<S>                          <C>             <C>          <C>           <C>
 Employee termination costs  $       1,849   $    (1,119) $        --   $        730
 Lease agreements                    3,249          (897)                      2,352
 Loss on disposal of assets            800                       (100)           700
 Other                                 445          (398)                         47
                             -------------   -----------  -----------   ------------
 Total                       $       6,343   $    (2,414) $      (100)  $      3,829
                             -------------   -----------  -----------   ------------
</TABLE>



                                     - 54 -
<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 Anderson and the appointment of Deloitte and Touche
     as its independent accountants.


                                     - 55 -
<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, 2002.
<TABLE>

Name                                Age  Position
----------------------------------- ---- -----------------------------------------------------------------------
<S>                                <C>   <C>
Michael A. McLain (1)               52   Chief  Executive  Officer,  President,  and  Chairman  of the Board of
                                         Directors

Jeffrey S. Kulka                    45   Vice President and Chief Financial Officer, Treasurer and Secretary

James H. Bernhardt                  58   Vice President and Chief Marketing Officer

James H. Floyd                      47   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                     60   Vice President and Senior Vice President Specialty Composites

D. Garrad (Gary) Warren, III        50   Senior Vice President, North American Industrial Safety Sales and
                                         Managing Director - Europe

James M. Phillips                   50   Vice President, Human Resources

Rahul Kapur                         51   Vice President, Corporate Development and Business Director, SRx

Norman W. Alpert (1,2)              43   Director

Daniel S. O'Connell                 47   Director

Arthur J. Nagle                     66   Director

Bryan P. Marsal (2)                 51   Director

William E. Kassling (2)             57   Director

William J. Brady (1,2)              41   Director

John D. Curtin, Jr.                 68   Director

John A. Shaw                        54   Director
</TABLE>

1.   Member of Compensation Committee

2.   Member of Audit Committee


                                     - 56 -
<PAGE>

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,  Vice President,  Human  Resources  joined the Company in May
1998.  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
Aearo Corporation,  MCG Capital Corporation,  Cluett American Group,  Siegelgale
Holdings,  Inc. and Remington  Products  Company,  L.L.C. 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., Agrilink Foods,
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.

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,  is  co-founder  of Alvarez & Marsal,  Inc.  ("A&M"),  a global
professional  services firm  specializing  in providing  corporate  advisory and
management services to distressed and underperforming companies.  Previously, he
has served as Chairman and CEO of Cluett American  Corporation,  Republic Health
Corporation, Anthony


                                     - 57 -
<PAGE>

Manufacturing,  and Gitano.  He was also Chief Operating  Officer of Alexander's
Department  Stores.  Mr.  Marsal  holds  both a  B.B.A.  and a  M.B.A  from  the
University of Michigan.  He also serves on the boards of Timex Corporation,  and
Cluett  American  Corporation  (Gold Toe  Socks).  He became a  director  of the
Company in October 1998.

William E.  Kassling was named  Chairman of the Board of Wabtec  Corporation  in
February 2001, after having served as Chairman and Chief Executive Officer 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 the Pittsburgh  Penguins and Scientific  Atlanta. He became a director
of the Company in July 1998.

William J. Brady is 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.

John D.  Curtin,  Jr.  retired as Chairman  and Chief  Executive  Officer of the
Company in February  1998. Mr. Curtin was named Chief  Executive  Officer of the
Company in April 1994 and became a  director  of the  Company in July 1995.  Mr.
Curtin  joined  Cabot in 1989 as Chief  Financial  Officer  and  Executive  Vice
President.  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 director of Harbor Global  Company,  LTD,  Hamilton  Thorne  Biosciences,
Inc., and Nano-C, LLC.

John A. Shaw is Executive  Vice President and Chief  Financial  Officer of Cabot
Corporation in Boston, Massachusetts. Previously, he was with Dominion Resources
in Richmond,  Virginia in charge of finance for their energy  company.  Prior to
that he spent 20 years with Atlantic Richfield. Mr. Shaw has a B.Sc. with honors
in Mechanical  Engineering from Bristol  University in the UK and is a Chartered
Accountant.

