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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

                         COMMISSION FILE NUMBER 33-96190

                                AEARO CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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



                 DELAWARE                                 13-3840450
     (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)

    ONE WASHINGTON MALL, EIGHTH FLOOR
          BOSTON, MASSACHUSETTS                           02108-2610
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

                                 (617) 371-4200
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No
                                             ---      ---
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  X
           ---
     As of December 15, 1997, all voting stock 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 15, 1997 was 97,625.




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                                TABLE OF CONTENTS


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PART I..................................................................................................      1
     Item 1.  Business..................................................................................      1
     Item 2.  Properties................................................................................      9
     Item 3.  Legal Proceedings.........................................................................     10
     Item 4.  Submission of Matters to a Vote of Security Holders.......................................     10

PART II.................................................................................................     11
     Item 5.  Market For Registrant's Common Equity and Related Stockholder Matters.....................     11
     Item 6.  Selected Financial Data...................................................................     11
     Item 7.  Management's Discussion and Analysis of Financial Condition and
                 Results of Operations..................................................................     13
     Item 8.  Financial Statements and Supplementary Data...............................................     21
     Item 9.  Changes in and Disagreements with Accountants on Accounting and
                 Financial Disclosure...................................................................     49

PART III................................................................................................     50
     Item 10. Directors and Executive Officers..........................................................     50
     Item 11. Executive Compensation....................................................................     52
     Item 12. Security Ownership of Certain Beneficial Owners and Management............................     57
     Item 13. Certain Relationships and Related Transactions............................................     58

PART IV.................................................................................................     62
     Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................     62
     Signatures.........................................................................................     68

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                                     PART I

ITEM 1.  BUSINESS

GENERAL

Aearo Corporation (formerly Cabot Safety Holdings Corporation), a Delaware
corporation ("Aearo"), and its direct wholly-owned subsidiary, Aearo Company I,
doing business as Aearo Company (formerly Cabot Safety Corporation), 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 through its safety products operating unit ("Safety Products"),
which manufactures and sells hearing protection devices, 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, E-A-R, Eastern, Shoplyne and Peltor. PPE
encompasses all articles of equipment and clothing worn for the purpose of
protecting against bodily injury, including safety eyewear and goggles, ear
muffs and ear plugs, respirators, hard hats, gloves, safety clothing and safety
shoes. Safety Products accounted for approximately 87% of the Company's net
sales in fiscal 1997. The Company attributes its leading market positions to:

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

Through its specialty composites operating unit ("Specialty Composites"), the
Company manufactures a wide array of energy-absorbing materials which are
incorporated into other manufacturers' products to control noise, vibration and
shock. Specific product applications for such materials include noise-reducing
and vibration- dampening matting used in the lining of transportation equipment
such as heavy truck cabs, shock protection parts for electronic devices such as
computer disk drives, and durable energy-absorbent and cushioning foams used in
footwear. Specialty Composites also produces specially formulated foam used in
the manufacture of Safety Products' polyvinylchloride ("PVC") ear plugs.
Specialty Composites accounted for approximately 13% of the Company's net sales
in fiscal 1997.

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 revenue, operating profit, and identifiable assets by
geographic area and amount of export sales is presented in Note 17 of Notes to
Financial Statements of Aearo Corporation contained in Item 8 hereof.

PERSONAL PROTECTION EQUIPMENT MARKET

A 1996 industry study prepared by Frost & Sullivan estimates that the size of
the U.S. segment of the PPE market in which the Company competes (which excludes
safety clothing, gloves and shoes) was approximately $1.0 billion in 1995.
Management estimates annual sales outside the United States for the segment of
the PPE market in which the Company competes were in excess of $1.0 billion in
1995. Historically, a large number of relatively small, independent
manufacturers with limited product lines served the PPE market and the industry
remains highly fragmented.




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PRODUCT OVERVIEW

The Company operates through two separate operating units: Safety Products and
Specialty Composites.

       SAFETY PRODUCTS

Within Safety Products, the Company classifies its products in five main
categories: hearing protection; safety prescription eyewear; eye, face and head
protection; first aid kits; and respiratory protection.

HEARING PROTECTION. The Company's hearing protection products primarily consist
of disposable ear plugs, reusable ear plugs, and ear muffs. The Company has been
a leader in hearing conservation research and development since 1972, when it
first introduced the PVC disposable ear plug. Today, this product is known as
the "Classic" and its color yellow is a registered trademark of the Company in
the United States and Canada. This product is designed to be "rolled down" or
compressed before being inserted into the ear, and, as a result of its unique
time delay characteristics, the plug slowly expands (or "recovers") to fill the
ear canal and provide the desired protection. The Company's PVC ear plugs are
available corded and uncorded and in a variety of packaging options. The Company
also produces private label versions of the PVC plug for many of the
international airlines for inclusion in their amenity kits. The Company also
manufactures a full line of polyurethane ear plugs, including its E-Z-Fit and
TaperFit products. These products serve the same disposable ear plug category,
but the PVC ear plugs have historically led the market.

In the reusable ear plug segment of the market, the Company offers its patented
UltraFit product, and the E-A- R Express, a patented product, which features a
polyurethane pod and a short plastic stem to facilitate sanitary insertion of
the plug into the ear. The Company also recently introduced the Reflex line of
"semi-aural" plugs designed for intermittent use with a patented feature
allowing for easy storage around the neck.

The Company sells a full range of ear muffs. Through its Peltor AB subsidiary
("Peltor"), acquired on May 30, 1996, the Company manufactures, assembles and
sells a broad line of ear muffs, hard caps/visors, noise attenuation headsets
and wireless and hardwire communication headsets, serving 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 environment exists, 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.

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

EYE, FACE AND HEAD PROTECTION. Non-prescription eye and face protection is used
in work environments where a number of hazards present a danger to the eyes and
face, including dust, flying particles, metal fragments, chemicals, extreme
glare and radiation. The Company offers a large number of task-specific
non-prescription safety eyewear products. The three basic categories of
non-prescription eye and face protection are non- prescription safety (or
"plano") eyewear, goggles and faceshields.


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

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

    |X| Faceshields. Faceshields are designed to protect against heat, splash
        and flying particles and are often worn in conjunction with other
        protective equipment, such as plano eyewear and respirators.

    |X| 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.

FIRST AID KITS. The acquisition of Eastern Safety Equipment Co., Inc.
("Eastern") on January 3, 1996 added first aid kits as a new product category
for the Company. First aid kits are either for general use or for industrial or
commercial uses.

RESPIRATORY PROTECTION. Respiratory protection products are used to protect
against the harmful effects of atmospheric contamination and pollution caused by
dust, gases, fumes, sprays and other contaminants. The market for respiratory
protection products is segmented into two types: supplied air and air-purifying.
Supplied air respirators are further segmented into two types: self-contained
breathing apparatuses ("SCBA") and respirators supplied from a remote source of
air through a hose ("air line"). The Company competes in the air- purifying and
air line supplied segments of the respiratory protection market with a broad
line of disposable dust and mist masks, cartridge-equipped quarter-, half- and
full-face respirators, powered air-purifying respirators (whereby a battery
pumps air through cartridges), and "escape" respirators (a single-use respirator
for emergencies).

      SPECIALTY COMPOSITES

The Company's Specialty Composites operating unit manufactures a wide array of
impact-resistant, shock- absorbing and energy-absorbing materials for a variety
of noise, vibration and shock control applications using a wide range of
technologies, manufacturing processes and applications know-how. Specialty
Composites also produces the specially formulated foam used in the manufacture
of Safety Products' PVC ear plugs. The principal strengths of Specialty
Composites are its specialized polyurethane chemistry, its thin-sheet casting
capability, its composite technologies and its applications engineering. These
strengths allow the Company to manufacture in a single process, high value-added
materials and components with multiple chemistries and substrates using casting,
extrusion and molding processes.

Specialty Composites' products fall into three broad categories: barriers and
absorbers for noise control; damping and isolation products for vibration and
shock control; and energy control products for shock and comfort management. The
Company's products include: Isoloss LS polyurethane high density cellular foams,
which are manufactured by three production lines in a variety of thicknesses,
widths, colors and densities for mechanical vibration reduction, noise and shock
control and high resilience cushioning and sealing applications; the Confor
heavily damped viscoelastic foam for ergonomic cushioning applications; the
Tufcote

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polyurethane and PVC thin sheet foams for acoustical, absorption and noise
control applications; and the Isodamp PVC foams for mechanical vibration
reduction and noise and shock control.

Specialty Composite's products are sold into four market segments:
transportation; health-related; footwear; and other original equipment
manufacturers ("OEM") in industries such as electronics and communications.

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

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

FOOTWEAR SEGMENT. Specialty Composites supplies a durable and highly
shock-absorbent polyurethane foam, which is incorporated into insoles for
high-wear cushioning applications, such as athletic shoes, dress shoes, military
boots and work boots. Specialty Composites also offers an energy-absorbent
material to help protect against skeletal shock in military boots, work boots
and orthotic insoles.

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

SALES AND MARKETING

The Company divides it sales force into two principal categories: Safety
Products and Specialty Composites.

SAFETY PRODUCTS OPERATING UNIT. Within Safety Products, sales are managed
through seven channels: U.S. Industrial Distribution; U.S. Industrial Direct;
Consumer/Do-It-Yourself ("DIY"); Healthcare; Europe; Canada; and Export. Each of
these channels has its own sales force and its own distinct sales strategies. In
addition, through the acquisition of Peltor, the Company has significantly
expanded its sales coverage, including a dedicated effort to serve the specialty
communications ear muff market.

    |X| U.S. Industrial Distribution. This is the largest sales channel for
        Safety Products and includes approximately 170 Dialog industrial
        distributors and approximately 120 industrial dealers. Participation in
        the Dialog program requires minimum purchase levels while encouraging
        support across the full product line, in return for rebates based on
        growth and volume as well as preferred treatment regarding shipping
        terms, new products, field sales support, and cooperative advertising.
        The Company also offers Dialog distributors financial incentives for
        establishing electronic order entry/invoicing interfaces with the
        Company and for developing marketing programs which promote the
        Company's products.

    |X| U.S. Industrial Direct. Approximately 90% of the Company's safety
        prescription eyewear is sold directly to more than 40,000 industrial
        companies, including a majority of the industrial companies in the
        Fortune 500. The remainder of the Company's SRx products are sold
        through the industrial


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        distribution channel. In most states, current laws require that
        prescription eyewear be dispensed to the user by a licensed optical
        professional, traditionally a local optician. As an alternative to this
        approach, in 1994 the Company introduced its Dispensing Manager program,
        whereby the Company employs its own licensed opticians to dispense
        prescription safety eyewear.

    |X| Consumer/DIY. The Company is the leading supplier of safety products to
        the consumer/DIY market and is the primary supplier to such leading
        retailers as ACE, Home Depot, Lowe's, Sears and Tru-Serv. The Company
        offers both its AOSafety brand of industrial grade products in consumer
        packaging and its Eastern and Shoplyne brands of consumer grade products
        in consumer packaging.

    |X| Healthcare. The Company maintains its own national sales manager and has
        an exclusive arrangement with an independent representative group to
        pursue the growing use of PPE in the healthcare sector and has developed
        a specialized line of healthcare products with the goal of building a
        national distribution network. Use of the Company's products can assist
        in compliance by healthcare professionals with recently introduced OSHA
        regulations designed to reduce the risk of diseases associated with
        blood- borne pathogens and dealing with splash control.

    |X| Europe. The Company has a significant presence in Europe with sales
        offices in the U.K., Sweden, Germany, France, Italy and Spain. While the
        Company's historical strength in this market has been in hearing
        protection devices sold through industrial distributors, the Company has
        recently been successful in pursuing sales of safety eyewear and has
        dedicated a full-time eyewear product sales manager to lead and train
        the existing sales organization.

    |X| Canada. In Canada, the Company has a strong position in both stock
        safety products and prescription safety eyewear. Just as in the United
        States, prescription safety eyewear is sold primarily on a direct basis
        to industrial firms, while stock safety products are sold through
        distributors.

    |X| Export. The Company exports its products around the world, and this
        channel is managed through sales representatives located in Singapore
        and Hong Kong (covering Asia), Miami (covering Latin America), Sydney
        (covering Australia and New Zealand) and South Africa.

SPECIALTY COMPOSITES OPERATING UNIT. The Company relies upon independent
manufacturer representatives and the Company's factory sales representatives to
identify OEM applications for Specialty Composites' products and technologies.
Once such applications have been identified, the Company's sales and technical
staffs work closely with OEMs to provide the customer with a low-cost,
integrated solution for its noise, vibration, shock, cushioning and/or comfort
management problems.

RESEARCH AND DEVELOPMENT

SAFETY PRODUCTS OPERATING UNIT. 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 (Energy Absorbing Resins) Division of Cabot Corporation ("Cabot"),
has been a leader in the development of technology for understanding and
measuring noise and hearing loss and in developing products to protect against
such loss. In order to test the efficacy of its hearing protection products, the
Company owns and operates the only privately-owned National Voluntary Laboratory
Accreditation Program ("NVLAP") laboratory in the United States accredited for
testing the efficacy of hearing protection products. The Company also operates
sound chambers and testing facilities which measure the performance of its
materials and designs. Similarly, the Company believes that it has been a
pioneer and leader in the development and testing of safety eyewear and
maintains extensive facilities for the design and testing of safety eyewear. The
research and development personnel of the Company include recognized experts in
the safety products industry.


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SPECIALTY COMPOSITES OPERATING UNIT. The research and development efforts of
Specialty Composites focus on developing proprietary materials and enhancing
existing products in order to meet customer needs identified by the Company's
sales and technical staff. Products such as the Isoloss LS polyurethane high
density cellular foams and the Confor heavily damped viscoelastic foam are being
introduced in a growing number of applications across all markets served by
Specialty Composites.

The Company does not engage in any customer-sponsored research and development
projects.

RAW MATERIALS AND SUPPLIERS

The Company consumes a wide variety of raw materials, supplies and components,
including, among others, paper products, chemicals, eyewear frames and optical
lenses. The paper products category includes corrugated paper, folding cartons
and packaging materials. The chemicals category includes plastic resins such as
polycarbonate and propionate, as well as polyols, plasticizers, substrates,
isocyanates and adhesives. The eyewear frames category includes frames for SRx
products.

The Company has a diversified base of raw material suppliers. The Company does,
however, use single sources for the supply of several raw materials, including
General Electric Plastics, a division of General Electric Company, for
polycarbonate resin, the primary raw material used in the production of the
Company's non- prescription optical lenses. The Company has not experienced any
significant delays or shortages in obtaining raw materials in recent years and
believes that alternative supplies of raw materials can be located on
commercially reasonable terms.

The Company outsources the production of less than 10% of its products to
various manufacturers. Competition among these manufacturers is strong, and,
although a change in manufacturers often results in a period of adjustment
concerning product quality and distribution, the Company, in the past, has
changed manufacturers with respect to certain of its outsourced products.

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 ear plugs); high speed assembly and packaging of ear plugs; plastic
injection molding, coating and assembly of non-prescription eyewear; and
assembly, grinding, polishing and coating of prescription eyewear. 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 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.

SAFETY PRODUCTS OPERATING UNIT. The Company's Indianapolis, Indiana plant is the
largest ear plug manufacturing facility in the world. It fabricates, molds and
packages hundreds of millions of pairs of ear plugs annually, utilizing
automated, high speed assembly and packaging equipment. Because the economies of
scale present in this operation are unique in the hearing protection products
industry, management believes that they offer the Company a competitive
advantage of lower costs within the production process. The plant's high-speed
robotic fabrication, assembly and packaging of ear plugs facilitate cost-saving,
high-volume production and improve cycle time and inventory management. Other
safety products are manufactured at the Southbridge,

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Massachusetts facility, where during the period 1993 to 1995 the Company
invested over $2 million in industrial robotics and cellular manufacturing to
produce plano eyewear products previously outsourced from southeast Asia. As a
result, the Company is now able to advertise these products as "Made in the
USA."

The Company fills virtually all of its domestic and certain of its international
orders, other than SRx, through its state-of-the-art distribution center located
in Indianapolis, Indiana which has efficient bar-coding and scanning
capabilities to assure rapid turn-around time and service levels for customer
orders.

During 1993 and 1994 the Company completed a major program to consolidate and
retool its SRx laboratory operations. The SRx production operations of six
different manufacturing facilities were consolidated into two U.S. facilities
that possess new lens surfacing, edging and grinding machinery capable of
handling glass, plastic and polycarbonate lenses. These two facilities currently
manufacture and distribute approximately 500,000 pairs of safety prescription
glasses annually.

The Company's principal international manufacturing operations are located in
Poynton, England; Mississauga, Ontario; Varnamo, Sweden; and Ettlingen, Germany.
The Poynton facility serves customers in Western Europe, producing and packaging
ear plugs and other hearing and eyewear products. In addition, Poynton has an
SRx laboratory that primarily serves the U.K. market. The Mississauga plant
fabricates prescription eyewear and, together with a small prescription eyewear
laboratory in Montreal, produces SRx products for the Canadian market. The
Varnamo, Sweden plant is the principal Peltor manufacturing location; finished
goods and components are shipped to customers and other subsidiaries from this
location. Certain of these products are received in the Ettlingen, Germany plant
which provides an assembly operation for the components and a stocking facility
for finished goods for shipment to customers.

