SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K405

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

                  For the Fiscal Year Ended September 30, 2003

                         Commission file number 0-26942

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

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

              Delaware
  (State or other jurisdiction of                      13-3840450
   incorporation or organization)         (I.R.S. Employer Identification No.)

       5457 West 79th Street
       Indianapolis, Indiana                             46268
(Address of principal executive offices)                 (Zip Code)
                                 (317) 692-6666
              (Registrant's telephone number, including area code)
                           --------------------------

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

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

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

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[X]

          As of December 22, 2003,  all voting and  non-voting  common equity of
the Registrant was held by affiliates of the Registrant.

     The number of shares of the  Registrant's  common stock, par value $.01 per
share, outstanding as of December 22, 2003 was 59,412.5.



<PAGE>





                                TABLE OF CONTENTS

Part I                                                                        3
   Item 1.  Business..........................................................3
   Item 2.  Properties.......................................................11
   Item 3.  Legal Proceedings................................................12
   Item 4.  Submission of Matters to a Vote of Security Holders..............13
Part II                                                                      14
   Item 5.  Market for Registrant's Common Equity and Related Stockholder
                Matters......................................................14
   Item 6.  Selected Financial Data..........................................15
   Item 7.  Management's Discussion and Analysis of Financial Condition
                and Results of Operations....................................17
   Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......24
   Item 8.  Financial Statements and Supplementary Data......................26
   Item 9.  Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure.....................................54
   Item 9A. Controls and Procedures..........................................55
PART III                                                                     56
   Item 10. Directors and Executive Officers.................................56
   Item 11. Executive Compensation...........................................59
   Item 12. Security Ownership of Certain Beneficial Owners and
                Management...................................................63
   Item 13. Certain Relationships and Related Transactions...................65
   Item 14. Principal Accountant Fees and Services...........................68
PART IV                                                                      69
   Item 15. Exhibits, Financial Statement Schedules, and Reports
                on Form 8-K..................................................69





                                       -2-
<PAGE>






                                     PART I

Item 1.  Business

General
Aearo Corporation, a Delaware corporation ("Aearo"), and its direct wholly owned
subsidiary,  Aearo  Company  I,  doing  business  as Aearo  Company,  a Delaware
corporation  (the  "Subsidiary"),  are  collectively  referred  to herein as the
"Company". The Company is one of the leaders in the hearing, eye, face, head and
respiratory  protection  segments of the personal  protection  equipment ("PPE")
market  worldwide.  PPE  encompasses all articles of equipment and clothing worn
for the purpose of protecting  against bodily injury,  including  safety eyewear
and goggles,  earmuffs and earplugs,  respirators,  hard hats, fall  protection,
gloves,  safety clothing and safety shoes.  The Company  manufactures  and sells
hearing   protection   devices,   communication   headsets,   prescription   and
non-prescription   safety  eyewear,   face  shields,   reusable  and  disposable
respirators,  fall  protection,  hard  hats and  first  aid kits in more than 70
countries under its well-known brand names: AOSafety(R), E-A-R(R), Peltor(R) and
SafeWaze(TM). The Company attributes its leading market positions to:


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

The Company also  manufactures a wide array of  energy-absorbing  materials that
are incorporated into other manufacturers'  products to control noise, vibration
and shock.  These products are marketed under its brand name E-A-R(R)  Specialty
Composites.  Aearo  derives all of its  operating  income and cash flow from the
Subsidiary,  and its only material  assets are the shares of common stock of the
Subsidiary  that Aearo owns.  Other than its ownership of the Subsidiary and its
guarantee  of the  indebtedness  of the  Subsidiary,  Aearo has no  business  or
operations.  Aearo was  incorporated  in the  State of  Delaware  in June  1995.
Detailed  information  with  respect  to  the  Company's  segment  reporting  is
presented  in Note 14 of Notes to  Consolidated  Financial  Statements  of Aearo
Corporation contained in Item 8 hereof.


Segments
The Company  operates  three  business  segments.  The Safety  Products  segment
manufactures  and sells  hearing  protection  devices,  communication  headsets,
non-prescription   safety  eyewear,   face  shields,   reusable  and  disposable
respirators,  hard hats,  fall  protection  equipment and first aid kits in more
than 70  countries  under its  well-known  brand names:  AOSafety(R),  E-A-R(R),
Peltor(R)  and   SafeWaze(TM).   The  Safety  Products  segment   accounted  for
approximately  77% of the Company's  net sales in fiscal 2003 and  approximately
73% in fiscal 2002 and fiscal 2001, respectively.

The Safety  Prescription  Eyewear segment  manufactures and sells products under
the  AOSafety(R)  brand  name that are  designed  to  protect  the eyes from the
typical  hazards  encountered in the industrial  work  environment.  The Company
purchases  component  parts (lenses and the majority of its frames) from various
suppliers, grinds and shapes the lenses to the end-user's prescription, and then
assembles  the  glasses  using  the  end-user's  choice  of  frame.  The  Safety
Prescription  Eyewear segment  accounted for  approximately 13% of the Company's
net sales in fiscal 2003 and  approximately  14% in fiscal 2002 and fiscal 2001,
respectively.