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
Mr. Shaw 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 Norman
W. Alpert, William E. Kassling and Bryan P. Marsal (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.

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").


                                     - 58 -
<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  2002 (the  "Named  Executive  Officers")  for  services  rendered to the
Company in all  capacities  (including  service as an  officer or  director)  in
fiscal 2002.

                           Summary Compensation Table
                               Annual Compensation
<TABLE>

                                                                 Fiscal                                   All Other Annual
                                                                 Year          Salary         Bonus         Compensation
<S>                                                              <C>        <C>           <C>             <C>


Michael A. McLain                                               2002       $  500,004    $  225,069      $   86,797(1)
Chief Executive Officer, President, and Chairman of the Board   2001       $  496,667    $   56,250      $   84,977
of Directors                                                    2000       $  473,784    $  286,738      $   64,989


D. Garrad Warren, III                                           2002       $  243,000    $   87,507      $   64,250(2)
Senior Vice President, North American Industrial Safety Sales   2001       $  240,833    $   21,870      $   43,316
and Managing Director, Europe                                   2000       $  192,500    $  106,764      $  195,386


James H. Floyd                                                  2002       $  207,934    $   75,623      $   52,721(3)
Senior Vice President, Logistics and Information Technology,    2001       $  195,066    $   17,784      $   42,122
Managing Director, International and Business Director,         2000       $  187,624    $   77,976      $   26,791
Consumer


M. Rand Mallitz                                                 2002       $  206,604    $   74,399      $   22,907(4)
Vice President and Senior Vice President, Specialty Composites  2001       $  205,267    $   18,594      $   25,180
                                                                2000       $  197,000    $   99,975      $   24,906

Rahul Kapur                                                     2002       $  192,108    $   69,177      $   40,495(5)
Vice President, Corporate Development and Business Director,    2001       $  190,873    $   17,289      $   34,336
SRx                                                             2000       $  183,204    $   92,978      $   25,215


</TABLE>

1.   Includes contributions made on behalf of Mr. McLain to the Company's 401(k)
     Savings Plan  ($5,250) and to the  Company's  Cash Balance Plan  ($12,049).
     Also includes expenses recognized by the Company for unfunded accruals made
     on Mr. McLain's behalf to the Company's  Supplemental  Executive Retirement
     Plan  ($32,168)  as well as  Company  match  and  interest  credits  to the
     Company's Deferred Compensation Plan ($37,330).

2.   Includes contributions made on behalf of Mr. Warren to the Company's 401(k)
     Savings Plan  ($5,250) and to the  Company's  Cash Balance Plan  ($12,049).
     Also includes expenses recognized by the Company for unfunded accruals made
     on Mr. Warren's behalf to the Company's  Supplemental  Executive Retirement
     Plan  ($7,280)  as  well as  Company  match  and  interest  credits  to the
     Company's Deferred Compensation Plan ($39,671).

3.   Includes  contributions made on behalf of Mr. Floyd to the Company's 401(k)
     Savings Plan ($5,200);  to the Company's Cash Balance Plan ($12,049).  Also
     includes  expenses  recognized by the Company for unfunded accruals made on
     Mr. Floyd's behalf to the Company's  Supplemental Executive Retirement Plan
     ($3,418) as well as Company  match and  interest  credits to the  Company's
     Deferred Compensation Plan ($32,054).

4.   Includes  contributions  made on behalf  of Mr.  Mallitz  to the  Company's
     401(k)  Savings  Plan  ($5,767)  and to the  Company's  Cash  Balance  Plan
     ($12,049).  Also includes  expenses  recognized by the Company for unfunded
     accruals  made  on  Mr.  Mallitz's  behalf  to the  Company's  Supplemental
     Executive  Retirement  Plan  ($3,883) as well as Company match and interest
     credits to the Company's Deferred Compensation Plan ($1,208).