SPECIALTY COMPOSITES OPERATING UNIT. Specialty Composites' products are
manufactured in Indianapolis, Indiana and Newark, Delaware. The Indianapolis
plant, which supplies specially formulated foam for the Company's PVC ear plugs,
manufactures and fabricates sheet and roll PVC and polyurethane materials and
molds polyurethane foams and solids. This facility also houses applications
engineering, research and development, quality assurance and customer service
support. The Newark, Delaware facility manufacturers polyurethane foams and
films and houses the Company's new proprietary, thinsheet foam casting line,
which will permit the casting of both sheet and composite materials, including
facings and substrates, in a single pass through the line. The new casting line,
which cost approximately $5.4 million, is operational, but is not yet in full
production mode.

COMPETITION

The PPE market is fragmented and highly competitive. The Company estimates that
there are more than 500 manufacturers of PPE (other than safety clothing, gloves
and shoes) in the United States, Europe and Southeast Asia. Participants in the
industry range in size from small, independent, single-product companies with
annual sales of less than $15 million, to a small number of multinational
corporations with annual sales in excess of $100 million. The Company believes
that participants in the PPE market compete primarily on the basis of product
characteristics (such as design, style and functional performance), product
quality, service and brand name recognition and, to a lesser extent, price. From
a positive competitive standpoint, the Company believes it is well situated,
primarily because of its large size and its broad product offerings, to compete
in a fragmented industry. The Company enjoys certain economies of scale which
are not available to smaller competitors. 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.

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


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EMPLOYEES

As of September 30, 1997, the Company had 2,151 employees, of whom 1,459 were
primarily engaged in manufacturing, 453 in sales, marketing and distribution, 70
in research and development and 169 in general and administrative. The Company
believes its employee relations are good. The Company has one facility that
employs union members. This facility, located in Plymouth, Indiana, employs 67
members of the International Union of Electronic, Electrical, Salaried, Maritime
and Furniture Workers (out of a total of 92 employees), and the Company's
relations with these union members are fully satisfactory. The union contract
expires on June 30, 1998.

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 ear plugs 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 over the next 17 to 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 are: the Occupational Safety and Health Administration
("OSHA"), which regulates the usage of all PPE, with the exception of
respirators; the Environmental Protection Agency ("EPA"), which regulates
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; and the Food and Drug Administration ("FDA"), which
regulates eye, face and respiratory protection products for the healthcare
industry. These agencies generally mandate that the Company's products meet
standards established by private groups, such as American National Standards
Institute ("ANSI"). The Company's products are also subject to foreign laws and
regulations. In particular, they must comply with the Canadian Standards
Association, European Committee for Normalization and Standards Australia. The
Company believes it is in compliance in all material respects with the
regulations and standards of these governmental bodies, and any failures to
comply with such regulations and standards in the past have not had a material
adverse effect on its business.

ENVIRONMENTAL MATTERS

The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous substances and wastes. The Company believes
that it is in substantial compliance with all such laws and regulations.


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ITEM 2.  PROPERTIES

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

<TABLE>
<CAPTION>

                                            APPROXIMATE
LOCATION                                    SQUARE FEET                FUNCTION
--------                                    -----------                --------
<S>                                             <C>            <C>
CORPORATE OFFICES
Boston, Massachusetts.....................        8,031        Corporate Headquarters

U.S. SAFETY PRODUCTS
Southbridge, Massachusetts................      295,000        Manufacturing/Administration
Indianapolis, Indiana(1)..................      220,564        Distribution/Customer Service
Indianapolis, Indiana.....................       81,540        Manufacturing
Chickasha, Oklahoma.......................       15,000        Manufacturing/Customer Service
Plymouth, Indiana.........................       10,224        Manufacturing/Customer Service

INTERNATIONAL SAFETY PRODUCTS
Poynton, England..........................       56,530        Manufacturing/Distribution/Customer Service
Varnamo, Sweden...........................      125,595        Manufacturing/Distribution/Customer Service
Mississauga, Ontario, Canada..............       28,850        Manufacturing/Customer Service
Ettlingen, Germany........................       45,000        Manufacturing/Distribution/Customer Service
Bognor Regis, England.....................        2,700        Customer Service
Paris, France.............................        1,894        Sales Office
Montreal, Quebec, Canada..................        1,800        Manufacturing/Customer Service
Barcelona, Spain..........................          (*)        Sales Office
Milan, Italy..............................          (*)        Sales Office

SPECIALTY COMPOSITES
Indianapolis, Indiana.....................      156,000        Manufacturing/Distribution
Newark, Delaware..........................       82,300        Manufacturing/Distribution
----------------
</TABLE>
(1) This facility also serves as an international distribution center and
    central packaging operation with respect to certain of the Company's
    products.

(*) Less than 1,000 square feet.

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


                                       9


<PAGE>   12



ITEM 3.  LEGAL PROCEEDINGS

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

During fiscal 1997 the Company received a complaint from Gargoyles, Inc.
alleging that one of the Company's recently introduced plano eyewear products
(Fectoids) infringes a patented lens shape utilized in the plaintiff's sun and
sporting glasses. The Company is defending this allegation vigorously and the
matter is expected to go to trial in fiscal 1998. 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On July 28, 1997, the Company held a special meeting of stockholders to act on
and approve the Company's 1997 Stock Option Plan and to approve the selection of
Arthur Andersen LLP as the Company's independent public accountants.


                                       10

<PAGE>   13




                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of the common stock, par value $0.01 per share, of Aearo ("Aearo Common
Stock") is held, collectively, by Vestar Equity Partners, L.P. (together with
certain related persons, "Vestar"), Cabot Corporation ("Cabot") and management.
In July 1995, Vestar, Cabot and management effected through the Company the
acquisition of substantially all of the assets and certain liabilities of Cabot
CSC Corporation ("Old Cabot Safety Corporation"), a wholly-owned subsidiary of
Cabot, and certain of its affiliates (the "Formation Acquisition") for $206.1
million. To finance the Formation Acquisition, the Company incurred $47.5
million of senior secured debt ("Senior Bank Facilities") sold $100 million of
12 1/2% senior subordinated notes due 2005 (the "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 (collectively the
"Management Investors") 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.

ITEM 6.  SELECTED FINANCIAL DATA

The selected historical financial data for each of the two years in the period
ended September 30, 1994 are derived from the combined financial statements of
Cabot Safety Corporation, which have been audited by Coopers & Lybrand LLP,
independent public accountants. The selected income statement data for the
period ended July 11, 1995 are also derived from the combined financial
statements of Cabot Safety Corporation, which have been audited by Arthur
Andersen LLP, independent public accountants. The balance sheet data for July
11, 1995 is unaudited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation. The selected historical financial data for the period ended
September 30, 1995 and the years ended September 30, 1996 and 1997 are derived
from the consolidated financial statements of Aearo Corporation and were also
audited by Arthur Andersen LLP. The data should be read in conjunction with the
combined and consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.


                                       11


<PAGE>   14



                                AEARO CORPORATION

                             SELECTED FINANCIAL DATA
           (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)


<TABLE>
<CAPTION>
                                      PREDECESSOR COMPANY                           SUCCESSOR COMPANY
                            -------------------------------------------  -----------------------------------------
                                                                                     
                               YEAR ENDED SEPTEMBER 30,  PERIOD ENDED    PERIOD ENDED     YEAR ENDED SEPTEMBER 30,
                            ----------------------------   JULY 11,      SEPTEMBER 30,   -------------------------
                                  1993          1994        1995            1995             1996          1997
                            --------------------------------------------------------------------------------------

INCOME STATEMENT DATA:
<S>                                <C>       <C>           <C>             <C>            <C>           <C>
Net Sales--
   Safety Products..............   $ 143.9   $  149.7      $ 129.6         $   40.0       $  205.2      $  249.6
   Speciality Composites........      25.7       28.6         25.1              7.9           38.3          36.2
                                   -------   --------      -------         --------       --------      --------
     Total net sales............     169.6      178.3        154.7             47.9          243.5         285.8
Cost of Sales...................      96.6       99.5         87.7             29.3(1)       133.6         163.5
                                   -------   --------      -------         --------       --------      --------
   Gross profit.................      73.0       78.8         67.0             18.6          109.9         122.3
Operating Expenses--
   Selling and administrative...      45.3       51.7         47.1(2)          13.1           73.6          87.0
   Research and technical service      2.3        2.7          2.3              0.6            3.2           5.1
   Amortization expense.........       5.7        5.6          4.3              0.8            5.6           7.0
   Other charges (income), net..       0.1         --         (0.2)             0.1            0.3           2.5
                                   -------   --------      -------         --------       --------      --------
     Operating income...........      19.6       18.8         13.5              4.0           27.2          20.7
Interest expense, net...........       4.8        5.8          5.7              4.1           20.7          26.7
                                   -------   --------      -------         --------       --------      --------
   Income (loss) before income
    taxes and cumulative effect
    of accounting change........      14.8       13.0          7.8             (0.1)           6.5          (6.0)
Provision for income taxes......       5.7        5.0          3.0              0.5            4.3           0.9
                                   -------   --------      -------         --------       --------      --------
   Income (loss) before
    cumulative effect of
    accounting change...........       9.1        8.0          4.8            (0.6)            2.2          (6.9)
Cumulative effect of
 accounting change..............        .3         --           --               --             --            --
                                   -------   --------      -------         --------       --------      --------
Net income (loss)...............   $   9.4   $    8.0      $   4.8         $  (0.6)       $    2.2      $   (6.9)
                                   =======   ========      =======         =======        ========      ========
Preferred stock dividend
 accrued........................                                                1.3            6.2           7.1
Earnings (loss) applicable to
 common shareholders............                                               (1.9)          (4.0)        (14.0)
Earnings (loss) per common
 share..........................                                           $ (18.67)      $ (40.58)     $(142.77)

OTHER DATA:
EBITDA(3).......................   $  31.0   $   30.6      $  22.9         $    6.1       $   39.7      $   37.8
Depreciation and amortization...      11.8       11.7          9.2              2.1           13.9          18.6
Capital expenditures............       9.0        4.5         10.4              2.7            9.2           8.9
Ratio of earnings to fixed
 charges(4).....................       3.4        2.8          2.2               --            1.3            --

BALANCE SHEET DATA (AT
 PERIOD-END):
Total assets....................   $ 163.4   $  171.2      $ 177.5         $  218.3       $  338.4      $  310.9
Long-term debt (including
 current portion)...............      82.4       76.9         78.4            152.3          250.3         244.7
Stockholders' equity............      51.0       35.2         40.1             32.0           34.8          20.0

</TABLE>


                                       12



<PAGE>   15



                                AEARO CORPORATION

                      SELECTED FINANCIAL DATA - (CONTINUED)


NOTES TO SELECTED FINANCIAL DATA:

(1) For the period ended September 30, 1995, includes a $3.6 million charge
    related to allocation of purchase price to inventory.

(2) For the period ended July 11, 1995, includes a $1.1 million charge related
    to termination of the Old Cabot Safety Corporation stock option plan and a
    $0.8 million charge related to a provision for potential value-added tax
    penalties by the Company's French subsidiary.

(3) 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.

(4) 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) and a portion of rental expense assumed to represent interest.
    Earnings for the period ended September 30, 1995 and the year ended
    September 30, 1997 were inadequate to cover fixed charges by $0.2 million
    and $6.0 million, respectively.

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 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

Prior to the Formation Acquisition in July 1995, Old Cabot Safety Corporation
was a wholly-owned subsidiary of Cabot. In 1990, Cabot combined into Old Cabot
Safety Corporation the operations of its E-A-R Division with the operations of
the AOSafety Division, which Cabot acquired from American Optical Corporation at
such time. The combined financial statements of the Company include the results
of Old Cabot Safety Corporation and certain of its affiliates whose operations
are partially or exclusively related to the business of the Company.


                                       13


<PAGE>   16



The Company experienced a decline in profitability in fiscal 1993 and the early
part of fiscal 1994 following the combination of the E-A-R Division and the
AOSafety Division. While the combination resulted in a larger company with
broader product offerings, giving E-A-R distributors access to AOSafety products
and vice versa, it resulted in some long-standing relationships among the
Company, distributors and end-users being undermined. In addition, as part of
the combination the Company reduced its sales force while expanding the product
line, which resulted in decreased distribution focus and support of the
Company's products by distributors. During the late 1980s the Company had also
suffered from a prolonged lack of investment in product innovation and
development. Because end-users are relatively slow to switch products or brands,
the combined effect of the deteriorating distributor relations and the lack of
new products did not adversely affect financial results in fiscal 1991 and 1992.
However, the combined effect of such problems, coinciding with the introduction
of new products by competitors, began to result in some loss of market share in
fiscal 1992. In an effort to retain market share, the Company began to offer
price promotions and reduced the prices of several products. While this aided
financial performance in fiscal 1992, it largely did so at the expense of fiscal
1993 results by pulling business forward. The reduction in pricing, however, did
not stem the market share erosion, as many end-users are more interested in
product performance and increased safety compliance than they are in discounted
prices. Operating profit in fiscal 1993 and the first half of fiscal 1994 was
also negatively affected by the costs of consolidating the prescription eyewear
manufacturing facilities in the U.S. from six locations to two and consolidating
the Company's other manufacturing facilities at its Southbridge, Massachusetts
location.

The Company's current senior management team was installed in mid-1994 to
address operational issues that had adversely affected the Company's sales and
profitability. Management focused on four primary areas: (i) strengthening
relationships with distributors and product end-users, (ii) increasing the
Company's participation in projected high-growth markets, such as the
consumer/DIY and catalog supply markets and the emerging international markets
of Latin America and the Pacific Rim, (iii) expanding product innovation and
development efforts and (iv) pursuing acquisitions. These initiatives were
largely successful in fiscal 1996. In addition, the Company completed the
acquisitions of Peltor and Eastern in fiscal 1996. Each of these acquisitions
were key contributions to the Company's overall strategy.

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


                                       14

<PAGE>   17




RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER 30,
                                                                -------------------------------------
                                                                  1995           1996           1997
                                                                -----------   ------------   --------
<S>                                                             <C>            <C>            <C>  
Net sales:
   Safety Products..........................................      83.7%          84.3%          87.3%
   Speciality Composites....................................      16.3           15.7           12.7
                                                                 -----          -----          -----
     Total net sales........................................     100.0          100.0          100.0
   Cost of sales............................................      56.0(1)        54.5(3)        57.2
                                                                 -----          -----          -----
   Gross profit.............................................      44.0(1)        45.5(3)        42.8
   Selling and administrative...............................      28.8(2)        29.9(4)        30.4
   Research and technical service...........................       1.4            1.3            1.8
   Amortization expense.....................................       2.5            2.3            2.5
   Other charges (income), net..............................      (0.1)           0.1            0.9
                                                                 -----          -----          -----
     Operating income.......................................      11.4%(1)(2)    11.9%(3)(4)     7.2%
                                                                 =====          =====          =====
</TABLE>
----------

(1) Excludes $3.6 million charged to cost of sales as a result of purchase price
    allocated to acquired inventory. This amount was recorded in cost of sales
    as the acquired inventory was sold during the period ended September 30,
    1995.

(2) Excludes $1.1 million charged to selling and administrative expense for the
    termination of the Old Cabot Safety Corporation stock option plan and $0.8
    million charged to selling and administrative expense attributable to
    penalties incurred by the Company's French subsidiary relative to delinquent
    value added tax payments.

(3) Excludes $1.0 million charged to cost of sales as a result of purchase price
    allocated to inventory acquired in the Peltor acquisition. This amount was
    recorded in cost of sales as the acquired inventory was sold during the year
    ended September 30, 1996.

(4) Excludes $0.8 million charged to selling and administrative expense for
    costs related to the abandoned effort at an initial public offering.

The Company's business is slightly seasonal. Traditionally, net sales during the
first fiscal quarter (October 1 -- December 31) are slightly lower than the
other quarters. This is generally attributable to stock reductions by
distributors and plant shutdowns by end-users towards the end of each calendar
year.

                                       15


<PAGE>   18




OVERVIEW

The combined financial statements of the Company for the periods prior to July
12, 1995 have been prepared on the historical cost basis. The consolidated
balance sheets of the Company at September 30, 1995 and 1996 reflect allocation
of the purchase price to the assets acquired and thus are not comparable with
the historical balance sheets presented for prior periods. Operating results
subsequent to the Formation Acquisition are comparable to prior periods, with
the exception of cost of sales (due to the $3.6 million and $1.0 million charges
in the period and year ended September 30, 1995 and 1996, respectively, related
to the allocations of purchase price to inventory), depreciation expense,
amortization of intangible assets and interest expense.

FISCAL 1997 COMPARED TO FISCAL 1996

NET SALES. Net sales in the year ended September 30, 1997 increased 17.4% to
$285.8 million from $243.5 million in the year ended September 30, 1996. The
increase in net sales was primarily due to the acquisitions of Peltor and
Eastern which were only included for four months of fiscal 1996 and nine months
of fiscal 1996, respectively, as well as internal growth at Safety Products.
Safety Products net sales increased 21.6% from $205.2 million to $249.6 million.
Of this $44.4 million increase, the acquisitions of Peltor and Eastern
contributed $28.6 million and $3.0 million respectively, and $12.8 million was
from internal growth. There was growth in net sales of eye & face products due
to increased volumes and successful new products, as well as in hearing
protection due to increased volumes, a portion of which was due to larger
purchases from the U.S. military in order to increase inventories. Comparisons
to last year were particularly strong in the fourth fiscal quarter when sales at
Safety Products increased by 14.1% as the Company continued to improve service
levels and overcome the difficulties triggered by the conversion to a new
management information system in the fourth quarter of last year. Net Sales in
last year's fourth quarter were hampered by the conversion to the new management
information system. The conversion effort resulted in inaccurate production
planning, backorders and missed shipments particularly in eye & face products
manufactured at the Company's Southbridge, Massachusetts facility. Specialty
Composites net sales decreased 5.5% from $38.3 million to $36.2 million. This
decrease was largely due to the impact of a $2.3 million shipment related to the
Sea Wolf Submarine in the year ended September 30, 1996 and, to a lesser extent,
softness in the Class 8 truck market.