The Specialty  Composites segment  manufactures a wide array of energy-absorbing
materials that are incorporated  into other  manufacturers'  products to control
noise, vibration and shock problems in other manufacturers'  products.  Specific
product  applications  for  Specialty  Composites'  materials,   technology  and
engineering  expertise include thermal acoustic systems in business and regional
jet  aircraft;  protective  and  performance-enhancing  components  in precision
electronic equipment; thermal and acoustic treatments for heavy-duty trucks; and
treatments to control  noise,  vibration and shock in a wide range of industrial
and  commercial   equipment.   Specialty   Composites  also  produces  specially
formulated  foam  used  in the  manufacture  of the  Safety  Products  segment's
polyvinyl   chloride  ("PVC")  and  polyurethane   ("PU")  earplugs.   Specialty
Composites  accounted for approximately 10% of the Company's net sales in fiscal
2003 and approximately 13% in fiscal 2002 and fiscal 2001, respectively.




                                       -3-
<PAGE>



Products - Safety Products Segment
Within  Safety  Products,  the  Company  classifies  its  products  in five main
categories:  hearing protection and communication headsets; eye protection; face
and  head  protection;   respiratory  protection;   fall  protection  and  other
protection products. These products serve a variety of end users, such as in the
construction,  heavy machinery,  airport,  forestry,  textile, mining, military,
motor sports, health care and two-way radio markets.

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

In the reusable  earplug segment of the market,  the Company offers its patented
UltraFit(R) and E-A-R(R)  Express(R)  products.  The E-A-R(R) Express(R) product
features a polyurethane pod and a short plastic stem to facilitate  sanitary and
easy  insertion of the plug into the ear. The Company also offers the "Flex"(TM)
line of "semi-aural" banded products.  These products feature  articulating arms
that allow for use in multiple  positions and for easy storage  around the neck.
The  Company  manufactures,  assembles  and sells a broad line of  earmuffs  and
communication  headsets  under its  Peltor  brand.  The  Company  is a leader in
providing  noise  attenuating  headsets and wireless and hardwire  communication
headsets.  These products provide protection from harmful high and low frequency
noise and also allow for easy communication in noisy or remote environments. The
Company also offers auditory  systems  products,  which are sold to audiologists
and are used in the testing of hearing.

In 2003 E-A-R  Push-Ins(TM)  were  introduced,  offering all the performance and
convenience  of a reusable  earplug for the price of a disposable  earplug.  The
product's  flexible  stem allows for easy  insertion and removal with no rolling
down,  and the patented foam tip is sized to mold  comfortably  to fit virtually
every size of ear canal. The quick and easy fit and sure seal combine to provide
high noise attenuation.

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


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


     Goggles. The Company manufactures and sells a broad line of goggles,  which
     are typically required in work environments where a higher degree of impact
     protection is required,  where increased  protection  against dust, mist or
     chemical  splash is needed  and/or for use in welding  operations.  To meet
     these  requirements,  the Company offers a variety of vented and non-vented
     goggles  with  varying  fields  of view  including  Dust  GoggleGearTM  for
     Lexa(R),  Splash  GoggleGearTM for Lexa(R) and Centurion(R),  all under the
     AOSafety(R) brand.

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



                                       -4-
<PAGE>

     Faceshields.  Faceshields are designed to protect against heat,  splash and
     flying  particles  and  are  worn  in  conjunction  with  other  protective
     equipment, such as Plano eyewear and respirators. The Company offers a wide
     variety  use  specific   faceshield  windows  under  both  AOSafety(R)  and
     Peltor(R) brands.  The patented AO TuffMaster(R) line of faceshields is one
     of the leading brands in the market.

     Hard Hats.  The Company  manufactures  and sells a broad line of hard hats,
     including "bump" caps,  full-brim hats and traditional hard hats, featuring
     four or six point suspension,  ratchet adjustment,  and a wide selection of
     colors and custom imprinting.  The XLR8(R) line of hard hats represents the
     latest design and functionality under the AOSafety(R) brand.

Respiratory  Protection:  Respiratory  protection  products  are used to protect
against the  harmful  effects of  contamination  and  pollution  caused by dust,
gases, fumes, sprays and other contaminants.  The Company offers a broad line of
disposable dust and mist masks,  cartridge-equipped  quarter, half and full-face
respirators,  and "escape" respirators (a single-use respirator for emergencies)
under  the  AOSafety(R)  brand.  Pleats  PlusTM  offers  the  latest  design  in
particulate   respirators.   QuickLatch(R)   half  mask  respirators   offer  an
innovative,  patented  on-and-off  latching system that can be accomplished with
just one hand.

Fall  Protection:  The Company offers a line of fall protection  equipment under
the  SafeWaze(TM)  brand name as a result of the  acquisition  of VH Industries,
Inc. in March of 2003.

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


Products - Safety Prescription Eyewear Segment

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


Products - Specialty Composites Segment

The  Company's  Specialty  Composites  segment  manufactures  a  wide  array  of
energy-absorbing  materials  that are  incorporated  into  other  manufacturers'
products to control noise,  vibration and shock.  Specialty Composites' products
fall into three broad categories:  (i) barriers and absorbers for airborne noise
control,  (ii) damping and isolation  products for vibration and shock  control,
and (iii) energy  control  products  for  vibration,  shock  control and comfort
management.  Some examples of end user  applications for such materials  include
noise- and vibration-damping materials used in under-hood and cab treatments for
transportation  equipment  such  as  Class  8 heavy  trucks,  as  well as  shock
protection  parts for  electronic  devices  such as computer  hard disk  drives,
servers and highly  damped  proprietary  materials  for the  interior  cabins of
business and regional jet aircraft.  The Company's  products include  Tufcote(R)
polyurethane  foams  for  acoustical  applications,   Confor(R)  heavily  damped
viscoelastic  foams for ergonomic  cushioning  applications and shock protection
and Isodamp(R) foams for the reduction of mechanical vibration, noise and shock.
Specialty  Composites also produces the specially  formulated  foams used in the
manufacture of Safety Products'  earplugs.  The principal strengths of Specialty
Composites are its specialized polyurethane formulations, its thin-sheet casting
capability,  its  composite  technologies  and its  applications  and  materials
engineering.  These  strengths  allow the  Company  to  manufacture  in a single
process,  high  value-added  composites  using  casting,  extrusion  and molding
processes.