5.   Includes  contributions made on behalf of Mr. Kapur to the Company's 401(k)
     Savings Plan  ($4,835) and to the  Company's  Cash Balance Plan  ($11,575).
     Also includes expenses recognized by the Company for unfunded


                                     - 59 -
<PAGE>

     accruals made of Mr. Kapur's behalf to the Company's Supplemental Executive
     Retirement  Plan ($3,004) as well as Company match and interest  credits to
     the Company's Deferred Compensation Plan ($21,081).

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  2002.  None  of the  Named  Executive  Officers
exercised any stock options during fiscal 2002.
<TABLE>

                                                                                      Value of Outstanding
                                                    Number of Beneficial              In-the-money Options
                             Shares               Options at Fiscal Year-end         At Fiscal Year-end (1)
                            Acquired    Value
Name                       On Exercise Realized    Exercisable    Unexercisable    Exercisable    Unexercisable
------------------------- ------------- ----------- -------------- ---------------- -------------- -----------------
<S>                           <C>        <C>            <C>              <C>        <C>            <C>
Michael A. McLain             --           --            --              1,100      $        --    $         --
D. Garrad Warren, III         --           --            --              1,750               --              --
M. Rand Mallitz               --           --            --                356               --
Rahul Kapur                   --           --            --                275               --              --
James H. Floyd                --           --            --                400               --              --
</TABLE>

1.   There was no public  market for the Aearo Common Stock as of September  30,
     2002.  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  2002.  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, 2002,  13,200 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) on  various  dates,  none
exceeding five years from the date of purchase. Each Management Investor is also
required to be a party to the  Stockholders'  Agreement.  See Item 13,  "Certain
Relationships and Related Transactions -- Stockholders' Agreement."

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


                                     - 60 -
<PAGE>

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 11,800  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, 2002, non-qualified options to acquire 12,017 shares at a price
of $600 per  share,  and 3,903  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 880 options  remain  available for  issuance..  Of  outstanding
options,  3,881.25  in the  aggregate  have  been  granted  to  Named  Executive
Officers,  including Mr. McLain (1,100 options), Mr. Warren (1,750 options), Mr.
Floyd (400 options),  Mr. Kapur (275 options) and Mr. Mallitz (356.25  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 for
Named Executive Officers pursuant to the Executive Plan and the 1997 Option Plan
during the year ended September 30, 2002.

<TABLE>

                                                                                Potential Realizable Value at
                                            % of Total                          Assumed Annual Rates of Stock
                                             Options                            Price Appreciation for Option
                              Number of     Granted in   Exercise                          Term (1)
                              Underlying   the Fiscal      Price   Expiration
   Name                        Options         Year       ($/Shr)     Date        5% ($)    10% ($)
   ----                        -------         ----       -------     ----        ------    -------
   <S>                           <C>           <C>          <C>     <C>           <C>        <C>
   D. Garrad Warren, III          500          11.6         600     05/30/12     188,668    478,123
   J. Floyd                       100           2.3         600     05/30/12      37,734     95,625
   R. Mallitz                     100           2.3         600     05/30/12      37,734     95,625
   R. Kapur                        75           1.7         600     05/30/12      28,300     71,718
</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).

Management Incentive Plan. The Company provides  performance-based  compensation
awards to executive  officers and key employees for achievement during each year
as part of a management  incentive 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 Policy.  The  Company  has adopted a severance  pay
policy providing  executive officers and key employees with salary  continuation
in the event of a termination.  Termination  resulting  from cause,  retirement,
death and disability are not eligible.  Subject to the Company's discretion, the
policy generally provides for one month's base pay for each full year of service
with a minimum  amount  payable of three month 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


                                     - 61 -
<PAGE>

bond rates and with  amounts  replicating  the  Company  match in the 401(k) for
savings from income above the qualified plan limits.