GROSS PROFIT. Gross profit in the year ended September 30, 1997 increased 11.3%
to $122.3 million from $109.9 million in the year ended September 30, 1996.
Excluding the $1.0 million negative effect of purchase accounting for the Peltor
acquisition in fiscal 1996, gross profit would have increased 10.3% from an
adjusted gross profit of $110.9 million. The increase was primarily due to the
acquisitions of Peltor and Eastern which were partially offset by higher costs
in the Southbridge, Massachusetts manufacturing facility and, to a lesser
extent, the Indianapolis, Indiana central packaging operation in the first
quarter. These costs included temporary labor, overtime and excess material
usage and were significantly increased by efforts to correct difficulties
associated with the conversion to the new management information system as well
as changes in manufacturing. Gross profit as a percentage of sales in the year
ended September 30, 1997 was 42.8% as compared to gross profit as a percentage
of sales, on an adjusted basis, of 45.6% in the year ended September 30, 1996.
The percentage decrease was primarily due to the increased costs at the
Southbridge, Massachusetts facility. Gross profit as a percentage of sales
increased towards historical levels in the second half of the year as
improvements in operations were realized.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in the
year ended September 30, 1997 increased 18.2% to $87.0 million from $73.6
million in the year ended September 30, 1996. Of this increase, approximately
$5.0 million was due to the acquisitions of Peltor and Eastern. Of the remaining
increase, approximately $2.5 million was due to higher distribution expenses.
These expenses include higher freight charges as well as excess labor costs
associated with a higher level of backorders and partial shipments as well as a
higher level of product returns. In addition, the Company incurred higher costs
in customer service in order to mitigate operational difficulties relating to
the new management information system. Also there were higher sales and
marketing expenses from the Company's growth initiatives which were partially
offset


                                       16

<PAGE>   19



by reductions in management and employee incentive accruals. Selling and
administrative expenses as a percentage of net sales were 30.5% in fiscal 1997
compared to 30.2% in fiscal 1996. Excluding the $0.8 million of costs of an
abandoned equity offering in fiscal 1996, such percentage would have been 29.9%.

RESEARCH AND TECHNICAL EXPENSES. Research and technical expenses in the year
ended September 30, 1997 increased 54.5% to $5.1 million from $3.3 million in
the year ended September 30, 1996. The increase was primarily due to the
acquisition of Peltor which spends proportionately more on research and
technical services because there is a more significant technical component to
this product line.

AMORTIZATION EXPENSE. Amortization expense in the year ended September 30, 1997
increased to $7.0 million from $5.6 million in the year ended September 30, 1996
as a result of purchase accounting for the acquisitions of Peltor and Eastern.

OTHER CHARGES (INCOME), NET. Other charges increased to $2.5 million in the year
ended September 30, 1997 from $0.3 million in the year ended September 30,1996.
Approximately $1.7 million of this increase was due to foreign exchange losses
primarily during the first three fiscal quarters. During the fourth quarter the
Company initiated the use of forward contracts to mitigate the effects of
changes in foreign currency rates on profitability. This program has been
successful in significantly reducing these effects. The remaining charges relate
to the abandonment of two automation-related capital projects totaling
approximately $0.5 million at the Company's Indianapolis, Indiana Safety
Products manufacturing facility.

OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income in the year ended September 30, 1997 decreased 23.9% to $20.7
million from $27.2 million in the year ended September 30, 1996.

INTEREST EXPENSE, NET. As a result of the increased borrowings to finance the
acquisitions of Peltor and Eastern, interest expense, net in the year ended
September 30, 1997 increased 29.0% to $26.7 million from $20.7 million in the
year ended September 30, 1996.

PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1997 was $0.9 million. The Company's subsidiaries have taxable
income in foreign jurisdictions, but a loss for income tax purposes in the U.S.
In the results for the year ended September 30, 1997 the Company has not
recognized any of the tax benefits which will occur in future periods if there
is taxable income in the U.S.

NET INCOME (LOSS). As a result of the decrease in operating income as well as
the higher interest expense the Company incurred a net loss of $6.9 million for
the year ended September 30, 1997 as compared to net income of $2.2 million for
the year ended September 30, 1996.

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 as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. EBITDA for
the year ended September 30, 1997 was $37.8 million as compared to $39.7 million
for the year ended September 30, 1996. This decrease was due to fact that the
contribution from the acquisitions of Peltor and Eastern were more than offset
by the combined effects of higher costs in the Company's Southbridge,
Massachusetts manufacturing facility, higher selling and administrative costs
and the foreign exchange losses. EBITDA as a percentage of sales declined from
15.7% to 13.2% due to the decreased profitability in the first three fiscal
quarters of fiscal 1997. In the fourth fiscal quarter of 1997 EBITDA was $12.2
million or 16.3% of sales as compared to $10.4 million or 16.3% of sales in the
fourth fiscal quarter of fiscal 1996. This increase was due to the favorable
effect of higher volume in the period as well as improvements in profitability.

FISCAL 1996 COMPARED TO FISCAL 1995

NET SALES. Net sales in the year ended September 30, 1996 increased 20.2% to
$243.5 million from $202.6


                                       17

<PAGE>   20



million in the year ended September 30, 1995. The increase in net sales was due
to the acquisition of Peltor and Eastern as well as internal growth at Safety
Products and Specialty Composites. Safety Products net sales increased 20.9%
from $169.7 million to $205.2 million. Of this $35.5 million increase, $12.8
million resulted from owning Peltor for four months, $10.9 million resulted from
owning Eastern for nine months, and $11.8 million was from internal growth.
There was growth in revenue of hearing products due to better realized prices
and new products, in eye and face products due to increased volumes and new
products, and in prescription safety eyewear as a result of higher volume from
new accounts. Growth in the fourth quarter of fiscal 1996 was hampered by the
conversion to a new management information system. The conversion effort
resulted in inaccurate production planning, backorders and missed shipments,
particularly in eye and face products manufactured at the Company's Southbridge,
Massachusetts facility. Specialty Composites net sales increased 16.3% from
$32.9 million to $38.3 million. This increase was due to a $2.3 million contract
in December of 1995 to supply materials for the Sea Wolf submarine and growth in
sales to the transportation markets.

GROSS PROFIT. Gross profit in the year ended September 30, 1996 increased 28.4%
to $109.9 million from $85.6 million in the year ended September 30, 1995. Gross
profit, adjusted for the impact of inventory purchase accounting adjustment
charges of $3.6 million and $1.0 million in fiscal 1995 and 1996, respectively,
increased 24.3% to $110.9 million from $89.2 million. The increase was a result
of the acquisitions, improved pricing and margins, and internal sales growth. On
an adjusted basis, gross profit as a percentage of sales in the year ended
September 30, 1996 would have been 45.6% as compared to 44.0% in the year ended
September 30, 1995. The percentage increase was due to the combined effect of
the Peltor acquisition, as the Peltor product line has higher gross margins, and
improved margins in the base business which more than offset the effect of the
Eastern product line, which has lower gross margins.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in the
year ended September 30, 1996 increased 22.1% to $73.6 million from $60.3
million in the year ended September 30, 1995. In the year ended September 30,
1996, the Company incurred $0.8 million of costs associated with the abandoned
efforts at an initial public offering (IPO). Excluding these costs, as well as
$1.1 million in costs in fiscal 1995 related to the termination of the old Cabot
Safety Corporation stock option plan and a $0.8 million charge relating to a
provision for penalties by the Company's French subsidiary, selling and
administrative expenses would have increased 24.7% to $72.8 million from an
adjusted $58.4 million in fiscal 1995. Such expenses as a percentage of net
sales would have been 29.8% as compared to 28.8% in fiscal 1995. The increase in
expenses is partially attributable to higher selling expenses from the Company's
expanded sales programs, higher distribution and administrative expenses during
the fourth quarter as a result of partial shipments and back orders and the
direct costs incurred in absorbing the conversion to a new management
information system.

RESEARCH AND TECHNICAL EXPENSES. Research and technical expenses in the year
ended September 30, 1996 increased 15.1% to $3.3 million from $2.8 million in
the year ended September 30, 1995. The increase was the result of the
acquisition of Peltor as well as increased expenses for product development.

OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income in the year ended September 30, 1996 increased 55.6% to $27.2
million from $17.5 million in the year ended September 30, 1995. Excluding the
inventory charges related to purchase accounting as well as the costs of the
abandoned IPO effort in fiscal 1996, and the costs of the Old Cabot Safety
Corporation stock option plan and charges related to the French subsidiary in
fiscal 1995, operating income would have been $29.0 million in the year ended
September 30, 1996 and $23.0 million in the year ended September 30, 1995
representing an increase of 26.2%.

INTEREST EXPENSE, NET. Interest expense, net is not comparable with prior
periods as a result of the financing related to the Formation Acquisition and
the Peltor acquisition. Interest expense, net in the year ended September 30,
1996 was $20.7 million.


                                       18


<PAGE>   21



PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1996 was $4.3 million or 66.2% of income before provision for
income taxes. Such rate was higher than the Company's normalized rate of 40% as
the interest expense on the borrowings for the Peltor acquisition could not be
used to offset income taxes in Sweden until after September 30, 1996.

NET INCOME (LOSS). The increase in interest expense and the higher tax provision
resulted in a 48.1% decrease in net income to $2.2 million from $4.2 million.

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 as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. EBITDA for
the year ended September 30, 1996 was $39.7 million as compared to $29.0 million
for the year ended September 30, 1995. Excluding the inventory charges related
to purchase accounting as well as the costs of the abandoned IPO effort in
fiscal 1996, and the costs of the Old Cabot Safety Corporation stock option plan
and charges related to the French subsidiary in fiscal 1995, EBITDA would have
been $41.5 million in the year ended September 30, 1996 and $34.5 million in the
year ended September 30, 1995. This increase was due to the contribution of the
Peltor and Eastern acquisitions, as well as internal sales growth, but dampened
somewhat by the additional costs incurred in absorbing the conversion to the new
management information system.

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 currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
product costs are U.S. Dollar denominated. As a result, a decline in the value
of the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S. Dollar
relative to these other currencies can have a negative effect on the
profitability of the Company. As a result of the acquisition of Peltor AB, 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 estimates that
these exchange rate changes had the effect of decreasing operating profit by
$2.1 million in the year ended September 30, 1997 compared to $0.3 million in
the year ended September 30, 1996.

EFFECTS OF INFLATION

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

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 $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies aggregating
$140.0 million (the Term Loans) and (ii) a Revolving Credit Facility providing
for up to $25.0 million (the Senior Bank Facilities).

Maturities under the Company's Term Loans are: $10.6 million in fiscal 1998,
$12.9 million in fiscal 1999, $15.9 million in fiscal 2000, $20.6 million in
fiscal 2001, $34.4 million in fiscal 2002 and $35.2 million in fiscal 2003.
Other than upon a change of control or as a result of certain asset sales, or in
the event that certain


                                       19

<PAGE>   22



excess funds exist at the end of a fiscal year, the Company will not be required
to make any principal payments in respect of the Notes until maturity. The
Company will also be required to make interest payments with respect to both the
Senior Bank Facilities and the Notes.

The Company typically makes capital expenditures related primarily to the
maintenance and improvement of manufacturing facilities. The Company spent $8.9
million for capital expenditures for the year ended September 30, 1997 as
compared to $9.3 million for capital expenditures for the year ended September
30, 1996 and $13.2 million for the year ended September 30, 1995. Included in
the capital expenditures over the past three years was an aggregate of $5.4
million for a casting line at the Newark, Delaware facility and $8.0 million for
a worldwide management information system. The Company's capital spending is of
a relatively short duration, with the complete commitment process typically
involving less than one year.

The Company's principal source of cash to fund these capital requirements is net
cash provided by operating activities. The Company's net cash provided by
operating activities for the year ended September 30, 1997 totaled $9.1 million
as compared to $4.5 million for the year ended September 30, 1996. The increase
was due to comparative improvements in accounts receivables collections of $4.0
million and a reduction in inventories of $3.8 million in fiscal 1997 compared
to an increase of $3.8 million in fiscal 1996. The Company realized improvements
in working capital as shipping and billing accuracy improved and as inventory
management and accuracy improved throughout the second half of fiscal 1997.
These improvements were offset by a deterioration in operating profitability
mainly in the early part of fiscal 1997. In fiscal 1995, the Company's net cash
provided by operating activities totaled $24.9 million.

Net cash used by investing activities was $8.3 million for the year ended
September 30, 1997 as compared to $96.4 million for the year ended September 30,
1996 and $16.2 million (excluding the Formation Acquisition) in the year ended
September 30, 1995. Net cash used by investing activities consisted of $8.9
million of capital expenditures in the year ended September 30, 1997 as compared
to $9.2 million in the year ended September 30, 1996. In the current period, the
most significant expenditures were to support the introduction of the Company's
new Fectoids eyewear product. Offsetting the spending in the year ended
September 30, 1997 was $0.8 million in proceeds from the sale of the Rhode
Island facility of Peltor as those operations were consolidated into the
Company's Southbridge, Massachusetts and Indianapolis, Indiana facilities. In
the year ended September 30, 1996, excluding the $83.6 million invested in the
Peltor acquisition, the $6.6 million invested in the Eastern acquisition and the
escrow for the Eastern acquisition, net cash used by investing activities would
have been $9.3 million.

Net cash used by financing activities for the year ended September 30, 1997 was
$4.2 million as repayment of term loans of $8.3 million and repayment of other
long term debt of $0.8 million were partially offset by increased borrowings
under the revolving credit facility of $5.2 million. Net cash provided by
financing activities for the year ended September 30, 1996 was $95.5 million as
compared to $164.5 million in the year ended September 30, 1995. In fiscal 1996
net cash provided by financing activities consisted primarily of proceeds from
the amended and restated senior bank facility which were used to finance the
acquisitions of Peltor and Eastern. In fiscal 1995 the primary activity was the
financing of the Formation Acquisition. The Formation Acquisition was financed
by the issuance of common and preferred stock totaling $32.5 million, the
issuance of the Notes totaling $100.0 million, borrowing of $45.0 million in
Term Loans, as well as borrowings of $3.1 million under the Senior Bank
Facilities. The financings totaled $180.6 million and were used to finance the
cash paid for Cabot Safety Corporation of $169.2 million as well as financing
costs of $11.4 million. Excluding these amounts, net cash used by financing
activities would have been $4.6 million for the year ended September 30, 1995 as
compared to $13.6 million for the year ended September 30, 1994. This decrease
was due to the increase in net cash used by investing activities.

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 available under the Senior Bank Facilities, which
provides for borrowings up to $25.0 million, subject to certain customary
drawing conditions, to meet its liquidity needs. At September 30, 1997 the
Company had borrowed $10.2 million under the revolving credit facility.
Throughout most of fiscal 1997, borrowing levels remained high until the
difficulties


                                       20

<PAGE>   23



associated with the conversion to the new management information system were
largely resolved and the improvements in production planning were beginning to
be realized. Management believes that improvements will continue to be realized
during the next fiscal year. The Company anticipates that operating cash flow
will be adequate to meet its debt service and capital expenditure requirements
for the next several years, although there can be no assurances that existing
levels of sales and normalized profitability, and therefore cash flow, will be
maintained in the future. Levels of sales and profitability may be impacted by
service levels, continued new product development, worldwide economic conditions
and competitive pressures. In addition, the Company may make additional
acquisitions in the future and would rely on internally generated funds and, to
the extent necessary, on borrowings to finance such acquisitions.

The Company's ability to borrow is limited by covenants in the senior bank
facilities and the Notes. In April, 1997, the Company amended its credit
agreement with its syndicate of lenders with respect to the financial covenants
applicable to periods ending on and after June 30, 1997. The revised covenants
reflect the reduced profitability that the Company has been experiencing due to
the operating difficulties which have been triggered by the new management
information system. The amendment also provides the Company with the ability to
simplify its corporate structure in Europe in order to proceed with the further
integration of Peltor.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    (1) Index to Financial Statements


<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
<S>                                                                                <C>
Reports of Independent Public Accountants-- Arthur Andersen LLP.................   22
Balance Sheets -- September 30, 1996 and 1997...................................   24
Statements of Operations-- Period ended  July 11, 1995, Period ended
  September 30, 1995  and Years ended September 30, 1996 and 1997...............   25
Statements of Stockholders' Equity -- Period ended July 11, 1995, Period
  ended September 30, 1995 and Years ended September 30, 1996 and 1997..........   26
Statements of Cash Flows -- Period ended July 11, 1995, Period ended
  September 30, 1995 and Years ended September 30, 1996 and 1997................   27
Notes to Financial Statements...................................................   28
Valuation and Qualifying Accounts -- Period ended July 11, 1995, Period ended 
September 30, 1995 and years ended September 30, 1996 and 1997..................   67

</TABLE>


                                       21


<PAGE>   24




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Aearo Corporation:

We have audited the accompanying consolidated balance sheets of Aearo
Corporation and subsidiaries (a Delaware corporation) as of September 30, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended, and for the period ended
September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aearo Corporation
and subsidiaries as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, and for the period ended
September 30, 1995, in conformity with generally accepted accounting principles.