                                       -5-
<PAGE>



Sales and Marketing

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


Sales and Marketing - Safety Products Segment

Within Safety Products,  sales are managed through five channels: North American
Industrial Distribution;  Consumer/Do-It-Yourself  ("DIY"); Europe, construction
and  International.  Each of these  channels has its own sales force and its own
distinct yet synergistic sales strategies. In addition, through the acquisitions
of  Peltor(R)  and  Norhammer,  the  Company  significantly  expanded  its sales
coverage,  including a dedicated  effort to serve the  specialty  communications
earmuff  market.  The Company  also  produces  versions of the PVC plug for many
international airlines for inclusion in their amenity kits.

          North  American  Industrial  Distribution  (NAI).  This is the largest
          sales  channel for Safety  Products and includes  approximately  1,041
          North American  distributors and dealers of which,  approximately  213
          qualify  for  the  Dialog(TM)  rebate  program.  Participation  in the
          Dialog(TM)  program  requires  minimum  annual  purchase  levels while
          encouraging  support across the full product line. Dialog distributors
          qualify  for  annual  volume  and  growth  rebates,   and  cooperative
          advertising. The Company also offers Dialog(TM) distributors financial
          incentives   for   establishing   electronic   order   entry/invoicing
          interfaces  with the Company,  and for developing  marketing  programs
          that promote the Company's products.

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

          Europe.  The  Company  has  a  significant  presence  in  Europe  with
          manufacturing  facilities in England,  Sweden,  and France,  and sales
          offices in the U.K., Sweden, Norway, Germany, France, Italy and Spain.
          The Company's  historical  strength in this market has been in passive
          hearing  protection   products   (E-A-R(R))  sold  through  over  1000
          industrial  distributors,  and Peltor Communications  products sold to
          the  military,  sport  shooting,  and rally  sports  market  segments.
          AOSafety is the number one prescription eyewear brand in France.

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


Sales and Marketing - Safety Prescription Eyewear Segment (SRx)

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


Sales and Marketing - Specialty Composites Segment

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


                                       -6-
<PAGE>
Aircraft  Market.  Specialty  Composites  provides  integrated  thermal acoustic
systems  for  aircraft  manufacturers  and  refurbishers   worldwide.   Designed
primarily for business and regional jets, the systems include high  performance,
weight-efficient,  multi-function  composites  that the  Company  has  developed
specifically  to meet the  requirements  of aircraft  applications  and meet FAA
regulations.

Precision  Equipment  Market.  This global  market has  increasingly  focused on
compact designs and highly portable devices.  Specialty Composites'  engineering
expertise and advanced  energy-control  materials and technology are critical to
customers' product development,  helping in the design of quieter,  more rugged,
more accurate and faster devices. Key applications include portable and desk top
computers, hand held devices, disk drives, data servers and data storage units.

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

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


Research and Development

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


Research and Development - Safety Products Segment

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


Research and Development - Safety Prescription Eyewear Segment

This segment shares  resources with the Safety Products  Segment in the areas of
coating  technology,  automation and manufacturing  process  improvements.  This
segment works  extensively  with outside  suppliers for  development  of frames,
lenses and coatings.

Research and Development - Specialty Composites Segment

Specialty  Composites'  research and  development  efforts  focus on  developing
proprietary  materials and enhancing  existing  products in order to meet market
and customer needs  identified by the Company's  marketing,  sales and technical
staffs.  Products such as VersaDamp(TM)  thermoplastic  elastomers and Confor(R)
environmentally  friendly,  energy-absorbing  foams  are being  introduced  in a
growing  number  of   applications   across  all  markets  served  by  Specialty
Composites.


Raw Materials and Suppliers

The Company buys and consumes a wide variety of raw materials,  component parts,
office  supplies,  and  maintenance  and repair  parts.  Significant  categories
purchased include  corrugated paper products,  poly packaging films,  chemicals,
eyewear frames and optical lenses. The chemical category includes plastic resins
such  as  polycarbonates,   propionates,   polyols,  plasticizers,   substrates,
pre-polymers,  isocyanates  and  adhesives.  The eyewear frames are for both the
non-prescription and SRx products.


                                       -7-
<PAGE>


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

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

Although the Company outsources the production of less than 25% of its assembled
parts and  products to various  manufacturers,  the  Company has found  resource
availability,  abundant supplier competition and infrastructure stability in the
Far East to provide favorable supply opportunities.