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 60.0% 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>

   Name and Principal Position                                                            Annual Benefits
                                                                                              Payable
   ----------------------------------------------------------------------------------     ---------------

   <S>                                                                                    <C>
   Michael A. McLain                                                                      $        97,558
     Chief Executive Officer, President, and Chairman of the Board of Directors

   D. Garrad Warren, III                                                                  $        40,963
     Senior Vice  President,  North  American  Industrial  Safety Sales and Managing
     Director, Europe

   M. Rand Mallitz                                                                        $        28,067
     Vice President Aearo and Senior Vice President Specialty Composites

   Rahul Kapur                                                                            $        33,785
     Senior Vice President, Corporate Development and Business Director, SRx

   James H. Floyd                                                                         $        51,658
     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, 2002, the committee  consists of Messrs.  Alpert,  McLain and Brady,
three directors of the Company. Mr. McLain is also the Chief


                                     - 62 -
<PAGE>

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.


                                     - 63 -
<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, 2002. All of the Subsidiary's  issued and outstanding  capital stock
is owned by Aearo.
<TABLE>

                                                           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)
     245 Park Avenue                                             42,500                        41.7%
     New York, New York 10167

Cabot CSC Corporation (2)                                        42,500                        41.7%
     Two Seaport Lane, Suite 1300
     Boston, Massachusetts 02210

Norman W. Alpert (3)                                             42,500                        41.7%

Daniel S. O'Connell (3)                                          42,500                        41.7%

Arthur J. Nagle (3)                                              42,500                        41.7%

William J. Brady (4)                                             42,500                        41.7%

John A. Shaw (4)                                                 42,500                        41.7%

Michael A. McLain                                                4,050                         3.97%

John D. Curtin, Jr.                                              3,713                         3.64%

Rahul Kapur                                                      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 (17 persons)(5)      98,363                        96.5%
-------------------------------------
* Less than 1%.
</TABLE>


                                     - 64 -
<PAGE>

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.

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,
     although  such  persons  believe  that  they do not  have  such  beneficial
     ownership.  Each  such  person's  business  address  is c/o  Vestar  Equity
     Partners,  L.P. at the address set forth above.

4.   Messrs.  Brady and Shaw are affiliated with Cabot,  the parent of Cabot CSC
     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 Cabot CSC 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 3,550 shares of Aearo Common
     Stock held by Management Investors who are not executive officers.



                                     - 65 -
<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. See Item 3, Legal Proceedings, for a
more detailed discussion of the respective rights and obligations of the parties
under this arrangement.

Stock Ownership and Stockholders' Agreement

As of September 30, 2002,  Cabot owns 41.7% of common stock (42,500  shares) and
50% of redeemable  preferred stock (22,500 shares),  Vestar owns 41.7% 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 16.6% of
common stock (16,912.5 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, 2002,  the  redemption  value of the
preferred stock is $109.5 million.

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  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


                                     - 66 -
<PAGE>

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 Mr.
Shaw 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 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


                                     - 67 -
<PAGE>

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.   These  payments  totaled
approximately  $686,000,  $728,000 and $519,000 during the years ended September
30, 2000,  2001 and 2002,  respectively.  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 Mr.
Shaw,  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) bear interest at an annual rate determined  pursuant to Section  7872(f)(2)
of the Internal  Revenue Code, and (iii) are subject to mandatory  prepayment in
the event the


                                     - 68 -
<PAGE>

employment  of such  Management  Investor  terminates  or event of maturity.  At
December 1, 2002, amounts outstanding in thousands of dollars were:
<TABLE>


                                         Amount Outstanding        Aggregate Amount Outstanding at
 Management Investors                     December 1, 2002               September 30, 2002           Interest Rate
------------------------------------ --------------------------- ------------------------------------ ------------------
<S>                                  <C>                         <C>                                       <C>
  Michael A. McLain                  $          647              $               644                       2.73 %
  D. Garrad (Gary) Warren, III                  240                              239                       2.73 %
  Rahul Kapur                                    70                               70                        2.73%
  Joseph C. Marlette                             70                               70                        2.73%
  James H. Floyd                                 70                               70                        2.73%
  M. Rand Mallitz                                79                               79                        2.73%