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 a part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state, 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



Boston, Massachusetts
November 14, 1997


                                       22

<PAGE>   25




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Aearo Company:

We have audited the accompanying combined statement of operations, stockholders'
equity and cash flows of Aearo Company, formerly Cabot Safety Corporation (the
"Predecessor") for the period October 1, 1994 through July 11, 1995, inclusive.
These combined financial statements are the responsibility of the Predecessor's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Predecessor for the period October 1, 1994 through July 11, 1995, inclusive,
in conformity with generally accepted accounting principles.

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 a part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state, 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


Boston, Massachusetts
December 29, 1995


                                       23

<PAGE>   26



                                AEARO CORPORATION

                                 BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                              SEPTEMBER 30,
                                                                     ---------------------------
                                                                       1996               1997
                                                                     --------           --------

<S>                                                                  <C>                <C>     
Current Assets:

  Cash and cash equivalents..............................            $  8,540           $  5,476

  Accounts receivable (net of reserve for doubtful accounts of         45,890             45,876
     $1,301 and $1,200 in 1997 and 1996, respectively)...

  Inventories............................................              41,164             36,693
  Deferred and prepaid expenses..........................               2,748              3,397
                                                                     --------           --------
          Total current assets...........................              98,342             91,442
                                                                     --------           --------

Property, Plant and Equipment, net.......................              68,712             64,948
Intangible Assets, net...................................             161,940            146,906
Other Assets.............................................               9,442              7,580
                                                                     --------           --------
          Total assets...................................            $338,436           $310,876
                                                                     ========           ========


Current Liabilities:

  Current portion of long-term debt......................            $  8,767           $ 10,937
  Accounts payable and accrued liabilities...............              40,348             36,186
  Accrued interest.......................................               3,779              3,769
  U.S. and foreign income taxes..........................               5,713              2,734

          Total current liabilities......................              58,607             53,626
                                                                     --------           --------
Long-term Debt...........................................             241,520            233,729
Deferred Income Taxes....................................                 697                883
Other Liabilities........................................               2,811              2,688



Commitments and Contingencies
Stockholders' Equity:
  Preferred stock, $.01 par value --
     Authorized -- 200,000 shares
     Issued and outstanding-- 45,000 shares..............                  --                 --

  Common stock, $.01 par value --
     Authorized -- 200,000 shares
     Issued and outstanding-- 96,810 and 99,350 shares in 1997              1                  1
     and 1996, respectively..............................
  Additional paid-in capital.............................              32,640             32,476
  Retained earnings (deficit)............................               1,607             (5,269)
  Cumulative foreign currency translation adjustments....                 553             (7,258)
                                                                     --------           ---------
          Total stockholders' equity.....................              34,801             19,950
                                                                     --------           --------
          Total liabilities and stockholders' equity.....            $338,436           $310,876
                                                                     ========           ========
</TABLE>

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


                                       24

<PAGE>   27




                               AEARO CORPORATION

                            STATEMENTS OF OPERATIONS
           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                        PREDECESSOR
                                         COMPANY                    SUCCESSOR COMPANY
                                     -----------------   ---------------------------------------------
                                     PERIOD ENDED    PERIOD ENDED      YEAR ENDED       YEAR ENDED
                                       JULY 11,      SEPTEMBER 30,    SEPTEMBER 30,    SEPTEMBER 30,
                                         1995            1995             1996             1997
                                       -------------------------------------------------------------

<S>                                    <C>             <C>               <C>              <C>        
Net Sales...........................   $154,712        $ 47,900          $243,459          $285,783
Cost of Sales (Note 3)..............     87,674          29,319           133,551           163,460
                                       --------        --------          --------          --------
   Gross profit.....................     67,038          18,581           109,908           122,323
Selling and Administrative..........     47,149          13,146            73,614            87,036
Research and Technical Services.....      2,273             551             3,250             5,119
Amortization Expense................      4,361             838             5,563             6,957
Other Charges (Income), net.........       (233)             70               301             2,505
                                       --------        --------          --------          --------
   Operating income.................     13,488           3,976            27,180            20,706
Interest Expense, net...............      5,673           4,135            20,703            26,665
                                       --------        --------          --------          --------
   Income (loss) before provision                                                        
    for income taxes................      7,815            (159)            6,477            (5,959)
Provision for Income Taxes..........      3,009             425             4,286               917
                                       --------        --------          --------          --------
   Net income (loss)................   $  4,806            (584)            2,191            (6,876)
                                       ========                                          
Preferred Stock Dividend                                                                 
 Accrued............................                      1,283             6,248             7,112
                                                       --------          --------          --------
Loss applicable to Common                                                                
 Shareholders.......................                   $ (1,867)          $(4,057)         $(13,988)
                                                       ========           =======          ========
Loss per Common Share...............                   $ (18.67)          $(40.58)         $(142.77)
                                                       ========           =======          ========
Weighted average Common                                                                  
 Shares outstanding.................                    100,000            99,980            97,979
                                                       ========           =======          ========
</TABLE>                                                   

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


                                       25

<PAGE>   28




                                AEARO CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                                         CUMULATIVE           
                                                                                                          FOREIGN   
                                      PREFERRED STOCK        COMMON STOCK       ADDITIONAL                CURRENCY
                                     -----------------      ---------------      PAID-IN    RETAINED    TRANSLATION  
                                     SHARES     AMOUNT      SHARES   AMOUNT      CAPITAL    EARNINGS    ADJUSTMENTS    TOTAL
                                     ------     ------      ------   ------      -------    --------    -----------    -----
                                                                                                                     
<S>                                   <C>       <C>         <C>       <C>         <C>         <C>          <C>        <C>    
PREDECESSOR COMPANY                                                                                                  
                                                                                                                     
Balance, September 30, 1994.....                $    --      9,500    $   1       $ 21,228    $18,249      $(4,274)   $35,204
                                                                                                                     
   Foreign currency translation                                                                                      
     adjustments................                     --         --       --             --         --           75         75
                                                                                                                     
   Net income...................                     --         --       --             --      4,806           --      4,806
                                                -------    -------    -----       --------    -------      -------    -------
                                                                                                                     
Balance, July 11, 1995..........                $    --      9,500    $   1       $ 21,228    $23,055      $(4,199)   $40,085
                                                =======    =======    =====       ========    =======      =======    =======
                                                                                                                     
SUCCESSOR COMPANY                                                                                                    
                                                                                                                     
   Issuance of common and                                                                                            
     preferred stock in                                                                                              
     connection with                                                                                                 
     acquisition, net...........      45,000    $    --    100,000    $   1       $ 32,530    $    --      $    --    $32,531
   Foreign currency translation                                                                                      
     adjustments................          --         --         --       --             --         --            7          7
                                                                                                                     
   Net loss.....................          --         --         --       --             --       (584)          --       (584)
                                      ------    -------    -------    -----       --------    -------      -------    -------
                                                                                                                     
Balance, September 30, 1995.....      45,000         --    100,000        1         32,530       (584)           7     31,954
                                                                                                                     
   Repayment of shareholders                                                                                         
     notes......................          --         --         --       --            260         --           --        260
   Repurchase of common stock,                                                                                       
     net........................          --         --       (650)      --           (150)        --           --       (150)
   Foreign currency translation                                                                                      
     adjustment.................          --         --         --       --             --         --          546        546
                                                                                                                     
   Net income...................          --         --         --       --             --      2,191           --      2,191
                                      ------    -------    -------    -----       --------    -------      -------    -------
                                                                                                                     
Balance, September 30, 1996.....      45,000         --     99,350        1         32,640      1,607          553     34,801
                                                                                                                     
   Repayment of shareholders                                                                                         
     notes......................          --         --         --       --            258         --           --        258
   Repurchase of common                                                                                              
     stock, net.................          --         --     (2,540)      --           (422)        --           --       (422)
   Foreign currency translation                                                                                      
     adjustment.................          --         --         --       --             --         --       (7,811)    (7,811)
                                                                                                                     
   Net loss.....................          --         --         --       --             --     (6,876)          --     (6,876)
                                      ------    -------    -------    -----       --------    -------      -------    -------
                                                                                                                     
Balance, September 30, 1997.....      45,000    $    --     96,810    $   1       $ 32,476    $(5,269)     $(7,258)   $19,950
                                      ======    =======    =======    =====       ========    =======      =======    =======
</TABLE>                                        


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

                                       26


<PAGE>   29



                                AEARO CORPORATION

                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                  PREDECESSOR
                                                   COMPANY                      SUCCESSOR COMPANY
                                                 ------------     -------------------------------------------------
                                                 PERIOD ENDED     PERIOD ENDED      YEAR ENDED        YEAR ENDED
                                                   JULY 11,       SEPTEMBER 30,    SEPTEMBER 30,     SEPTEMBER 30,
                                                    1995              1995             1996              1997
                                                 ------------     -------------    -------------   ----------------

<S>                                               <C>              <C>               <C>                <C>
Cash Flows from Operating Activities:
   Net income (loss)................              $  4,806         $    (584)        $  2,191           $(6,876)
   Adjustments to reconcile net income (loss)
     to cash provided by operating activities--
     Depreciation...................                 4,855             1,247            6,908             9,773
     Amortization...................                 4,361             1,117            7,028             8,858
     Deferred income taxes..........                 1,851                --               --               109
     Other, net.....................                   160               (27)             423               517
   Changes in assets and liabilities--
     Accounts receivable............                  (410)           (1,523)          (4,431)             (479)
     Inventory......................                   903             4,190           (3,748)            3,787
     Accounts payable and accruals..                   991             7,229           (3,040)            (3325)
     Other, net.....................                (3,610)             (640)            (855)           (3,296)
                                                  --------         ---------         --------           -------
        Net cash provided by operating activities   13,907            11,009            4,476             9.068
                                                  --------         ---------         --------           -------
Cash Flows from Investing Activities:
   Cash paid for Cabot Safety Corporation               --          (169,200)              --                --
   Cash paid for Peltor AB and Eastern                  --                --          (90,204)               --
   Eastern escrow deposit...........                    --            (3,000)           3,000                --
   Purchase of Shoplyne assets......                    --                --               --              (242)
   Additions to property, plant and equipment      (10,448)           (2,719)          (9,249)            (8901)
   Proceeds provided by disposals of
     property, plant and equipment..                     4                --               26               818
                                                  --------         ---------         --------           -------
       Net cash used by investing
        activities..................               (10,444)         (174,919)         (96,427)           (8,325)
                                                  --------         ---------         --------           -------
Cash Flows from Financing Activities:
   Issuance of common and preferred stock
     in connection with acquisition, net                --            32,531               --                --
   Proceeds from sale of notes......                    --           100,000               --                --
   Repurchase of common stock, net..                    --                --             (150)             (422)
   Repayment of shareholder notes...                    --                --              260               258
   Proceeds from term loans.........                    --            45,000               --                --
   Proceeds from Amended and Restated
     Senior Bank Facilities, net....                    --                --           94,311                --
   Proceeds from revolving credit facility, net         --             3,800            1,250             5,150
   Payment of financing costs.......                    --           (11,382)              --                --
   Repayment of term loans..........                    --            (1,249)              --            (8,339)
   Repayment of external long-term debt               (122)             (109)            (218)             (840)
   Increase in note payable to
     Cabot Corporation, net.........                 1,412                --               --                --
   Increase in intercompany receivables, net        (5,381)               --               --                --
                                                  --------         ---------         --------           -------
        Net cash (used) provided
          by financing activities...                (4,091)          168,591           95,453            (4,189)
                                                  --------         ---------         --------           -------
Effect of Exchange Rate Changes on Cash                 78                26              331               382
                                                  --------         ---------         --------           -------
Increase (Decrease) in Cash and Cash Equivalents      (550)            4,707            3,883            (3,064)
Cash and Cash Equivalents, beginning of period       2,020                --            4,707             8,540
                                                  --------         ---------         --------           -------
Cash and Cash Equivalents, end of period          $  1,470         $   4,707         $  8,540           $ 5,476
                                                  ========         =========         ========           =======
Noncash Investing and Financing Activities:
   Capital lease obligations........              $    128         $      --         $     --           $    --
                                                  ========         =========         ========           =======
Cash Paid for:
   Interest.........................              $  1,734         $     794         $ 18,879           $22,316
                                                  ========         =========         ========           =======
   Income taxes.....................              $  2,265         $      37         $  1,138           $ 3,345
                                                  ========         =========         ========           =======
</TABLE>

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


                                       27


<PAGE>   30



                                AEARO CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997

(1)  BASIS OF PRESENTATION

For periods prior to July 11, 1995, the accompanying financial statements
represent the combined results and financial position of Aearo Company (formerly
Cabot Safety Corporation) and certain affiliates (the Predecessor) all of which
were wholly owned by Cabot Corporation (Cabot). On July 11, 1995, Cabot sold
substantially all of the assets and certain liabilities of the Predecessor to
Aearo Corporation (formerly Cabot Safety Holdings, Inc.) as described in Note 3
(Formation Acquisition). Financial statements for periods subsequent to July 11,
1995 represent the consolidated financial statements of Aearo Corporation and
subsidiaries (the Successor). References to the Company refer to the Predecessor
prior to the Formation Acquisition and the Successor post acquisition.

Separate financial statements of Aearo Company are not presented because they do
not provide any additional information from what is presented in the financial
statements of Aearo Corporation that would be meaningful to the holders of the
senior subordinated notes (see Note 9).

(2)  ORGANIZATION

The Company manufactures and sells personal safety equipment, as well as
energy-absorbing, vibration-damping and impact-absorbing products for industrial
noise control and environment enhancement. Included in personal safety equipment
are hearing protection, safety eyewear and respiratory equipment.

(3)  FORMATION ACQUISITION AND FINANCING

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 the Predecessor (the Formation Acquisition). The Predecessor was
wholly owned by Cabot prior to the Formation Acquisition. The Formation
Acquisition closed on July 11, 1995, when Aearo Corporation acquired
substantially all of the assets and certain liabilities of the Predecessor for
cash, preferred stock and a 42.5% common equity interest in Aearo Corporation,
as more fully described in Note 14. Aearo Corporation immediately contributed
the acquired assets and liabilities to Aearo Company, a wholly owned subsidiary
of Aearo Corporation, pursuant to an asset transfer agreement dated June 13,
1995. Aearo Corporation has no other material assets, liabilities or operations
other than those that result from its ownership of the common stock of Aearo
Company.


                                       28

<PAGE>   31




                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The total financing related to the Formation Acquisition was $217.5 million
(including transaction fees and expenses of $11.2 million), including the
assumption of certain debt. A summary of the Formation Acquisition financing is
as follows (dollars in millions):


<TABLE>
<CAPTION>

     <S>                                                       <C>      
     Implied fair value of equity issued(a)................... $ 65.0
     
     Issuance of stockholder loans............................   (0.9)
     
     Borrowings under revolving credit facility...............    2.5
     
     Borrowings under term loans..............................   45.0
     
     Borrowings under notes...................................  100.0
     
     Assumed debt.............................................    4.8
     
     Closing adjustment paid to Cabot.........................    1.1
                                                               ------
     
                                                               $217.5
                                                               ======
</TABLE>
----------

(a) The implied fair value of equity represents the implicit fair value of Aearo
    Corporation's equity based on the cash paid by Vestar and management for
    their equity interest in Aearo Corporation. The actual amount recorded for
    Aearo Corporation's equity was reduced by approximately $31.5 million to
    reflect Predecessor basis for the portion of equity retained by Cabot.

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


                                       29

<PAGE>   32




                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The allocation of the $206.1 million purchase price plus $2.1 million of direct
acquisition costs is summarized as follows (dollars in millions):



<TABLE>
<CAPTION>

<S>                                                                               <C>      
Cash paid to Cabot............................................................... $169.2
Debt assumed.....................................................................    4.8
Closing adjustment paid to Cabot.................................................    1.1
Fair value of 42.5% equity interest in Holdings issued to Cabot..................   31.0
                                                                                  ------
          Total..................................................................  206.1

Direct acquisition costs.........................................................    2.1
                                                                                  ------
          Total consideration and direct acquisition costs.......................  208.2
Predecessor historical cost of net assets acquired...............................  134.0
                                                                                  ------
          Excess of consideration paid over predecessor historical cost..........   74.2
Less -- Adjustment to reflect predecessor basis for the 42.5% equity
  interest retained by Cabot.....................................................   31.5
                                                                                  ------
          Fair market value step up..............................................   42.7
Debt issuance costs..............................................................    9.3
                                                                                  ------
          Net adjustment......................................................... $ 52.0
                                                                                  ======
Allocation of net adjustment --
  Inventories.................................................................... $  3.6
  Property, plant and equipment, net.............................................   13.6
  Intangible assets..............................................................   31.7
  Deferred charges...............................................................    9.3
  Liabilities and other..........................................................   (6.2)
                                                                                  ------
                                                                                  $ 52.0
                                                                                  ======
</TABLE>

The $3.6 million allocated to inventory was charged to cost of sales in the
period ended September 30, 1995 as the inventory was sold to customers.

(4)  SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The significant accounting policies of
the Company are described below.

       PRINCIPLES OF COMBINATION AND CONSOLIDATION

The combined financial statements of the Company for the period from October 1,
1994 through July 11, 1995 include Aearo Company and the results of certain
affiliates of the Company whose operations are partially or exclusively related
to the business of the Company. All significant transactions and balances
between affiliates have been eliminated. Transactions with Cabot and its
subsidiaries are reflected as intercompany balances.