Manufacturing and Distribution Operations

The Company  maintains a high  degree of  vertical  integration,  allowing it to
manufacture  over 75% 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 and PU earplugs);  high speed  assembly and  packaging of earplugs;  plastic
injection  molding,  coating  and  assembly  of  non-prescription  eyewear;  and
assembly,  grinding,  polishing and coating of prescription eyewear. The Company
also utilizes a limited number of contract manufacturers in the United States of
America,  Mexico, and Europe to supplement  internal  operations and to assemble
and/or  manufacture  products  where  the  Company  does  not have  world  class
processing  capabilities.  The Company uses  selected  Asian  suppliers for some
product lines to complement  Company  manufactured  products and fill in product
families,  where  it  is  advantageous  to  minimize  capital  expenditures  and
accelerate new product introductions.  The Company will continue to use contract
manufacturers  where  appropriate  to remain  competitive  and  maximize  profit
margins.  Consistent across all of the Company's manufacturing  operations is an
emphasis on producing  high quality  products.  Currently,  all of the Company's
manufacturing  facilities have been awarded ISO 9002 or ISO 9001  certification,
indicating  that the Company has achieved and sustained a high degree of quality
and consistency  with respect to its products.  The Company has also attained QS
9000 certification for the Specialty  Composites  operations in Indianapolis and
Newark. The Company believes that ISO certification is an increasingly important
selling feature both  domestically and  internationally,  and certain  customers
require ISO certification from all their vendors.

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


Manufacturing and Distribution Operations - Safety Products Segment

The Company's  Indianapolis,  Indiana plant is the largest earplug manufacturing
facility in the world. It fabricates,  molds, assembles and packages hundreds of
millions of pairs of earplugs annually, utilizing automated, high-speed assembly
and packaging  equipment.  The economies of scale present in this  operation are
unique in the hearing protection  products industry and management believes that
they offer the Company a competitive  advantage in lowering  costs.  The plant's
high-speed robotic  fabrication,  assembly and packaging of earplugs  facilitate
cost-savings,  high-volume  production  and improved  cycle times and  inventory
management.  The Southbridge,  Massachusetts  facility is the Company's  largest
manufacturing  site and  manufactures  a wide  variety  of  Personal  Protection
Equipment. These manufactured safety products include respiratory, plug and muff
type hearing,  head and face, and a broad offering of safety eyewear protection.
All  Company  manufacturing  sites  have  implemented  a number  of  initiatives
including lean  manufacturing  concepts and an extensive  KAIZEN event schedule,
resulting in significant improvements in the areas of safety, quality, cost, and
customer service.



                                       -8-
<PAGE>


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

The Company fills virtually all of its domestic and certain of its international
orders through its distribution  center located in  Indianapolis,  Indiana which
has bar-code scanning  capabilities to assure rapid turn-around time and service
levels  for  customer  orders.   Recent  freight  studies,   having  taken  into
consideration Aearo Company manufacturing locations in conjunction with domestic
customer locations, have shown Indianapolis to be the ideal single warehouse and
distribution  location  for our  safety  business.  Over the road  carriers  are
readily available in Indianapolis,  which contributes to competitive pricing for
both our  inbound  and  outbound  business.  European  orders  are  filled  from
distribution facilities near Manchester, U.K. and in Varnamo, Sweden.



Manufacturing and Distribution Operations - Safety Prescription Eyewear Segment

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


Manufacturing and Distribution Operations - Specialty Composites Segment

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


Competition and the Personal Protection Equipment Market

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

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

                                       -9-
<PAGE>


Employees

As of September  30,  2003,  the Company had 1,603  employees,  of whom 989 were
primarily engaged in manufacturing, 429 in sales, marketing and distribution, 55
in research and development and 130 in general and  administrative.  The Company
believes  its employee  relations  are good.  The Company has one domestic  U.S.
facility  that  employs  union  members.  This  facility,  located in  Plymouth,
Indiana,   employs  72  members  of  the  International   Union  of  Electronic,
Electrical,  Salaried,  Maritime  and  Furniture  Workers  (out of a total of 79
employees),  and the  Company's  relations  with these  union  members are fully
satisfactory. The union contract expires on June 26, 2004.


Patents and Trademarks

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


Government Regulation

As a manufacturer  of safety  products,  the Company is subject to regulation by
numerous governmental bodies. Principal among the federal regulatory agencies in
the  United  States  of  America  are:  the   Occupational   Safety  and  Health
Administration  ("OSHA"), which regulates the occupational usage of all PPE, the
Environmental  Protection  Agency ("EPA"),  which regulates  labeling of hearing
protection devices; the Mine Safety and Health  Administration  ("MSHA") and the
National  Institute of Occupational  Safety and Health ("NIOSH"),  both of which
certify  respirators.  These  agencies  generally  mandate  that  the  Company's
products meet standards established by private groups, such as American National
Standards Institute ("ANSI"). The Company's products are also subject to foreign
laws and  regulations.  In  particular,  they  must  comply  with  the  Canadian
Standards  Association,  European  Committee  for  Normalization  and  Standards
Australia.  The Company  believes it is in compliance  in all material  respects
with the regulations and standards of these governmental bodies.


Environmental Matters

The  Company  is  subject  to  various   evolving   federal,   state  and  local
environmental laws and regulations governing,  among other things,  emissions to
air, discharge to waters and the generation,  handling, storage, transportation,
treatment and disposal of hazardous  substances and wastes. The Company believes
that it is in substantial  compliance  with all such laws and  regulations.  The
Company has an active program to ensure environmental compliance and achievement
of  environmental  goals and objectives.  The Company will continue to implement
Environmental  Management  Systems at its manufacturing  facilities.  In October
2003, the Company's Varnamo, Sweden facility achieved ISO 14001 certification.



                                      -10-
<PAGE>
Item 2.  Properties


The  Company  owns and/or  leases  facilities  in the United  States of America,
Canada,  and Europe.  The following  table sets forth the location of each,  its
square footage and the principal function as of December 23, 2003.