</TABLE>


                                     - 69 -
<PAGE>

Item 14. Controls and Procedures

Disclosure  controls and  procedures  are defined by the Securities and Exchange
Commission as those  controls and other  procedures  that are designed to ensure
that  information  required to be disclosed in the  Company's  filings under the
Securities Act of 1934 is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.  The Company's Chief Executive  Officer and Chief Financial  Officer have
evaluated the Company's  disclosure controls and procedures within 90 days prior
to the filing of this Annual  Report on Form  10-K405 and have  determined  that
such disclosure controls and procedures are effective.

Subsequent to the Company's  evaluation,  there were no  significant  changes in
internal  controls or other  factors that could  significantly  affect  internal
controls,   including  any   corrective   actions  with  regard  to  significant
deficiencies and material weaknesses.


                                     - 70 -
<PAGE>
                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

The following documents are filed as part of this Annual Report on Form 10-K405:

a)   1. Financial Statements:
     See Index to financial statements under Item 8 on page 29 of this report.

     2. Financial Statement Schedules:
     See Schedule II on page 72 of this report.

      3.  Exhibits:
      See Index of Exhibits on pages 76 to 80 hereof.

b)    Current Reports on Form 8-K
      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.

c)    Exhibits
      See Index of Exhibits on pages 76 to 80 hereof.

d)    Financial Statement Schedule See Schedule II on page 72 of this report.


                                     - 71 -
<PAGE>

                                   SCHEDULE II
                                AEARO CORPORATION


                        VALUATION AND QUALIFYING ACCOUNTS
                     For the years ended September 30, 2000,
                                 2001, and 2002
                             (Dollars in thousands)
<TABLE>
                                                                         Additions
                                                Balance at       Provisions       Charged to
                                               beginning of      Charged to          Other       Net Deductions     Balance at
                                                  Period         Operations        Accounts      From Allowances   end of Period
                                              --------------- ------------------ -------------- ------------------ --------------
<S>                                                 <C>                <C>                           <C>                <C>
Year ended September 30, 2000
      Bad Debt Reserve                             1,296               366              -            (308)              1,354

Year ended September 30, 2001
      Bad Debt Reserve                             1,354               450              -            (973)                831

Year ended September 30, 2002
      Bad Debt Reserve                               831               999              -            (306)              1,524

</TABLE>


                                     - 72 -
<PAGE>


                                   SIGNATURES
     Pursuant to the  requirements  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 15, 2002     By: /s/ Michael A. McLain
                                 ---------------------
                             Michael A. McLain
                             Chief Executive Officer, President, and Chairman
                             of the Board of Directors

     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: December 15, 2002      /s/ Michael A. McLain
                             ---------------------
                             Michael A. McLain
                             President, Chief Executive Officer and Chairman
                             (Principal Executive Officer)
Date: December 15, 2002      /s/ Jeffrey S. Kulka
                             --------------------
                             Jeffrey S. Kulka
                             Vice President, Chief Financial Officer, Treasurer
                             and Secretary
                             /s/ John D. Curtin, Jr.*
                             ------------------------
                             John D. Curtin, Jr., Director
                             /s/ Norman W. Alpert*
                             ---------------------
                             Norman W. Alpert, Director
                             /s/ William J. Brady*
                             ---------------------
                             William J. Brady, Director
                             /s/ John Shaw*
                             --------------
                             John Shaw, Director
                             /s/ Arthur J. Nagle*
                             --------------------
                             Arthur J. Nagle, Director
                             /s/ Daniel S. O'Connell*
                             ------------------------
                             Daniel S. O'Connell, Director
                             /s/ William Kassling*
                             ---------------------
                             William Kassling, Director
                             /s/ Bryan Marsal*
                             -----------------
                             Bryan Marsal, Director

*By Michael A. McLain, as attorney-in-fact under a Power of Attorney executed by
the  Directors  listed  above,  which  Power of Attorney is being filed with the
Securities and Exchange Commission as an exhibit hereto.