The consolidated financial statements of the Company as of and for the years
ended September 30, 1997 and 1996 and the period from July 12, 1995 through
September 30, 1995 include the accounts of Aearo Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated.


                                       30



<PAGE>   33



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997


      USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

      REVENUE RECOGNITION

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

      CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all time
deposits and short-term investments with an original maturity of three months or
less at time of purchase to be cash equivalents.

      FOREIGN CURRENCY TRANSLATION

Assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates. Revenues and expenses are translated at the average
rate during the year. Translation gains and losses are reflected as a separate
component of stockholders' equity. Foreign currency gains and losses arising
from transactions by any of the Company's subsidiaries are reflected in net
income. For the periods ended July 11, 1995 and September 30, 1995 and the years
ended September 30, 1996 and 1997, the accompanying statements of operations
include approximately ($448,000), $60,000, $286,000 and $2,101,000,
respectively, of transaction (gains) and losses.
 During the fourth quarter of fiscal 1997, the Company initiated the use of
forward foreign currency contracts to mitigate the effects of changes in foreign
currency rates on profitability, which has to date been successful in
significantly reducing such effects.

      INVENTORIES

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

      PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is calculated using the straight-line method based on
estimated economic useful lives. Expenditures for maintenance and repairs and
minor renewals are charged to expense.

Property, plant and equipment and their estimated useful lives consist of the
following:



  ASSET CLASSIFICATION                                ESTIMATED USEFUL LIFE
  --------------------                                ---------------------

Buildings                                                 25--40 Years

Leasehold improvements                              Life of the lease or useful

                                                    life, whichever is shorter

Machinery and equipment, furniture and fixtures            3--10 Years


                                       31


<PAGE>   34





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


                                       32

<PAGE>   35




                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

      INCOME TAXES

For the year ended September 30, 1997, as in the year ended September 30, 1996
and the period ended September 30, 1995, the Company will file a consolidated
federal income tax return. The Company filed a consolidated federal income tax
return with Cabot for the period ended July 11, 1995. The provision for federal
income taxes reflected in these financial statements for which the Company filed
consolidated returns with Cabot have been determined as if the Company filed a
separate federal income tax return.

Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.

      INTANGIBLE ASSETS

Intangible assets consist primarily of the costs of goodwill, patents and
trademarks purchased in business acquisitions. Intangible assets are amortized
on the straight-line basis over either 25 years or an estimated useful life,
whichever is shorter.

The Company accounts for long-lived and 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 intangible assets for events or changes in
circumstances which 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 intangibles 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.
At September 30, 1997, no such impairment of assets was indicated.

A summary of the estimated lives by major category of intangible assets at
September 30, 1997 is as follows:

Goodwill...................................               25 Years

Patents....................................               17 Years

Non-compete agreements.....................  Life of agreements (up to 5 years)

Trademarks, Tradenames and
  Other....................................     Various from 15 to 25 Years

      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.


                                       33


<PAGE>   36




                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

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, accounts receivable, accounts payable,
senior subordinated notes and bank debt. The carrying value of these assets and
liabilities is a reasonable estimate of their fair market value at September 30,
1997.

      LOSS PER COMMON SHARE

Loss per common share has been computed by dividing loss applicable to common
shareholders for the period by the weighted average number of common shares
outstanding during the period.

In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings per Share, which supersedes Accounting Principles Board Opinion
(APB) No. 15, the existing authoritative guidance. SFAS No. 128 is designed to
improve the earnings per share information provided in the financial statements
by simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of earnings per share on an
international basis. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period earnings per share data presented. Earnings per
share in these consolidated financial statements would not be affected under the
new pronouncement.

      SFAS NO. 123 -- ACCOUNTING FOR STOCK-BASED COMPENSATION

On October 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 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 APB No. 25. 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 in SFAS No. 123 been applied
(see Note 14).

(5)  INVENTORIES

Inventories consisted of the following at September 30 (dollars in thousands):



<TABLE>
<CAPTION>
                                                          SUCCESSOR COMPANY
                                                      ------------------------
                                                       1996             1997
                                                      -------          -------

<S>                                                   <C>              <C>    
Raw materials........................................ $13,100          $10,031

Work in process......................................  11,130            9,982

Finished goods.......................................  16,934           16,680
                                                      -------          -------

                                                      $41,164          $36,693
                                                      =======          =======
</TABLE>


                                       34


<PAGE>   37



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

(6)  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at September 30
(dollars in thousands):



<TABLE>
<CAPTION>
                                                             SUCCESSOR COMPANY 
                                                          ----------------------
                                                           1996           1997
                                                          -------        -------
<S>                                                       <C>            <C>    
Land..................................................    $ 2,637        $ 2,669
Buildings and improvements............................     17,584         16,171
Machinery and equipment...............................     35,501         43,069
Furniture and fixtures................................     10,957         15,485
Construction in progress..............................     10,343          4,768
                                                          -------        -------
                                                           77,022         82,162

Less-- Accumulated depreciation.......................      8,310         17,214
                                                          -------        -------
                                                          $68,712        $64,948
                                                          =======        =======
</TABLE>
(7)  INTANGIBLE ASSETS

Intangible assets consist of the following at September 30 (dollars in
thousands):


<TABLE>
<CAPTION>

                                                           SUCCESSOR COMPANY
                                                       -------------------------
                                                         1996             1997
                                                       --------         --------
<S>                                                    <C>              <C>     
Goodwill.............................................  $ 81,195         $ 84,800
Patents..............................................     1,638            1,638
Trademarks and tradenames............................    74,122           74,122
Non-compete agreement................................    10,592              269
Other................................................       585              585
                                                       --------         --------
                                                        168,132          161,414

Less-- Accumulated amortization......................     6,192           14,508
                                                       --------         --------
                                                       $161,940         $146,906
                                                       ========         ========
</TABLE>

At September 30, 1997, the gross book value of the non-compete agreements was
$0.3 million as compared to $10.6 million at September 30, 1996. The decrease
was primarily due to a reclassification of the non-compete agreement relative to
the Peltor acquisition into goodwill.

(8)  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following at September
30 (dollars in thousands):



<TABLE>
<CAPTION>
                                                            SUCCESSOR COMPANY
                                                         ----------------------
                                                          1996           1997
                                                         -------        -------

<S>                                                      <C>            <C>     
Accounts payable -- trade..............................  $19,806        $18,378
Accrued liabilities --                                     8,603          9,169
  Employee compensation and benefits (Note 11).........
  Other................................................   11,939          8,639
                                                         -------        -------
                                                         $40,348        $36,186
                                                         =======        =======
</TABLE>


                                       35


<PAGE>   38



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

(9)  DEBT

The long-term debt balances consisted of the following at September 30 (dollars
in thousands):



<TABLE>
<CAPTION>
                                                                SUCCESSOR COMPANY
                                                              --------------------
                                                                1996         1997
                                                              --------    --------

<S>                                                           <C>         <C>     
Revolving credit facility.................................    $  5,050    $ 10,200

Term loans, due 2003......................................     139,436     129,592

Senior subordinated notes, due 2005, 12.5%................     100,000     100,000

Note payable, other.......................................       1,281         646

Mortgage note, due 1997-- 2006, 10.1%.....................       2,500       2,458

Industrial Revenue Bonds, due 1997 -- 2003, 6.4% less
  advance deposit of $122.................................         598         448

Industrial Revenue Bonds, due 2002, 13.0%.................       1,000       1,000


Capitalized lease obligations--                                    329         286
  Lease term ends 2003, 6.5%..............................
  Lease term ends 1997, 8.9%..............................          24          --

  Lease term ends 1998, 9.0%..............................          69          36
                                                              --------    --------
                                                               250,287     244,666

Less-- Current portion of long-term debt..................       8,767      10,937                                              
                                                              --------    --------
          Total...........................................    $241,520    $233,729
                                                              ========    ========
</TABLE>

Revolving Credit and Term Loans

In July 1995, Aearo Company entered into a credit agreement (the Agreement) that
provides for secured borrowings from a syndicate of lenders consisting of (i) a
five-year revolving credit facility providing for up to $25.0 million in
revolving loans, $5.0 million of which may be used for letters of credit (the
Revolving Credit Facility) and (ii) a term loan facility providing for $45.0
million in term loans, consisting of a $28.5 million U.S. term loan, a $4.5
million term loan designated in Canadian dollars and a $12.0 million term loan
designated in Sterling (collectively, the Old Term Loans).

On May 30, 1996, Aearo Company and the Syndicated Lenders amended and restated
the Agreement. The amended and restated Agreement consists of (a) a secured term
loan facility consisting of A and B term loans providing for up to $90.0 million
of A term loans and $50.0 million of B term loans (collectively, the Term
Loans); a portion of the A term loans is denominated in an equivalent amount of
foreign currencies and (b) a secured revolving credit facility (the Revolving
Credit Facility) providing for up to $25.0 million of revolving loans, a portion
of which may be denominated in foreign currencies, for general corporate
purposes and, as to $15.0 million thereof, to finance permitted acquisitions
(collectively the Senior Bank Facilities). The Revolving Credit Facility
provides for the issuance of letters of credit in an aggregate face amount of up
to $5.0 million. The Term Loans will amortize quarterly over a seven-year
period. Amounts repaid or prepaid in respect of the Term Loans may not be
reborrowed. Loans and letters of credit under the Revolving Credit Facility will
be available at any time prior to the maturity date of the Senior Bank
Facilities, which is May 30, 2002. The amount outstanding at September 30, 1997
and 1996 on the Term Loans was $129.6 million and $139.4 million, respectively.



                                       36

<PAGE>   39



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

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 plus a margin of 2.25% in the case of A Term Loans and Revolving
Loans and 2.75% in the case of B Term Loans; or (b) the Base Rate, as defined
plus a margin of 1.00% in the case of A Term Loans and Revolving Loans and 1.50%
in the case of B Term Loans. The Base Rate is the higher of Bankers Trust
Company's announced prime lending rate and 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 fees relating to the issuance of
letters of credit.

At September 30, 1997 interest rates on Term Loans were 8.0% for the US Dollar
Term A Loan, 5.6% for the US DEM Term A Loan, 9.6% for the US Sterling Term A
Loan, 5.9% for the Canadian Term A Loan, 9.6% for the Sterling Term A Loan and
8.5% for the US Dollar Term B Loan. For the year ended September 30, 1997 the
weighted average interest rates paid were 7.9%, 5.5%, 8.7%, 5.6%, 8.7% and 8.4%
for the US Dollar Term A Loan, for the US DEM Term A Loan, for the US Sterling
Term A Loan, for the Canadian Term A Loan, for the Sterling Term A Loan and for
the US Dollar Term B Loan, respectively.

At September 30, 1996 interest rates on Term Loans were 7.8% for the US Dollar
Term A Loan, 5.4% for the US DEM Term A Loan, 8.1% for the US Sterling Term A
Loan, 6.4% for the Canadian Term A Loan, 8.1% for the Sterling Term A Loan and
8.3% for the US Dollar Term B Loan. During the period of May 30, 1996 to
September 30, 1996 the weighted average interest rates paid were 7.7%, 5.6%,
8.1%, 6.8%, 8.1% and 8.2% for the US Dollar Term A Loan, for the US DEM Term A
Loan, for the US Sterling Term A Loan, for the Canadian Term A Loan, for the
Sterling Term A Loan and for the US Dollar Term B Loan, respectively.

The weighted average interest rates on the Old Term Loans during fiscal 1995
were 7.9%, 8.5% and 8.7% for the US term loan, Canadian term loan and Sterling
term loan, respectively.

At September 30, 1997 Aearo Company had $10.2 million outstanding on the
Revolving Credit Facility. At September 30, 1997, the rate on the Revolving
Credit Facility was 9.5%. For the year ended September 30, 1997, the maximum
amount outstanding under the Revolving Credit Facility was $20.3 million with
the average being $12.9 million. The weighted average interest rate paid during
fiscal 1997 on the Revolving Credit Facility was 9.4%.

At September 30, 1996 Aearo Company had $5.1 million outstanding on the
Revolving Credit Facility. At September 30, 1996, the rate on the Revolving
Credit Facility was 9.25%. During the period from May 30, 1996 to September 30,
1996, the maximum amount outstanding under the Revolving Credit Facility was
$8.9 million with the average being $1.0 million. The weighted average interest
rate paid during fiscal 1996 on the Revolving Credit Facility was 9.3%.

During the period from July 11, 1995 to September 30, 1995, the maximum amount
outstanding under the Revolving Credit Facility was $5.5 million with the
average being $2.7 million and the weighted average interest rate during such
period was 9.5%.

Under the terms of the Senior Bank Facilities, Aearo Company is required to
comply with a number of affirmative and negative covenants. Among other things,
Aearo Company must satisfy certain financial covenants and ratios, including
interest coverage ratios, leverage ratios and fixed charge coverage ratios. In
April 1997, the Senior Bank Facilities were amended with respect to
certain covenants applicable to periods ending on and after June 30, 1997. The
Senior Bank Facilities also impose limitations on certain business activities of
Aearo Company. The Senior Bank Facilities restrict, among other things, the
incurrence of additional indebtedness, creation of certain liens, sales of
certain assets and limitations on transactions with


                                       37

<PAGE>   40



affiliates. As of September 30, 1997, Aearo Company is in compliance with the
covenants of the Senior Bank Facilities. The Senior Bank Facilities are
unconditionally guaranteed by Aearo Corporation and secured by first priority
security interests in substantially all the capital stock and tangible and
intangible assets of the Company.

Senior Subordinated Notes

In connection with the acquisition, Aearo Company issued $100.0 million of
Senior Subordinated Notes due 2005 (the Subordinated Notes). The Subordinated
Notes are unsecured obligations of Aearo Company. The Subordinated Notes bear
interest at a rate of 12.5% per annum and are payable semiannually on each
January 15 and July 15 commencing on January 15, 1996.

The Subordinated Notes are redeemable at the option of Aearo Company, on or
after July 15, 2000. From and after July 15, 2000, the Subordinated Notes will
be subject to redemption at the option of Aearo Company, in whole or in part, at
various redemption prices, declining from 106.3% of the principal amount to par
on and after July 15, 2004. In addition, on or prior to July 15, 1998, the
Company may use the net cash proceeds of one or more equity offerings to redeem
up to 35% of the aggregate principal amount of the Subordinated Notes originally
issued at a redemption price of 112.5% of the principal amount thereof plus
accrued interest to the date of redemption.

The Subordinated Note 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, 1997, Aearo Company is in
compliance with the various covenants of the Subordinated Note agreement. The
Subordinated Notes are unconditionally guaranteed on an unsecured, senior
subordinated basis by Aearo Corporation.

The following is a summary of maturities of all of the Company's debt
obligations due after September 30, 1997 (dollars in thousands):


<TABLE>
<CAPTION>
                                                      AMOUNT
                                                      ------
    
    <C>                                             <C>        
    1998........................................... $ 10,937
    1999...........................................   13,078
    2000...........................................   16,165
    2001...........................................   20,914
    2002...........................................   45,867
    Thereafter.....................................  137,705
                                                    --------
                                                    $244,666
                                                    ========
</TABLE>

                                       38



<PAGE>   41



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

 (10)  INTEREST EXPENSE, NET

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

<TABLE>
<CAPTION>

                                     PREDECESSOR
                                       COMPANY                         SUCCESSOR COMPANY
                                   ----------------    --------------------------------------------------
                                                         PERIOD ENDED       YEAR ENDED       YEAR ENDED
                                     PERIOD ENDED        SEPTEMBER 30,     SEPTEMBER 30,    SEPTEMBER 30,
                                     JULY 11, 1995           1995              1996             1997
                                   ---------------     ----------------  ---------------  ---------------
<S>                                    <C>                  <C>              <C>              <C>
Expense --
  Note payable to Cabot
    Corporation...................     $ 5,058              $   --           $    --          $    --

  External........................       1,802               4,160            20,975           26,896
                                       -------              ------           -------          -------

    Total interest expense........       6,860               4,160            20,975           26,896
                                       -------              ------           -------          -------


Income--                                (1,164)                 --                --               --
  Intercompany....................
  External........................         (23)                (25)             (272)            (231)
                                       -------              ------           -------          -------

    Total interest income.........      (1,187)                (25)             (272)            (231)
                                       -------              ------           -------          -------
Interest expense, net..........        $ 5,673              $4,135           $20,703          $26,665
                                       =======              ======           =======          =======
</TABLE>


(11)  EMPLOYEE BENEFIT PLANS

The Company has two noncontributory defined benefit pension plans, the Aearo
Company Employees' Retirement Account Plan (the Aearo Plan), which is a cash
balance plan, and the Eo Ao R Specialty Composites Division of Aearo Company
Non-Union Employees Retirement Plan (the Specialty Composites Plan). Benefits
provided under these plans are primarily based on years of service and the
employee's compensation.

The Aearo Plan, effective May 1, 1990, covers most employees in the United
States and is funded quarterly based on actuarial and economic assumptions
designed to achieve adequate funding of projected benefit obligations. Plan
assets are invested in a portfolio consisting primarily of debt and equity
securities. The Specialty Composites Plan resulted from a 1989 acquisition. As
of March 31, 1989, the benefits under this plan were frozen. Plan assets are
invested in fixed-income investments.