                             Approx
Location                   Square Ft Function

SAFETY PRODUCTS
Southbridge, Massachusetts   198,984 Manufacturing/Administration
Indianapolis, Indiana (1)    226,794 Distribution/Customer Service
Indianapolis, Indiana         81,540 Manufacturing/Corporate Headquarters
Poynton, England (2)          74,331 Manufacturing/Distribution/Customer Service
Varnamo, Sweden              124,130 Manufacturing/Distribution/Customer Service
Ettlingen, Germany            14,661 Manufacturing/Distribution/Customer Service
Concord, North Carolina       17,500 Manufacturing/Distribution/Customer Service
Paris, France                  1,894 Sales Office
Barcelona, Spain                 (*) Sales Office
Milan, Italy                     (*) Sales Office
Barrie, Ontario, Canada        4,768 Manufacturing/Distribution/Customer Service
Oslo, Norway                   6,300 Sales/Distribution/Customer Service
Joinville-le-Pont, France     10,200 Sales/Distribution/Customer Service

SAFETY PRESCRIPTION EYEWEAR
Chickasha, Oklahoma           35,000 Manufacturing/Customer Service
Plymouth, Indiana              9,500 Manufacturing/Customer Service
Mississauga, Ontario, Canada  12,300 Manufacturing/Customer Service
Montreal, Quebec, Canada       1,800 Customer Service
Brooklyn Park, Maryland        1,200 Customer Service
Dundalk, Maryland              1,050 Customer Service
Newport News, Virginia         1,400 Customer Service
Richmond, Virginia             1,800 Customer Service

SPECIALTY COMPOSITES
Indianapolis, Indiana        155,800 Manufacturing/Distribution/Customer Service
Newark, Delaware              79,650 Manufacturing/Distribution
Newark, Delaware              61,642 Warehouse/Distribution
---------------------
(1) This facility also serves as an international distribution center.

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

(*) Less than 1,000 square feet.

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

                                      -11-
<PAGE>



Item 3.  Legal Proceedings

Various  lawsuits and claims arise against the Company in the ordinary course of
its business.  Most of these lawsuits and claims are products  liability matters
that  arise out of the use of  safety  eyewear  and  respiratory  product  lines
manufactured by the Company as well as products purchased for resale.

In addition,  the Company is a defendant in lawsuits by plaintiffs alleging that
they  suffer  from  respiratory  medical  conditions,   such  as  asbestosis  or
silicosis, relating to exposure to asbestos and silica, and that such conditions
result, in part, from the use of respirators that,  allegedly,  were negligently
designed or  manufactured.  The defendants in these lawsuits are often numerous,
and include,  in addition to  manufacturers  and  distributors  of  respirators,
manufacturers,  distributors  and  installers  of sand (used in sand  blasting),
asbestos and  asbestos-containing  products. Most of these claims are covered by
the Asset  Transfer  Agreement  entered into on June 13, 1995 by the Company and
Aearo Company,  on the one hand, and Cabot and certain of its subsidiaries  (the
"Sellers"), on the other hand (the "1995 Asset Transfer Agreement"). In the 1995
Asset  Transfer  Agreement,  so long as the Company  makes an annual  payment of
$400,000  to Cabot,  the  Sellers  agreed to retain,  and Cabot and the  Sellers
agreed to defend and indemnify the Company against,  any liability or obligation
relating to or otherwise arising under any proceeding or other claim against the
Company or Cabot or their  respective  affiliates or other parties with whom any
Seller directly or indirectly has a contractual  liability  sharing  arrangement
which  sounds in product  liability or related  causes of action  arising out of
actual or alleged  respiratory  medical conditions caused or allegedly caused by
the use of respirators or similar devices sold by Sellers or their  predecessors
(including  American Optical Corporation and its predecessors) prior to July 11,
1995.  To date,  the  Company  has  elected to pay the annual fee and intends to
continue to do so. The Company could  potentially be liable for claims currently
retained by Sellers if the Company  elects to cease  paying the annual fee or if
Cabot and the Sellers no longer are able to perform their  obligations under the
1995  Asset  Transfer  Agreement.  Cabot  acknowledged  in  the  Stock  Purchase
Agreement that it and the Company  entered into on June 27, 2003  (providing for
the sale by Cabot to the Company of all of the common and preferred stock of the
Company owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer
Agreement remain in effect.  The 1995 Asset Transfer Agreement does not apply to
claims relating to the business of Eastern Safety Equipment,  the stock of which
the Company acquired in 1996.

At September 30, 2003,  the Company has recorded  liabilities  of  approximately
$4.5 million,  which represents reasonable estimates of its probable liabilities
for product  liabilities  substantially  related to asbestos and  silica-related
claims  as  determined  by the  Company  in  consultation  with  an  independent
consultant.  This reserve is re-evaluated periodically and additional charges or
credits to operations may result as additional  information  becomes  available.
Consistent with the current  environment being experienced by companies involved
in asbestos  and  silica-related  litigation,  there has been an increase in the
number of asserted claims that could  potentially  involve the Company.  Various
factors   increase  the  difficulty  in  determining  the  Company's   potential
liability,  if any, in such claims,  including  the fact that the  defendants in
these  lawsuits are often  numerous and the claims  generally do not specify the
amount  of  damages  sought.  Additionally,  the  bankruptcy  filings  of  other
companies  with  asbestos  and  silica-related  litigation  could  increase  the
Company's cost over time. In light of these and other uncertainties  inherent in
making  long-term  projections,  the Company has  determined  that the five-year
period  through  fiscal 2008 is the most  reasonable  time period for projecting
asbestos and  silica-related  claims and defense costs.  It is possible that the
Company  may incur  liabilities  in an amount  in  excess of  amounts  currently
reserved.   However,   taking  into  account  currently  available  information,
historical  experience,  and the 1995 Asset Transfer Agreement,  but recognizing
the  inherent  uncertainties  in the  projection  of any  future  events,  it is
management's  opinion  that  these  suits or claims  should  not result in final
judgments  or  settlements  in  excess of the  Company's  reserve  that,  in the
aggregate,  would have a material effect on the Company's  financial  condition,
liquidity or results of operations.