Date: December 15, 2002      /s/ Michael A. McLain
                             ---------------------------------------------------
                             Michael A. McLain
                             Attorney-In-Fact



                                     - 73 -
<PAGE>
                                  CERTIFICATION

I, Michael A. McLain, Principal Executive Officer of Aearo Corporation,  certify
that:

1.   I have reviewed this annual report on Form 10-K405 of Aearo Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and  procedures  as of a date  within 90 days prior the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors  (or person  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: December 15, 2002

                        Michael A. McLain
                        Chief Executive Officer,
                        President and Chairman of the Board
                        (Principal Executive Officer)


                                     - 74 -
<PAGE>

                                 CERTIFICATION

I, Jeffrey S. Kulka,  Principal Financial Officer of Aearo Corporation,  certify
that:

1.   I have reviewed this annual report on Form 10-K405 of Aearo Corporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and  procedures  as of a date  within 90 days prior the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors  (or person  performing  the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date:  December 15, 2002
                         Jeffrey S. Kulka
                         Vice President, Chief Financial Officer,
                         Treasurer and Secretary
                         (Principal Financial Officer)

                                     - 75 -
<PAGE>

                                INDEX OF 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.)


                                     - 76 -
<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 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.)

2.17      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.)


                                     - 77 -
<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.

3.3**     Certificate  of  Amendment  of Amended  and  Restated  Certificate  of
          Incorporation of Cabot Safety Holdings Corporation dated May 29, 1996

3.4**     Certificate of Incorporation  of Aearo  Corporation as Amended through
          May 29, 1996

3.5**     Aearo Corporation By-Laws as Amended through May 29, 1996

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.

                                     - 78 -
<PAGE>

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).)

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

10.17*    Form of Executive Security Purchase Agreement. (M)

10.18*    Aearo  Corporation  (formerly,   Cabot  Safety  Holdings  Corporation)
          Executive Stock Option Plan, adopted June 26, 1996. (M)

                                     - 79 -
<PAGE>

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.

10.25*    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.

10.27     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), adopted June 3, 1997. (M)

10.29     Credit  Agreement  dated July 11, 1995, and Amended and Restated as of
          July 13, 2001  (incorporated by reference to the same numbered exhibit
          of the  Company's  Quarterly  Report  on Form  10-Q for the  quarterly
          period ending June 30, 2001).

10.30     First  Amendment  to the Amended and Restated  Credit  Agreement as of
          July 13, 2001,  dated October 17, 2001  (incorporated  by reference to
          the same numbered  exhibit of the Company's  Quarterly  Report on Form
          10-Q for the quarterly period ending December 31, 2001).

10.31     Employment  Agreement  between  the  Company  and  Michael  A.  McLain
          (incorporated by reference to Exhibit 10.1 of the Company's  Quarterly
          Report on Form 10-Q for the  Quarterly  period ending March 31, 1998).
          (M)

10.32**   Form of Executive Security Purchase Agreement Investor Note. (M)

10.33**   Form of Pledge and Security  Agreement  related to Executive  Security
          Purchase Agreement Investor Note. (M)

10.34**   Form of  Amendment  No. 1 to  Executive  Security  Purchase  Agreement
          Investor Note, effective 2002. (M)

10.35**   Summary of Management  Incentive  Plan for  Executives  other than the
          CEO. (M)

10.36**   Summary of Management Incentive Plan for the CEO. (M)

10.37**   Nonqualified Deferred Compensation Plan, effective August 5, 1999. (M)

10.38**   Summary of Executive  Supplemental  Severance Pay Policy, as in effect
          December 1, 2002. (M)

10.39**   Supplemental Executive Retirement Plan, revised January 1, 1999. (M)

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.

(M) Identifies management contract or compensatory plan.

                                     - 80 -
<PAGE>