Net periodic pension cost for these plans comprises the following elements
(dollars in thousands):

<TABLE>
<CAPTION>

                                PREDECESSOR
                                  COMPANY                           SUCCESSOR COMPANY
                                -------------         -------------------------------------------------
                                                      PERIOD ENDED       YEAR ENDED        YEAR ENDED
                                PERIOD ENDED          SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,
                                JULY 11, 1995             1995              1996              1997
                                -------------         -------------     -------------     -------------
<S>                                <C>                    <C>              <C>               <C>   
Service cost..............         $ 748                  $ 217            $1,180            $1,273

Interest cost.............           272                     79               415               485

Return on plan assets.....          (527)                  (251)             (718)           (1,283)

Net amortization and deferral        207                    160               266               783
                                   -----                  -----            ------            ------

  Net periodic pension cost        $ 700                  $ 205            $1,143            $1,258
                                   =====                  =====            ======            ======

</TABLE>


                                       39

<PAGE>   42



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The following table sets forth the funded status of the pension plans at
September 30 (dollars in thousands):


<TABLE>
<CAPTION>
                                                                 SUCCESSOR COMPANY
                                                                -------------------
                                                                  1996        1997
                                                                -------     -------

<S>                                                             <C>         <C>     
Actuarial present value of benefit obligations --
  Vested benefit obligation.................................    $(6,264)    $(6,458)
                                                                =======     =======
  Accumulated benefit obligation............................    $(7,690)    $(8,350)
                                                                =======     =======
  Projected benefit obligation..............................    $(7,690)    $(8,413)
  Plan assets at fair value.................................      6,714       7,551
                                                                -------     -------
            Excess of projected benefit obligation over plan
              assets........................................       (976)       (862)
Unrecognized net gain.......................................       (291)     (1,488)
                                                                -------     -------
Pension liability (included in accrued liabilities).........    $(1,267)    $(2,350)
                                                                =======     =======
</TABLE>


At September 30, 1997, the pension liability of $2,350,000 comprised a liability
of $2,384,000 related to the Aearo Plan and a prepaid pension asset of $34,000
related to the Specialty Composites Plan. The pension liability of $1,267,000 at
September 30, 1996 comprised a liability of $1,288,000 related to the Aearo Plan
and a prepaid pension asset of $21,000 related to the Specialty Composites Plan.

The following weighted average rates were used in the calculations at September
30:


<TABLE>
<CAPTION>

                                                                 SUCCESSOR COMPANY
                                                             ------------------------
                                                                1996           1997
                                                             ------------   ---------

<S>                                                             <C>            <C> 
Discount rate -- projected benefit obligation...............    6.5%           7.0%

Expected rate of return on plan assets.....................     7.8            7.8

Assumed rate of increase in compensation...................     4.0            4.0

</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 this Plan were $90,000, $83,000, $9,000, and $32,000 for the years ended
September 30, 1997 and 1996, and the periods ended September 30, 1995 and July
11, 1995, respectively.

A 401(k) plan, the Aearo Company Employees' 401(k) Savings Plan, was established
as of May 1, 1990. Employees can join the plan after six months of service,
during which they work at least 500 hours and may contribute up to 15% of their
compensation. The Company contributes amounts equal to 50% of the employee's
contribution to a maximum of 3% of the employee's pay. Prior to January 1, 1997,
the Company provided a 40% match to a maximum of 2% of pay. The costs to the
Company for this Plan were $717,000, $425,000, $100,000, and $345,000 for the
years ended September 30, 1997 and 1996, and the periods ended September 30,
1995 and July 11, 1995, 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, 1997 and 1996, and
the periods ended September 30, 1995 and July 11, 1995, the Company contributed
approximately $158,000, $131,000, $27,000, and $79,000, respectively.




                                       40


<PAGE>   43



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

Postretirement Benefits

The Company does not provide defined benefit postretirement plans for retirees
after age 65. 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.

As of September 30, 1997 and 1996, the accrued postretirement benefit cost was
$104,000 and $168,000, respectively.

(12)  RELATED PARTY TRANSACTIONS

An annual management fee, which is to be shared by Cabot and Vestar, will be
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.

The Company and Cabot have entered into an arrangement relating to certain
respirator claims asserted after the Formation Acquisition whereby, so long as
the Company pays to Cabot an annual fee of $400,000, which the Company has
elected to pay, Cabot will retain responsibility and liability for, and
indemnify the Company against, certain legal claims alleged to arise out of the
use of respirators manufactured prior to July 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot with respect to such
claims.

The Company has made available to certain members of management (Management
Investors) loans in order to provide such Management Investors with funds to be
applied to a portion of the purchase price of the Common Stock purchased by such
Management Investors under the Stock Purchase Plan. Such loans (i) are secured
by Common Stock purchased with the proceeds thereof, (ii) have a term of from 5
to 10 years, (iii) bear interest at an annual rate determined pursuant to
Section 7872(f)(2) of the 1986 Internal Revenue Code, and (iv) will be subject
to mandatory prepayment in the event the employment of such Management Investors
terminates. The aggregate amount of these loans was approximately $415,000 and
$673,000 at September 30, 1997, and September 30, 1996, respectively.

Prior to the Formation Acquisition, the Company engaged in various transactions
with Cabot and its affiliates that are characteristic of a combined group under
common control. Cabot had historically provided the Company with various
financial and administrative functions and services, including the continued
participation of the Company in certain insurance policies maintained by Cabot,
for which the Company was charged associated direct costs and expenses. In
addition, certain indirect administrative costs were allocated to the various
business units of Cabot, including the Company, principally based on a formula
that considered such proportionate variables as revenue, payroll and property
balances. Administrative costs of doing business on a stand-alone basis may have
been significantly different. Cabot also provided financing and cash management
for the Company through a centralized treasury system. Operating expenses, as
described above, were $1,728,000 for the period ended July 11, 1995.



                                       41



<PAGE>   44



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

(13)  INCOME TAXES

Income (loss) before provision for income taxes is as follows (dollars in
thousands):


<TABLE>
<CAPTION>
                                PREDECESSOR
                                  COMPANY                    SUCCESSOR COMPANY
                               -------------   -------------------------------------------------
                                                                       
                               PERIOD ENDED     PERIOD ENDED      YEAR ENDED       YEAR ENDED
                                 JULY 11,      SEPTEMBER 30,    SEPTEMBER 30,     SEPTEMBER 30,
                                   1995           1995              1996              1997
                               ------------    -------------    -------------     --------------

<S>                              <C>              <C>              <C>               <C>     
Domestic..................       $1,258           $(1,064)         $5,614            $(7,126)
                                                 
Foreign...................        9,073               905             863              1,167
                                 ------           -------          ------            -------
                                                 
          Total...........       $7,815           $  (159)         $6,477            $(5,959)
                                 ======           =======          ======            =======
</TABLE>                                       

A summary of provision (benefit) for income taxes is as follows (dollars in
thousands):


<TABLE>
<CAPTION>
                                       PREDECESSOR
                                         COMPANY                        SUCCESSOR COMPANY
                                     ----------------     ---------------------------------------------
                                       PERIOD ENDED        PERIOD ENDED     YEAR ENDED       YEAR ENDED
                                         JULY 11,          SEPTEMBER 30,   SEPTEMBER 30,    SEPTEMBER 30,
                                           1995                1995             1996            1997
                                     ----------------      -------------   -------------    -------------

<S>                                      <C>                   <C>             <C>             <C>  
U.S. Federal and State --
  Current...........................     $(2,335)              $  47           $  155          $123
  Deferred..........................       1,851                  --            2,135            --
                                          ------                ----            -----          ----
          Total.....................        (484)                 47            2,290           123
                                          ------                ----            -----          ----
Foreign --
  Current...........................       3,493                 378            1,996           608

  Deferred..........................          --                  --               --           186
                                          ------                ----            -----          ----
                                           3,493                 378            1,996           794
                                          ------                ----            -----          ----
          Total.....................      $3,009                $425           $4,286          $917
                                          ======                ====           ======          ====
</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>
<CAPTION>
                                            PREDECESSOR
                                              COMPANY                        SUCCESSOR COMPANY
                                          ----------------       ----------------------------------------------
                                             PERIOD ENDED        PERIOD ENDED      YEAR ENDED      YEAR ENDED
                                               JULY 11,          SEPTEMBER 30,    SEPTEMBER 30,   SEPTEMBER 30,
                                                 1995                1995              1996           1997
                                           --------------        -------------    -------------   -------------

<S>                                             <C>                  <C>             <C>             <C> 
Computed tax expense at the expected
  statutory rate.........................       $2,735               $ (56)          $2,267          $(2,086)
                                                                                       (22)               81
State taxes, net of federal effect.......           61                  31             371              (917)
Foreign income taxed at different rates            454                  70
Goodwill amortization....................           --                  --              159              139
Non-deductible expenses..................           --                  --              106              112
Increase in valuation allowance..........           --                 362            1,357            3,551
Other, net...............................         (241)                 18               48               37
                                                ------               -----           ------           ------
  Provision for income taxes.............       $3,009               $ 425           $4,286           $  917
                                                ======               =====           ======           ======

</TABLE>

                                       42


<PAGE>   45




                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

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


<TABLE>
<CAPTION>

                                                                             SUCCESSOR COMPANY
                                                                           --------------------
                                                                              1996       1997
                                                                           ---------   --------

<S>                                                                         <C>        <C> 
Deferred tax assets
  Pension and other benefits.............................................   $  1,842   $  2,295
  Property, plant and equipment..........................................      1,309     (3,095)
  Intangible assets......................................................      5,143      3,312
  Restructuring charges..................................................        495        270
  Inventory..............................................................        329      2,519
  Net operating loss--foreign.............................................     1,357      2,671
  Net operating loss carryforwards--domestic..............................       100      6,642
  Other..................................................................        995        321
                                                                            --------   --------
     Subtotal............................................................     11,570     14,935
Valuation allowances.....................................................    (12,267)   (15,818)
                                                                            --------   --------
     Total deferred tax liability........................................   $   (697)  $   (883)
                                                                            ========   ========
</TABLE>

The valuation allowance at September 30, 1997 and 1996 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 carry forwards, before the tax effect, is approximately $19.0 million. Of
the valuation allowance, approximately $10.7 million will be used to reduce
goodwill or other intangibles related to the purchase if the benefits are
realized.

(14)  STOCKHOLDERS' EQUITY

Stock Ownership and Stockholders' Agreement

Prior to the Formation Acquisition, Cabot owned 100% of the outstanding shares
of the Company. Currently, (i) Cabot owns 43.9% of Common Stock and 50% of
Redeemable Preferred Stock, (ii) Vestar owns 43.9% of Common Stock and 50% of
Redeemable Preferred Stock and (iii) the Management Investors and certain other
employees of the Company own 12.2% of Common Stock. Vestar, Cabot and Management
entered into a stockholders' agreement (the Stockholders' Agreement) as of the
Formation Acquisition date. The Stockholders' Agreement contains stock transfer
restrictions, as well as provisions granting certain tag-along rights,
drag-along rights, registration rights and participation rights.

Common and Preferred Stock

To finance a portion of the Formation Acquisition, Aearo Corporation issued
100,000 (42,500 each to Vestar and Cabot and 15,000 to Management Investors)
shares of Common Stock and 45,000 shares of Redeemable Preferred Stock (22,500
each to Vestar and Cabot). Management Investors received a loan from the Company
in the amount of $934,000 to fund a portion of its cost of the Formation
Acquisition. This amount was reflected as a reduction to additional paid-in
capital related to the issuance of Common Stock. (See Note 12.)


                                       43


<PAGE>   46



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The Redeemable 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 daily. 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.

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 $500,000 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 in respect to such purchases or redemptions does not exceed
$1.5 million; 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.

Executive Stock Option Plan

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 with an exercise price of
$600 per share, to certain members of management. The options 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 and
the tenth anniversary of the date of grant. The option term will be ten years
except that options shall expire in certain instances of termination of
employment and upon the sale of the Company.

1997 Stock Option Plan

In July 1997, the Company's Board of Directors adopted and the stockholders
subsequently approved the 1997 Stock Option Plan (the "1997 Option Plan") under
which 10,000 shares of Aearo Common Stock have been reserved for issuance. Under
the 1997 Option Plan non-qualified and qualified options may be granted to
employees of the Company. As of December 15, 1997 no options had been granted
under the 1997 Option Plan.

Pro Forma Stock-Based Compensation Expense

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which sets forth a fair-value-based
method of recognizing stock-based compensation expense. As permitted by SFAS No.
123, the Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. Had compensation cost for awards granted in
fiscal 1997 and fiscal 1996 under the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method set forth under SFAS No. 123, reported net income (loss) and earnings
(loss) per share would not have been affected for both fiscal 1997 and fiscal
1996 as the Black-Scholes option pricing model calculated no value for the
options granted in fiscal 1997 and fiscal 1996.

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


                                       44


<PAGE>   47



<TABLE>
<CAPTION>

                                                             1997              1996
                                                             ----              ----
<S>                                                          <C>               <C>  
      Risk-free interest rate.....................           6.10%             6.33%
      Expected life of option grants..............          10 years         10 years
      Expected volatility of underlying stock.....             0%                0%
</TABLE>

The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's stock options.


Stock Option Activity

Stock Option data are summarized as follows for the years ended September 30,
1996 and 1997:

<TABLE>
<CAPTION>

                                                        Number       Weighted Average
                                                       of Shares      Exercise Price
                                                       ---------      --------------
      <S>                                               <C>               <C> 
      Outstanding, September 30, 1995                     --                --
      Granted                                            5,000            $600.00
      Exercised                                           --                --
      Forfeited                                           --                --
      Expired                                             --                --
                                                        ------            -------
      Outstanding, September 30, 1996                    5,000            $600.00
      Granted                                              701            $600.00
      Exercised                                           --                --
      Forfeited                                         (1,283)           $600.00
      Expired                                             --                --
                                                        ------            -------
      Outstanding, September 30, 1997                    4,418            $600.00
                                                        ======            =======
</TABLE>


                                       45



<PAGE>   48



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The following table sets forth information regarding options outstanding at
September 30, 1997:

<TABLE>
<CAPTION>
                                                                                                             Weighted
                                                                                     Weighted                 Average
                                            Number            Weighted                Average             Exercise Price
    Number of           Range of          Currently           Average                Remaining             for Currently
    Options          Exercise Prices      Exercisable       Exercise Price       Contractual Life           Exercisable
    -------          ---------------      -----------       --------------       ----------------           -----------

      <S>               <C>                   <C>             <C>                   <C>                        <C> 
      4,418             $600.00               0               $600.00               8.8 years                  N/A
</TABLE>

At September 30, 1996 and 1997, none of the shares were currently exercisable.
At September 30, 1996 and 1997, there were 0 and 10,582 options available for
grant.

(15)  COMMITMENTS AND CONTINGENCIES

Compensation Plans

The Company provides performance-based compensation awards to executive officers
and key employees for achievement during each year as part of an annual bonus
plan. Such compensation awards are a function of individual performance and
consolidated operating results. Business unit performance is also a factor used
in determining compensation awards with respect to key employees who are not
executive officers. The Company also has an overall incentive plan which
provides performance-based compensation awards to all employees based on
consolidated operating results.

Supplemental Severance Pay Plan

Upon consummation of the Formation Acquisition, the Company adopted a
supplemental severance pay plan providing certain executive officers and key
employees with salary continuation, based on years of service, in the event of
an eligible termination. The plan provides for one month's base pay for each
full year of service with a minimum amount payable of three months and a maximum
amount payable of 12 months.


                                       46



<PAGE>   49



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

Lease Commitments

The Company leases certain transportation vehicles, warehouse facilities, office
space, and machinery and equipment under cancelable and noncancelable leases,
most of which expire within 10 years and may be renewed by the Company. Rent
expense under such arrangements totaled $2,805,000, $768,000, $4,395,000 and
$5,315,000 for the periods ended July 11 1995 and September 30, 1995 and the
years ended September 30, 1996 and 1997, respectively. Future minimum rental
commitments under noncancelable leases in effect at September 30, 1997 are as
follows (dollars in thousands):


<TABLE>

      <S>                                                        <C>   
      1998                                                      $ 3,393
      
      1999                                                        3,312
      
      2000                                                        3,385
      
      2001                                                        3,164
      
      2002                                                        2,711
      
      2003 and thereafter                                         7,267
                                                                -------
      
                                                                $23,232
                                                                =======
</TABLE>

Contingencies

The Company is a defendant in various lawsuits and administrative proceedings
which are being handled in the ordinary course of business. In the opinion of
management of the Company, these suits and claims should not result in final
judgments or settlements which, in the aggregate, would have a material adverse
effect on the Company's financial condition or results of operations.

During fiscal 1997 the Company received a complaint from Gargoyles, Inc.
alleging that one of the Company's recently introduced plano eyewear products
(Fectoids) infringes a patented lens shape utilized in the plaintiff's sun and
sporting glasses. The Company is defending this allegation vigorously and the
matter is expected to go to trial in fiscal 1998. The ultimate outcome of this
case and its impact on the Company's financial condition and results of
operations cannot currently be determined.

(16)  ACQUISITIONS

On May 30, 1996, the Company acquired Peltor Holding AB (the Acquisition) for
approximately $85.6 million. The Acquisition has been accounted for as a
purchase transaction in accordance with Accounting Principles Board Opinion No.
16, and accordingly, the consolidated financial statements for the periods
subsequent to May 30, 1996 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 30, 1996.