                                      -12-
<PAGE>


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

On October 7, 2003,  the Company  held a special  meeting of  stockholders.  The
stockholders  approved the  selection of Deloitte & Touche LLP as the  Company's
independent  public  accountants  for the year ending  September 30, 2004 with a
total of 56,971.5 votes in favor,  50 votes in opposition  and 2,391  abstention
votes. The stockholders  voted to elect the following  directors for the ensuing
year  with a total  of  57,021.5  votes  in favor  of each  director  and  2,391
abstention votes for each director:  Norman W. Alpert,  Bryan P. Marsal, John D.
Curtin, Jr., William E. Kassling,  Michael A. McLain, Arthur J. Nagle, Daniel S.
O'Connell.


                                      -13-
<PAGE>


                                     PART II

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

As of December 1, 2003 there were  outstanding  59,412.5 shares of common stock,
par value $0.01 per share,  of Aearo ("Aearo  Common  Stock").  All of the Aearo
Common Stock is held,  collectively,  by Vestar Equity Partners,  L.P. (together
with certain related persons,  "Vestar") and management.  As of December 1, 2003
there  were 34  shareholders  of record of Aearo  Common  Stock.  In July  1995,
Vestar,  Cabot and management  effected  through the Company the  acquisition of
substantially all of the assets and certain liabilities of Cabot CSC Corporation
("Old Cabot  Safety  Corporation"),  a  wholly-owned  subsidiary  of Cabot,  and
certain of its affiliates (the "Formation  Acquisition") for $206.1 million.  To
effectuate the Formation  Acquisition,  the Company sold $100 million of 12 1/2%
senior  subordinated notes due 2005 (the "Senior  Subordinated  Notes"),  issued
pursuant to the Indenture  dated July 11, 1995 among Aearo Company,  the Company
and U.S.  Bank,  N.A.  (the  "Note  Indenture"),  issued to Vestar  and Cabot an
aggregate  of $45  million of 12 1/2%  redeemable  preferred  stock (the  "Aearo
Preferred Stock"), and issued to Vestar, Cabot and certain members of management
and key employees of the Company an aggregate of 100,000  shares of Aearo Common
Stock.  In August  2003,  the Company  redeemed the Aearo Common Stock and Aearo
Preferred  Stock held by Cabot  ("Cabot Stock  Redemption")  for a total cost of
$38.5  million,  including  $4.0  million for fees.  The Company  financed  this
transaction with $8.0 million in cash, $15.5 million from its revolver  facility
for up to $30.0 million for general purposes  ("Revolving  Credit Facility") and
$15.0  million  of new senior  subordinated  notes due July 15,  2005  ("Holding
Company Notes") issued pursuant to the Note Purchase  Agreement dated August 18,
2003 ("Note Purchase  Agreement").  See Item 12, "Security  Ownership of Certain
Beneficial  Owners and Management." All of the common stock of the Subsidiary is
owned by Aearo,  and thus no trading market exists for such stock.  Accordingly,
no trading market exists for any capital stock of the Company.

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


                                      -14-
<PAGE>




Item 6.  Selected Financial Data

The selected historical financial data as of and for the periods ended September
30, 1999, 2000, 2001, 2002, and 2003 are derived from the consolidated financial
statements of Aearo  Corporation  and  subsidiaries.  The data should be read in
conjunction  with the  consolidated  financial  statements  and  related  notes,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and other financial information included herein.


<TABLE>
<CAPTION>
                                AEARO CORPORATION
                             SELECTED FINANCIAL DATA
                (Dollars in Millions, Except Fixed Charge Ratio)


                                                                    Years Ended September 30,
<S>                                           <C>               <C>            <C>              <C>             <C>
                                              1999              2000           2001             2002            2003
                                         --------------    -------------    ----------      -----------      ----------
 Statement of Operations Data:
 Net Sales--
       Safety Products                   $       212.7     $      219.7     $   206.3       $    208.5         $ 242.3
       Safety Prescription Eyewear                35.5             39.9          39.1             40.8            40.0
       Specialty Composites                       42.9             45.9          38.5             37.6            34.1
                                         --------------    -------------    ----------      -----------      ----------
          Total net sales                         291.1            305.5         283.9            286.9           316.4
 Cost of Sales                                   156.7            160.8         155.2  (2)       150.4  (3)      164.0   (4)
                                         --------------    -------------    ----------      -----------      ----------
       Gross profit                              134.4            144.7         128.7            136.5           152.4
 Operating Expenses--
       Selling and administrative                 87.5             95.6          87.3             91.9           101.3
       Research and technical service              4.7              5.5           5.2              5.7             6.4
       Amortization expense                        6.8              6.9           6.5              6.3              .3
       Other charges (income), net                 0.8             (0.3)          0.7              1.5             1.7
       Restructuring charge                          -                -           9.1  (2)        (0.1) (3)          -
                                         --------------    -------------    ----------      -----------      ----------
       Operating income                           34.6             37.0          19.9             31.2            42.7
       Interest expense, net                      24.3             24.4          23.7             20.1            19.6
                                         --------------    -------------    ----------      -----------      ----------
       Income (loss) before
       income taxes                               10.3             12.6         (3.8)             11.1            23.1
       Provision for (benefit from)
         income taxes                              3.2              3.6         (1.9)              1.8             2.5
                                         --------------    -------------    ----------      -----------      ----------
  Net income (loss)                       $         7.1     $        9.0     $   (1.9)       $      9.3          $ 20.6
                                         ==============    =============    ==========      ===========      ==========


 Other Data:

 Depreciation and amortization                    18.3             18.7          18.7             17.3            11.4

 Capital expenditures                              8.4              9.6           7.8              9.7            10.3

 Ratio of earnings to fixed

 Charges (1)                                       1.4              1.5             -              1.5             2.1


 Balance Sheet Data (at period-end):

 Total assets                            $       282.3     $      266.8     $   261.3       $    270.2          $293.5
 Debt                                            214.8            199.8         202.2            195.6           213.6
 Stockholders' equity                             16.5             15.8           9.9             21.5            18.4

</TABLE>

                                      -15-
<PAGE>



Notes to Selected Financial Data:

1.   Ratio of  earnings  to fixed  charges  is  defined  as pretax  income  from
     continuing  operations plus fixed charges  divided by fixed charges.  Fixed
     charges include interest expense  (including  amortization of debt issuance
     costs). Earnings for the period ended September 30, 2001 were inadequate to
     cover fixed charges by $3.8 million.

2.   On September 30, 2001, the Company recorded a restructuring charge of $11.4
     million related to a restructuring plan announced by the Company to improve
     its competitive position and long-term profitability. The plan includes the
     closure  of  its  Ettlingen,   Germany  plant,  significantly  reorganizing
     operations  at the  Company's  Varnamo,  Sweden  plant,  rationalizing  the
     manufacturing  assets and product mix of its Specialty  Composites business
     unit and a reduction of products and product lines (See Note 16 of Notes to
     Consolidated Financial Statements).

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

4.   During fiscal 2003, the Company  reversed $0.3 million of reserves  related
     to  the  September  30,  2001  restructuring   provision.   The  adjustment
     represents  a change in  estimate  of the plan for the  disposal of certain
     items of inventory.  The inventory provision of $0.3 million was classified
     as cost of sales.


                                      -16-
<PAGE>



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

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


General

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

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

During fiscal year 2000, the sales increased 4.9%, despite a stronger US dollar,
which had the affect of depressing reported sales by approximately $6.6 million.
On a currency  adjusted  basis sales were 7.7% higher  than the  previous  year.
Although sales were higher in all three of the Company's segments, the Specialty
Composites  trucking  market  began to soften  during  the fourth  quarter.  The
continued productivity improvements in purchasing and manufacturing,  especially
in the manufacture of  non-prescription  eyewear  product lines,  drove a strong
improvement in gross profit performance,  resulting in a 0.8% improvement in the
gross profit percentage of sales. The gross profit would have been approximately
an  additional  0.6% higher had it not been for the weakness of the Euro,  which
depressed revenue while having a more limited impact on manufacturing costs.

During  fiscal  year 2001,  continued  softening  of the  Specialty  Composites'
trucking  market  that began in the  fourth  quarter  of the  previous  year was
followed by overall softness in the North American economy. Order softness began
with the consumer  marketplace  and then the industrial  marketplace as consumer
confidence and  manufacturing  employment in North America  declined  during the
year. In addition,  the US dollar  continued to  strengthen  against most global
currencies,  which had the affect of depressing  reported sales by approximately
$7.8  million.   Continued   productivity   improvements   in   purchasing   and
manufacturing enabled the Company to offset much of the negative currency impact
as well as the  impact  on  manufacturing  overhead  absorption  due to  reduced
volume. Selling and administrative expenses decreased $8.3 million primarily due
to the Company's proactive measures to reduce expenses in line with the slowdown
in the  economy.  In May  2001  the  Company  completed  an  upgrade  of its SAP
management  information  system to version  3.1i and it intends to  continue  to
apply information  system version  upgrades,  as it deems  appropriate.  In July
2001, the Company  successfully  completed the  refinancing of its  indebtedness
under its prior $165.0 million credit agreement with a new $135.0 million credit
agreement and ended the year with undrawn revolver  commitments of approximately
$30.0 million,  an available U.K. overdraft facility of $5.0 million and cash of
$18.2 million. On September 30, 2001 the Company recorded a restructuring charge
of $11.4 million  related to a  restructuring  plan  announced by the Company to
improve its competitive position and long-term profitability.

The terrorist  events of September 11, 2001,  coupled with the  previously  weak
economy,  made for a challenging start for fiscal year 2002. Sales for the first
quarter  were off 9.8%  versus the prior year due to the  resulting  significant
slowdown  in the  manufacturing  sectors  of the  economy  in which the  Company
markets  its  products.   The  following   three  quarters   showed   comparable
improvements  with sales down only 4.5% in the second  quarter  and then up 6.0%
and 12.7% in quarters three and four.