                                       47

<PAGE>   50



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997

The allocation of the $85.6 million purchase price and direct acquisition costs
is summarized as follows (dollars in thousands):



<TABLE>
<S>                                                                       <C>       
Cash paid for Peltor....................................................  $ 81,100
Acquisition costs.......................................................     4,500
                                                                          --------
          Total consideration and acquisition costs.....................    85,600
Historical Cost of Net Assets Acquired..................................    12,516
                                                                          --------
     Excess of consideration paid over historical cost..................  $ 73,084
                                                                          ========
Allocation of Excess of Consideration Paid over Historical Cost:

     Inventories........................................................  $  1,000

     Property, plant and equipment, net.................................     2,500

     Deferred financing costs...........................................     3,500

     Intangible assets..................................................    68,084

     Accrued liabilities................................................    (2,000)
                                                                          --------
                                                                          $ 73,084
                                                                          ========
</TABLE>

Unaudited pro forma operating results of the Company for the year ended
September 30, 1996, as adjusted for the debt financing and estimated effects of
the Acquisition as if it had occurred on October 1, 1995, are as follows:


<TABLE>

<S>                                                                      <C>          
Net sales (000s)......................................................      $273,723
Earnings (loss) applicable to common shareholders(000s)..............         (7,716)
Earnings (loss) per common share.......................................       (77.17)
Weighted average common shares outstanding.............................       99,980
</TABLE>

On January 3, 1996, the Company acquired the stock of Eastern Safety Equipment,
Inc. (Eastern) for $6.8 million, subject to final closing adjustments, as
defined. In addition, the Company entered into noncompete and consulting
agreements that provide an aggregate of $1.0 million in consideration to the
former controlling stockholder of Eastern. The transaction was accounted for
using the purchase method of accounting. The pro forma impact of the transaction
is not material to the results of the periods presented. Amounts allocated to
the non-compete and consulting agreements will be charged to expense over the
five year term of the agreements.



                                       48

<PAGE>   51



                                AEARO CORPORATION

                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
                               SEPTEMBER 30, 1997


(17)  FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA

All of Aearo Corporation's operations are included in the Safety and Energy
Absorbing Products industry segment. For the periods ended July 11, 1995 and
September 30, 1995 and the years ended September 30, 1996 and 1997, no single
customer accounted for more than 10% of sales. Transfers between geographic
areas are recorded at cost plus markup or at market. Financial information by
geographic area for the periods ended July 11, 1995 and September 30, 1995 and
the years ended September 30, 1996 and 1997, is as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                          PREDECESSOR
                                            COMPANY                    SUCCESSOR COMPANY
                                         -------------    ---------------------------------------------
                                         PERIOD ENDED     PERIOD ENDED     YEAR ENDED      YEAR ENDED
                                           JULY 11,       SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                             1995             1995            1996            1997
                                         ------------     -------------   -------------  -------------
  
<S>                                        <C>              <C>             <C>               <C>        
Sales:
   United States --
     Sales, excluding export sales....     $118,474         $ 36,366        $163,963         $182,732
     Export sales.....................        9,599            3,818          29,692           32,035
                                           --------         --------        --------         --------
         Total U.S. sales.............      128,073           40,184         193,655          214,767
   Canada.............................       10,098            3,102          14,686           14,727
   Europe.............................       25,914            7,425          50,282           78,850
                                           --------         --------        --------         --------
         Total........................      164,085           50,711         258,623          308,344
   Less -- Eliminations...............        9,373            2,811          15,164           22,561
                                           --------         --------        --------         --------
         Net sales....................     $154,712         $ 47,900        $243,459         $285,783
                                           ========         ========        ========         ========

Operating Profit:
   United States......................     $ 10,855         $  4,624        $ 30,412         $ 18,744
   Canada.............................        1,078               73             191            1,581
   Europe.............................        6,585            1,208           4,919            9,741
                                           --------         --------        --------         --------
         Total operating profit.......       18,518            5,905          35,522           30,066

Interest Expense, net.................        5,673            4,135          20,703           26,665
Unallocated corporate expenses(a).....        5,478            1,869           8,056            7,259
Foreign exchange gain (loss)..........         (448)              60             286            2,101
                                           --------         --------        --------         --------
           Income (loss) before income
             taxes....................     $  7,815         $  (159)        $  6,477         $ (5,959)
                                           ========         =======         ========         ========

Identifiable Assets:
   United States......................                      $189,328        $212,544         $203,489
   Canada.............................                         8,609           7,911            6,963
   Europe.............................                        20,326         117,981          100,424
                                                            --------        --------         --------
         Total identifiable assets....                      $218,263        $338,436         $310,876
                                                            ========        ========         ========
                                                                                       
</TABLE>
--------------


(a) Unallocated corporate expenses are corporate management costs and include
    services provided by Cabot Corporation for the Predecessor.


                                       49

<PAGE>   52




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.


                                       50

<PAGE>   53




                                    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 15, 1997.



<TABLE>
<CAPTION>
        NAME                                AGE                      POSITION
----------------------                  ---------   -------------------------------------------
<S>                                         <C>     <C>                                          
John D. Curtin, Jr.                         64       Chairman of the Board of Directors, Chief
                                                     Executive Officer, and President

Bryan J. Carey                              37       Vice President, Chief Financial Officer,
                                                     Treasurer and Assistant Secretary

James D. Hall                               47       Vice President, Product Management

Mark H. Hague                               46       Vice President, Operations

M. Rand Mallitz                             55       Vice President and General Manager, E-A-R
                                                     Specialty Composites

Daniel P. O'Connor                          53       Vice President, Sales

Steven F. Scott                             43       Vice President, General Counsel and Secretary

Norman W. Alpert*                           39       Director

Daniel S. O'Connell                         43       Director

Arthur J. Nagle                             59       Director

John W. Priesing                            68       Director

Samuel L. Hayes, III                        62       Director

William J. Brady                            36       Director

Margaret J. Hanratty*                       50       Director
</TABLE>

----------
* Member of Audit Committee

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

Bryan J. Carey joined the Company as Chief Financial Officer in April 1994 from
Cabot, where he had been Director of Strategic Planning since August 1992. Prior
to joining Cabot, he was a principal with Chase Capital Partners and its
predecessor.

James D. Hall joined the Company in October 1994 and served as a consultant to
the Company from July 1994 to October 1994. Mr. Hall was Executive Vice
President of Uvex Safety L.L.C. from 1993 to July 1994 and Vice President-Safety
of Uvex Winter Optical, Inc. from 1990 to 1993.

Mark H. Hague joined the Company in November 1996. He was Vice President and
General Manager of Cabot's North American Carbon Black Division from October
1993 through October 1996, and prior to that was Vice President and General
Manager of Cabot's Performance Materials Division.

M. Rand Mallitz joined the Company in January 1992 as Vice President and General
Manager, E-A-R Specialty Composites. He was Vice President and General Manager
of the Caulk Cartridge Division of Sonoco Products in


                                       51

<PAGE>   54



1991, and prior to that he was President/CEO of Roth Office Products.

Daniel P. O'Connor joined the Company in 1991 and has held the positions of Vice
President, Sales & Distribution; Vice President, Global Sales & Marketing; and
Vice President and General Manager, Prescription Eyewear. Prior to joining the
Company in 1991, he was Vice President of Sales and Marketing, Residential and
Small Businesses Services Division, of Northern Telecom.

Steven F. Scott joined the Company as Vice President, General Counsel and
Secretary in May 1997. Prior to joining the Company, Mr. Scott was an associate
at Ropes & Gray where he had practiced law for ten years.

John W. Priesing served as Chairman, President and Chief Executive Officer of
Russell-Stanley Corporation from 1993 until November 1996. He continues as
Chairman. Prior to joining Russell-Stanley Corporation, he was a private
investor. He became a director of the Company in December 1995.

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 Chairman of
the Board of Directors of International AirParts Corporation and a director of
Clark-Schwebel, Inc., Remington Products Company, L.L.C. and Russell-Stanley
Corporation, 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 Clark-Schwebel, Inc., Pinnacle
Automation, Inc., Sun Apparel, Inc., Reid Plastics Holdings, Inc., Remington
Products Company, L.L.C. and Russell-Stanley Corporation, all 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
Chart House Enterprises, Inc., Clark-Schwebel, Inc., La Petite Holdings
Corporation, Remington Products Company, L.L.C., and Russell-Stanley
Corporation, all companies (other than Chart House Enterprises, Inc.) in which
Vestar or its affiliates have a significant equity interest. He became a
director of the Company in July 1995.

Samuel L. Hayes, III was elected a director of the Company in May 1996. Since
1971, he has taught at the Harvard Business School, and he currently holds the
Jacob H. Schiff Chair in Investment Banking. His teaching and research have
focused on the capital markets and corporate financial management. Mr. Hayes is
also a director of Tiffany & Co., Ernst Home Centers, and certain Eaton Vance
mutual funds.

William J. Brady has been with Cabot for eleven years and is currently Vice
President and General Manager, Specialty Carbon Black Division. He became a
director of the Company in October 1997.

Margaret J. Hanratty has been Vice President and Treasurer of Cabot since
September 1993, and served previously as Director of Corporate Development.
Prior to joining Cabot in 1990, she served as Vice President, Mergers and
Acquisitions for The First Boston Corporation. She became a director of the
Company in July 1995.

The number of directors of the Company is fixed at nine with one position
currently vacant. 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, Priesing and Hayes
are the directors designated thus far by Vestar. Mr. Brady and Ms. Hanratty are
the directors designated by Cabot. Mr. Curtin is currently the only director
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 in office of each director ends when his or
her successor has been elected at the next following annual meeting of
stockholders and qualified or upon his or her removal or resignation.

The Board of Directors has established an audit committee consisting of Margaret
J. Hanratty and Norman W. Alpert (the "Audit Committee"). The Audit Committee
recommends the firm to be appointed as independent accountants to audit
financial statements and to perform services related to the audit, reviews the
scope and results


                                       52

<PAGE>   55



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").

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 (the "Named Executive
Officers") for services rendered to the Company in all capacities (including
service as an officer or director) in fiscal 1997.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                ANNUAL COMPENSATION

                                                                                                    ALL OTHER
                                            FISCAL                                                    ANNUAL
                                             YEAR              SALARY             BONUS            COMPENSATION
                                             ----              ------             -----            ------------
<S>                                          <C>              <C>                <C>                 <C>       
John D. Curtin, Jr.                          1997             $393,750              0                $29,186(1)
   Chairman of the Board of Directors,       1996             $375,000           $200,000            $30,791
   Chief Executive Officer, and President    1995             $375,000(2)        $150,000            $56,024

Albert F. Young, Jr.                         1997             $ 86,668              0                $415,909(3)
   President and Chief Operating             1996             $250,834           $ 90,000            $ 44,048
   Officer                                   1995             $230,004           $ 80,000            $ 13,758

Daniel P. O'Connor                           1997             $199,333           $ 44,000            $ 19,661(4)
   Vice President, Sales                     1996             $178,100           $ 65,000            $ 36,976
                                             1995             $160,483           $ 60,000            $ 46,332

Bryan J. Carey                               1997             $177,667           $ 30,000            $ 17,066(5)
   Vice President, Chief Financial Officer   1996             $159,164           $ 55,000            $ 15,227
   Treasurer and Assistant Secretary         1995             $146,387           $ 50,000            $ 12,323

James D. Hall                                1997             $179,750           $ 41,000            $ 19,740(6)
   Vice President, Product Management        1996             $157,080           $ 50,000            $ 14,720
                                             1995             $150,000           $ 40,000            $  7,968

Mark H. Hague                                1997             $196,429           $ 44,000            $  2,650(7)
   Vice President, Operations
</TABLE>

----------


(1) Includes contributions made on behalf of Mr. Curtin to the Company's 401(k)
    Savings Plan ($2,375); to the Company's Cash Balance Plan ($6,400); and to
    the Company's Supplemental Executive Retirement Plan ($20,411).

(2) Mr. Curtin's compensation for Fiscal 1995 represents $78,125 paid by the
    Company after July 11, 1995 and $296,875 paid by Cabot for the earlier
    period of the Fiscal year and billed to the Company.

(3) Mr. Young served as President and Chief Operating Officer until his
    resignation in January 1997. Includes contributions made on behalf of Mr.
    Young to the company's 401(k) savings plan ($688); to the Company's cash
    balance plan ($1,324); and to the Company's supplemental executive
    retirement plan ($6,193). Also includes payments associated with the
    termination of his employment as severance ($397,512) and outstanding
    vacation pay ($10,192).

(4) Includes contributions made on behalf of Mr. O'Connor to the Company's
    401(k) Savings Plan ($4,904); to the company's cash balance plan ($6,773);
    and to the Company's supplemental executive retirement plan


                                       53

<PAGE>   56



    ($7,984).

(5) includes contributions made on behalf of Mr. Carey to the Company's 401(k)
    Savings Plan ($3,668); to the Company's cash balance plan ($6,680); and to
    the Company's Supplemental Executive Retirement Plan ($6,718).

(6) Includes contributions made on behalf of Mr. Hall to the Company's 401(k)
    Savings Plan ($6,289); to the Company's Cash Balance Plan ($6,850); and to
    the Company's Supplemental Executive Retirement Plan ($6,601).

(7) Includes contributions made on behalf of Mr. Hague to the Company's 401(k)
    Savings Plan ($1,650); and to the Company's Cash Balance Plan ($1,000).

The following table sets forth information concerning the individual grant of
options to purchase Aearo Common Stock to the Named Executive Officers during
Fiscal 1997.

<TABLE>
<CAPTION>
                                       OPTION GRANTS DURING FISCAL 1997
                                                                                   POTENTIAL REALIZABLE
                                                                                    VALUES AT ASSUMED  
                                                                                    ANNUAL RATES OF    
                                                                                       STOCK PRICE     
                                          % OF                                      APPRECIATION FOR   
                                       TOTAL OPTIONS                                  OPTION TERM      
                                        GRANTED TO     EXERCISE                       (10 YEARS)(2)    
                            OPTIONS    EMPLOYEES IN     PRICE      EXPIRATION       -------------------
       NAME                GRANTED(1)   FISCAL YEAR    PER SHARE     DATE           5% ($)      10% ($)
------------------         ----------   -----------    ---------   ----------       ------      -------
<S>                          <C>            <C>         <C>         <C>             <C>         <C>    
Mark H. Hague............    218.75         55.0%       $600.00     11/10/06        82,542      209,179
</TABLE>

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

(1) 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 (November 11,
    2006). All options are subject to the employee's continued employment and
    terminate ten years after the grant date, subject to earlier termination in
    accordance with the Company's Executive Stock Option Plan and the applicable
    option agreement.

(2) This column shows the hypothetical gain or "option spreads" of the options
    granted based on both the fair market value of the Aearo Common Stock for
    financial reporting purposes and assumed annual compound stock appreciation
    rates of 5% and 10% over the term of the options. The 5% and 10% assumed
    rates of appreciation are mandated by the rules of the Securities and
    Exchange Commission and do not represent the Company's estimate or
    projection of future Aearo Common Stock prices. The gains shown are net of
    the option exercise price, but do not include deductions for taxes or other
    expenses associated with the exercise of the option or the sale of the
    underlying shares, or reflect nontransferability, vesting or termination
    provisions. The actual gains, if any, on the exercises of stock options will
    depend on the actual future performance of the Aearo Common Stock.


                                       54


<PAGE>   57




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 1997. None of the Named Executive Officers
exercised any stock options during fiscal 1997.

<TABLE>
<CAPTION>

                                                                                  VALUE OF OUTSTANDING
                                                     NUMBER OF BENEF              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>
John D. Curtin, Jr......    --         --           --            812             $ 0               $ 0
Daniel P. O'Connor......    --         --           --            250               0                 0
Bryan J. Carey..........    --         --           --            313               0                 0
James D. Hall...........    --         --           --            250               0                 0
Mark H. Hague...........    --         --           --            219               0                 0
                                                                                            
</TABLE>

(1) There was no public market for the Aearo Common Stock as of September 30,
    1997. Accordingly, these values have been calculated on the basis of an
    assumed fair market value of $300 per share.

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 were given the opportunity to purchase a limited
amount of shares of Aearo Common Stock; during fiscal 1996, John W. Priesing,
one of the Outside Directors, purchased 100 shares at a price of $200 per share
and Samuel L. Hayes, III, the other Outside Director, purchased 100 shares at a
price of $600 per share. In connection with such purchases Messrs. Priesing and
Hayes became parties to the Stockholders' Agreement. See Item 13, "Certain
Relationships and Related Transactions -- Stock Ownership and Stockholders'
Agreement."

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 15, 1997, 12,425 of such shares were issued
and outstanding.

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

EXECUTIVE STOCK OPTION PLAN. In June 1996, the Company's Board of Directors
adopted and the stockholders subsequently approved the Executive Stock Option
Plan (the "Executive Plan") under which 5,000 shares of Aearo Common Stock have
been reserved for issuance. Non-qualified options to acquire all 5,000 shares at
a price of $600 per share have been granted to officers and key employees of the
Company; of these options, 2,062 in the aggregate were granted to executive
officers, including Mr. Curtin (812 options), Mr. Hague (219 options), Mr.


                                       55


<PAGE>   58



O'Connor (250 options), Mr. Hall (250 options), Mr. Carey (313 options), Mr.
Mallitz (156 options), and Mr. Scott (250 options).

The Executive Plan is administered by a committee of the Board of Directors
consisting of all non-employee directors. As of December 15, 1997 no such
options were exercisable and no options remained available for future grant
under the Executive Plan. 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 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."

1997 STOCK OPTION PLAN. In July 1997, the Company's Board of Directors adopted
and the stockholders subsequently approved the 1997 Stock Option Plan (the "1997
Option Plan") under which 10,000 shares of Aearo Common Stock have been reserved
for issuance. Under the 1997 Option Plan non-qualified and qualified options may
be granted to employees of the Company. As of December 15, 1997 no options had
been granted under the 1997 Option Plan.

The 1997 Option Plan is administered by a committee of the Board of the
Directors consisting of all non-employee directors. The options are issuable at
fair market value of the underlying Aearo Common Stock and will vest ratably
over five years. Aearo Common Stock acquired upon exercise of the options
granted under the 1997 Option Plan will be 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."

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

SUPPLEMENTAL SEVERANCE PAY PLAN. The Company has adopted a supplemental
severance pay plan providing certain executive officers and key employees with
salary continuation in the event of an eligible termination based on years of
service. The plan provides for one month's base pay for each full year of
service with a minimum amount payable of three months and a maximum amount
payable of twelve months.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company has adopted a supplemental
executive retirement plan, which is a non-qualified plan under the Code, and
which provides unfunded deferred compensation benefits to certain executive
officers and key employees. Pursuant to the plan, participants are credited
annually with amounts representing 4% of compensation in excess of that amount
of compensation subject to social security taxes.

401(k) PLAN. The Company has adopted a savings plan (the "Saving Plan"), which
is qualified under Section 401(a) and 401(k) of the Code. All regular employees
of the Company in the United States are eligible to participate in the Savings
Plan after six months of service. For each employee who elects to participate in
the Savings Plan and makes a contribution thereto, the Company will make a
matching contribution. The Company matches 50.0% of the first 6.0% of
compensation contributed. The maximum contribution for any participant for any
year is 15.0% of such participant's eligible compensation. Contributions to the
Savings Plan will be invested, as the employee directs, in a money market fund,
income fund, growth and income fund, growth fund, or asset allocation fund.

PENSION PLAN. The Company has adopted a cash balance plan. Under such plan, the
Company will provide participants with annual credits of 4% of eligible
compensation. 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.
The following table sets forth, for the Named Executive Officers, the estimated
annual benefits payable upon retirement at normal retirement age, assuming in
each case that such officer elects payment over time


                                       56

<PAGE>   59



rather than in a lump sum:


<TABLE>
<CAPTION>
    NAME AND PRINCIPAL POSITION                                   ANNUAL BENEFITS PAYABLE
    ---------------------------                                   -----------------------

<S>                                                                       <C>     
John D. Curtin, Jr................................................        $  1,916

  Chairman of the Board of Directors
  and Chief Executive Officer


Mark H. Hague.....................................................
                                                                          $ 21,615
  Vice President, Operations



Daniel P. O'Connor................................................
                                                                          $ 17,663
  Vice President, Sales



Bryan J. Carey....................................................
                                                                          $ 50,076
  Vice President, Chief Financial
  Officer, Treasurer and Assistant
  Secretary


James D. Hall.....................................................
                                                                          $ 22,957
  Vice President, Product Management

</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company does not have a compensation committee. Since July 1995, all
executive officer compensation decisions have been made by the full Board of
Directors of the Company, with Mr. Curtin abstaining with respect to decisions
affecting his own compensation. Mr. Curtin, one of the directors of the Company,
is the Chairman of the Board and Chief Executive Officer of the Company. On July
11, 1995, Mr. Curtin acquired 4,950 shares of Aearo Common Stock under the Stock
Purchase Plan at a price of $990,000. Mr. Brady and Ms. Hanratty, two directors
of the Company, are officers of Cabot. On July 11, 1995, as part of the
Formation Acquisition, Cabot and its subsidiaries sold assets to the Company for
aggregate consideration of approximately $206.1 million. Messrs. Alpert,
O'Connell and Nagle, three directors of the Company, are officers of Vestar. On
July 11, 1995, as part of the Formation Acquisition, Vestar invested $31.0
million in capital stock of the Company.



                                       57


<PAGE>   60



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, the Directors, the Named Executive Officers and
all of the Company's Directors and executive officers as a group as of December
15, 1997. All of the Subsidiary's issued and outstanding capital stock is owned
by Aearo.

<TABLE>
<CAPTION>

                                                                                NUMBER OF
                                                                                 SHARES         PERCENTAGE OF
                                                                                OF AEARO         OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER                                          COMMON STOCK         SHARES
------------------------------------                                          ------------      -------------

<S>                                                                               <C>                <C>   
Vestar Equity Partners, L.P.(1)........................................           42,500             43.53%
   245 Park Avenue
   New York, New York  10017

Cabot CSC Corporation(2)...............................................           42,500             43.53%
   75 State Street, 13 Floor
   Boston, Massachusetts  02109

John D. Curtin, Jr.....................................................            4,950              5.07%
Bryan J. Carey.........................................................            1,500              1.54%
James D. Hall..........................................................            1,050              1.08%
Daniel P. O'Connor.....................................................            1,050              1.08%
Mark H. Hague..........................................................            1,050              1.08%
Norman W. Alpert(3)....................................................           42,500             43.53%
Daniel S. O'Connell(3).................................................           42,500             43.53%
Arthur J. Nagle(3).....................................................           42,500             43.53%
William J. Brady(4)....................................................           42,500             43.53%
Margaret J. Hanratty(4)................................................           42,500             43.53%
John W. Priesing.......................................................              100                  *
Samuel L. Hayes, III...................................................              100                  *
Directors and executive officers as a group (14 persons)(5)............           11,375             11.65%

</TABLE>

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

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

(2)  The board of directors of Old Cabot Safety Corporation controls the voting
     and investment of the shares of Aearo Common Stock held by Old Cabot Safety
     Corporation. Old Cabot Safety Corporation is a wholly-owned subsidiary of
     Cabot. Cabot appoints the directors of Old Cabot Safety Corporation and
     exercises ultimate voting and investment power with respect to all shares
     held of record by Old Cabot Safety 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 Old Cabot Safety
     Corporation is beneficially owned by any stockholder, director or officer
     of Cabot.


                                       58


<PAGE>   61



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

(4)  Mr. Brady and Ms. Hanratty are affiliated with Cabot, the parent of Old
     Cabot Safety Corporation, in the 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 Old Cabot Safety Corporation, of which such persons
     disclaim beneficial ownership. Each such person's business address is c/o
     Cabot CSC Corporation at the address set forth above.

(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 1,250 shares of Aearo Common
     Stock held by Management Investors who are not executive officers.

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 manufactured prior to June 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot and Old Cabot Safety
Corporation with respect to such claims.

STOCK OWNERSHIP AND STOCKHOLDERS' AGREEMENT

Prior to the Formation Acquisition, Cabot owned 100% of the outstanding shares
of the Subsidiary, which enabled Cabot to elect all of the directors of the
Subsidiary. After the consummation of the Formation Acquisition, (i) Cabot
indirectly owned 42.5% of the Aearo Common Stock outstanding and 50% of the
Aearo Preferred Stock outstanding, (ii) Vestar owned 42.5% of the Aearo Common
Stock outstanding and 50% of the Aearo Preferred Stock outstanding and (iii)
15.0% of the Aearo Common Stock has been reserved for issuance to management and
certain independent directors (collectively the Management Investors) of which
12,625 shares out of a total of 15,000 shares of Aearo Common Stock reserved for
the Management Investors are issued and outstanding. Cabot, Vestar and the
Management Investors (the "Stockholders") own 100% of the outstanding shares of
Aearo Common Stock and will elect all of the directors of Aearo and determine
the outcome of all matters requiring stockholder approval, including mergers,
consolidations and the sale of all or substantially all of the assets of Aearo,
and to prevent or cause a change in control of Aearo, in each case subject to
such restrictions, limitations and conditions as may be imposed under the
Stockholders' Agreement. There can be no assurance as to how long any of Cabot,
Vestar or the Management Investors will hold their shares of Aearo Common Stock.

Cabot, Vestar, and the Management Investors have entered into the Stockholders'
Agreement which provides for,


                                       59

<PAGE>   62



among other things, the matters described below.

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 eight 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 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 the principal executive officer
and the principal operating officer of the Company. Currently only one designee
of the Management Investors is serving on the Board of Directors. 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
Transaction and no longer held by them, less (iv) the value of all shares of the
Aearo Common Stock and Aearo Preferred Stock acquired by Vestar and its
affiliates after the Formation Acquisition and no longer held by them, as a
percentage of (b) the amount calculated pursuant to clause (a) for Cabot and its
affiliates for such date. The term "Cabot Relative Percentage" has a correlative
meaning focused on Cabot's remaining investment in Aearo capital stock relative
to Vestar's.

Messrs. Alpert, O'Connell and Nagle were designated by Vestar as described in
clause (i) above, Mr. Brady and Ms. Hanratty were designated by Cabot as
described in clause (ii) above, Messrs. Priesing and Hayes were designated by
Vestar as described in clause (iii) above and Mr. Curtin was 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


                                       60

<PAGE>   63



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 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.


                                       61


<PAGE>   64



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

MANAGEMENT ADVISORY AGREEMENT. In connection with the Formation Acquisition, the
Company became a party to a management advisory agreement with Vestar and Cabot
(the "Management Advisory Agreement"), pursuant to which the Company is
obligated to pay an annual management fee in an aggregate amount with respect to
each fiscal year equal to the greater of (i) $400,000 and (ii) 1.25% of the
consolidated net income of the Company before cash interest, taxes, depreciation
and amortization for such fiscal year to be shared by Cabot and Vestar based on
their relative equity ownership of the Company. Pursuant to the Management
Advisory Agreement, each of Vestar and Cabot received $311,949 (including
$55,975 to each party as an advisory fee adjustment relative to fiscal 1996)
with respect to fiscal 1997, and $200,000 to each party with respect to fiscal
1996. Messrs. Alpert, O'Connell and Nagle, three of the directors of the
Company, are affiliated with Vestar in the capacities described under Item 11,
"Management -- Directors and Executive Officers" and, accordingly, benefit from
any payments received by Vestar. Mr. Brady and Ms. Hanratty, two of the
directors for the Company, are affiliated with Cabot in the capacities described
under Item 11, "Management -- Directors and Executive Officers" and,
accordingly, benefit indirectly from any payments received by Cabot.

MANAGEMENT LOANS. The Company has made available to certain Management Investors
loans in order to provide such Management Investors with funds to be applied to
a portion of the purchase price of the Common Stock purchased by such Management
Investors under the Stock Purchase Plan. Such loans (i) are secured by the Aearo
Common Stock purchased with the proceeds thereof, (ii) have a term of between 5
and 10 years, (iii) bear interest at an annual rate of 7%, and (iv) are subject
to mandatory prepayment in the event the employment of such Management Investor
terminates. At September 30, 1997, amounts outstanding under such loans to
Messrs. Carey, O'Connor, Hall, and Mallitz were $100,000, $81,000, $89,803, and
$85,305, respectively.


                                       62



<PAGE>   65




                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                                                           DESCRIPTION
------                                                           -----------

<S>          <C>    <C>    
 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).)
                    Subscription Agreement, dated July 11, 1995, between Aearo Corporation (formerly, Cabot Safety Holdings

 2.3         --     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.)

 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.)

</TABLE>

                                       63


<PAGE>   66



<TABLE>
<CAPTION>


EXHIBIT
NUMBER                                                           DESCRIPTION
------                                                           -----------
<S>          <C>    <C>    

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

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

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

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

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

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

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

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

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

 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.

</TABLE>

                                       64


<PAGE>   67



<TABLE>
<CAPTION>

EXHIBIT
NUMBER                                              DESCRIPTION
------                                              -----------
<S>         <C>     <C>    

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

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

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

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

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

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

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

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

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

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

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

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).)
</TABLE>



                                       65

<PAGE>   68

<TABLE>
<S>         <C>     <C>    

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

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

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

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

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

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

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

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

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

 10.17*     --      Form of Executive Security Purchase Agreement.

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

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

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

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

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

 10.23*     --      Employment Agreement between Peltor AB and Leif Palmact, dated January 1, 1996.

 10.24*     --      Employment Agreement between Peltor AB and Leif Anderzon, dated January 1, 1996.
</TABLE>


                                       66

<PAGE>   69




<TABLE>

<C>         <C>     <C>                               
 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.

 12.1**     --      Statements re: Computation of Ratios.

 21.1*      --      List of Subsidiaries.

 24.1**     --      Powers of Attorney (see page 67 of this report).

 27.1**     --      Financial Data Schedule.

</TABLE>

----------------
*    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.

(b) Financial Statement Schedules
     See next page.

(c)  Reports on Form 8-K
      None.


                                       67

<PAGE>   70
                                                                      SCHEDULE I



                                AEARO CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS

       FOR THE PERIODS ENDED JULY 11, AND SEPTEMBER 30, 1995 AND THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1997

<TABLE>
<CAPTION>
                                            (Dollars in Thousands)



                                                                     ---------------------ADDITIONS--------------------       
                                                                                                                               Net
                                                           Balance at      Provisions        Charged       Deductions        Balance
                                                            Beginning      Charged to       to Other             From         at End
                                                            of Period      Operations       Accounts       Allowances      of Period
 
<S>                                                             <C>               <C>       <C>              <C>              <C>
Period ended July 11, 1995
     Bad Debt Reserve                                           1,021             170             --            (199)            992
     Sales Returns & Allowances Reserve                            --              --             --               --             --

Period ended September 30, 1995
     Bad Debt Reserve                                             992             115         170(A)             (56)          1,221
     Sales Returns & Allowances Reserve                            --              --             --               --             --

Year ended September 30, 1996
     Bad Debt Reserve                                           1,221             620         186(B)            (827)          1,200
     Sales Returns & Allowances Reserve                            --           1,519             --               --          1,519

Year ended September 30, 1997
     Bad Debt Reserve                                           1,200             622         100(C)            (621)          1,301
     Sales Returns & Allowances Reserve                         1,519             203             --            (838)            884

</TABLE>


NOTES:
     Goodwill.
     Acquisition date balance at acquired companies.
     Accrued liabilities.



                                       68




<PAGE>   71



                                   SIGNATURES

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

                                      Aearo Corporation


Date:  December 29, 1997              By: /s/ John D. Curtin, Jr.
                                         -----------------------
                                         John D. Curtin, Jr.
                                         Chairman and Chief Executive Officer

                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Aearo Corporation hereby severally constitute John D. Curtin, Jr.,
Bryan J. Carey and Steven F. Scott, and each of them singly, our true and lawful
attorney with full power to him to sign for us and in our names in the
capacities indicated below, the Annual Report on Form 10-K filed herewith and
any and all amendments to said Annual Report on Form 10-K, and generally to do
all such things in our names and in our capacities as officers and directors to
enable Aearo Corporation to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorney, to said Annual Report on Form 10-K and any and all
amendments thereto.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


Date:   December 29, 1997      /s/ John D. Curtin, Jr.
                               -------------------------------------------------
                               John D. Curtin, Jr.
                               Chairman and Chief Executive Officer (Principal
                               Executive Officer)


Date:    December 29, 1997     /s/ Bryan J. Carey
                               -------------------------------------------------
                               Bryan J. Carey
                               Vice President, Chief Financial Officer,
                               Treasurer and Assistant Secretary
                               (Principal Accounting Officer)


Date:    December 29, 1997     /s/ Norman W. Alpert
                               -------------------------------------------------
                               Norman W. Alpert, Director


Date:    December 29, 1997     /s/ William J. Brady
                               -------------------------------------------------
                               William J. Brady, Director


Date:    December 29, 1997     /s/ Margaret J. Hanratty
                               -------------------------------------------------
                               Margaret J. Hanratty, Director


Date:    December 29, 1997     /s/ Arthur J. Nagle
                               -------------------------------------------------
                                                                        

                                       69

<PAGE>   72



                               Arthur J. Nagle, Director


Date:    December __, 1997    
                               -------------------------------------------------
                               Daniel S. O'Connell, Director


Date:    December 23, 1997     /s/ John W. Priesing
                               -------------------------------------------------
                               John W. Priesing, Director


Date:    December 29, 1997     /s/ Samuel L. Hayes, III
                               -------------------------------------------------
                               Samuel L. Hayes, III, Director


                                       70

<PAGE>   73




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

         No annual report or proxy material relating to the Registrant's fiscal
year ended September 30, 1997 has been sent to security holders of the
Registrant.



                                       71

<PAGE>   74




                                INDEX OF EXHIBITS

<TABLE>
<CAPTION>

EXHIBIT
NUMBER                                                           DESCRIPTION
------                                                           -----------
<S>         <C>     <C>                                         
 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.)

 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.)
</TABLE>


                                       72


<PAGE>   75



<TABLE>
<CAPTION>


EXHIBIT
NUMBER                                                           DESCRIPTION
------                                                           -----------


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

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

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

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

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

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

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

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

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

 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.

</TABLE>


                                       73

<PAGE>   76



<TABLE>
<CAPTION>

EXHIBIT
NUMBER                                                    DESCRIPTION
------                                                    -----------

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

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

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

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

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

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

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

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

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

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

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

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).)

</TABLE>


                                       74


<PAGE>   77

<TABLE>

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

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

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

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

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

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

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

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

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

 10.17*     --      Form of Executive Security Purchase Agreement.

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

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

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

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

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

 10.23*     --      Employment Agreement between Peltor AB and Leif Palmact, dated January 1, 1996.

 10.24*     --      Employment Agreement between Peltor AB and Leif Anderzon, dated January 1, 1996.
</TABLE>


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<TABLE>

<S>         <C>     <C>

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.

 12.1**     --      Statements re: Computation of Ratios.

 21.1*      --      List of Subsidiaries.

 24.1**     --      Powers of Attorney (see page 67 of this report).

 27.1**     --      Financial Data Schedule.
</TABLE>

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

*    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.


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