Despite the  difficult  economy in fiscal 2002,  the Company was able to improve
performance  through continued reliance on its strategy of ongoing  productivity
improvements,  global new product  development and value-creating  acquisitions.
Productivity  improvements  in  purchasing  and  manufacturing  as  well  as the
benefits of the restructuring  program implemented toward the end of fiscal 2001
allowed the Company to improve gross profits to 47.6% of net sales (up 230 basis

                                      -17-
<PAGE>

points).  The  initiatives  on global new  product  development  resulted in the
Company launching 36 new or improved product lines including the  Quick-Latch(R)
respiratory line, the X-Factor(TM) eyewear line for the Consumer channel, and PU
shaped  earplugs  under the  EARsoft(R)  name.  In  addition,  the Company  also
released new and improved  Peltor  passive muffs as well as the new and improved
Comtac(TM) and PowerCom Plus(TM) communication muffs. In addition, the difficult
economy  did  provide  acquisition  opportunities  and the  Company  was able to
complete  four  value  creating  acquisitions  during  the  fiscal  year.  These
acquisitions  are in the  Company's  core  product  offerings  and  enhance  the
Company's global eyewear positions. In prescription eyewear the Company added to
SRx's number one global market share position under its single AOSafety(R) brand
name, and in non-prescription  eyewear the Company acquired an eyewear line that
was restaged under the  X-Series(TM)  line which is being  expanded  through the
International,  Consumer,  European  and North  American  channels.  The overall
result was that the Company ended its fiscal year with operating income of $31.2
million,  as compared to $19.9 million in the previous fiscal year, with undrawn
revolver commitments of approximately $30.0 million, an available U.K. overdraft
facility of $5.0 million and cash of $14.5 million.

In fiscal  2003,  the Company  continued  with the  momentum  gained  during the
previous  fiscal year and increased its sales by $29.6  million,  or 10.3%.  The
impact of a strong new product  development program allowed the Company's Safety
Segment to register its fifth straight quarter of organic growth ending the year
with organic growth of 5.9%. The Company's SRx and Specialty  Composite segments
were negatively impacted by the weak economy in North America resulting in total
Company organic growth of 1.7%.

During the year the Company introduced new eyewear products including Maxim(TM),
Metaliks(TM) and X.Sport(TM).  In the hearing product line, the Company launched
EAR PushIns(TM),  and HearPlug  products.  A major launch in respiratory was the
launch of Quick-Latch with Voice Transmission.  Acquisitions accounted for $10.9
million of incremental sales led by the acquisition of the SafeWaze branded fall
protection product line. SafeWaze sells into the US non-residential construction
market and allows the Company  access to that channel for its existing  personal
protection equipment.  In addition, the acquired fall protection product line is
being  introduced  to the North  American  industrial  market via the  Company's
strong  presence in that channel.  A weaker US dollar added $13.7 million to net
sales and gross  profit as a  percentage  of net sales  increased  0.6% to 48.2%
primarily  as  a  result  of   productivity   improvements   in  purchasing  and
manufacturing.  Operating  income  improved  $11.5  million,  or  36.8% to $42.7
million.

In August 2003, the Company effected the Cabot Stock Redemption for a total cost
$38.5  million,  including  $4.0  million for fees.  The Company  financed  this
transaction  with $8.0 million in cash,  $15.5 million from its Revolving Credit
Facility and $15.0 million of Holding Company Notes.  The Company ended the year
with cash of $7.3 million and a revolver balance of $11.7 million.


Critical Accounting Policies

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

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

Income  Taxes - The  Company  accounts  for  income  taxes  in  accordance  with
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income Taxes",  which requires deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between book and
tax  bases of  recorded  assets  and  liabilities.  SFAS No.  109 also  requires
deferred  tax assets be reduced by a  valuation  allowance  if it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.  Recognition  of a  deferred  tax  asset is  dependent  on  generating
sufficient future taxable income in the United States prior to the expiration of
the tax loss and credit carryforwards, which expire over various periods ranging
from 2010 to 2021. In its evaluation of the adequacy of the valuation allowance,
the Company  assesses prudent and feasible tax planning  strategies.  Due to the
uncertainties  of realizing these tax benefits,  the Company has recorded a full
valuation allowance against these losses and credit carryforwards.  The ultimate
amount of deferred tax assets  realized could be different from those  recorded,
as influenced by potential  changes in enacted tax laws and the  availability of
future taxable income.
                                      -18-
<PAGE>

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

Restructuring - The Company recorded an unusual charge in fiscal 2001 based on a
restructuring   plan  to  improve  its   competitive   position  and   long-term
profitability.  The  provision  recorded  was based on estimates of the expected
costs  associated  with site  closures,  consolidation  of products  and product
lines, disposal of assets, contract terminations or other costs directly related
to the  restructuring.  To the extent that actual  costs may differ from amounts
recorded,   revisions  to  the  estimated   reserves  would  be  required.   The
restructuring provision included a reduction of $0.6 million and $0.3 million in
fiscal years 2002 and 2003,  respectively,  to account for new information  made
available during the year.

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

Revenue  Recognition  - The  Company  recognizes  revenue  when  title  and risk
transfer  to the  customer,  which is  generally  when the product is shipped to
customers  (FOB  shipping  point).  At the time revenue is  recognized,  certain
provisions  may also be  recorded,  including  pricing  discounts,  rebates  and
incentives.  In  addition,  an  allowance  for  doubtful  accounts is  generally
recorded based on a percentage of aged receivables. However, management judgment
is  involved  with the final  determination  of the  allowance  based on several
factors including specific analysis of a customers credit worthiness, historical
bad debt experience,  changes in payment history and general economic and market
trends.


Results of Operations

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


                                             Years Ended September 30,
                                   ---------------------------------------------
                                       2001             2002             2003
                                   -------------    ------------    ------------
Net sales:
   Safety Products                     72.7  %          72.7  %          76.6  %
   Safety Prescription Eyewear         13.8             14.2             12.6
   Specialty Composites                13.5             13.1             10.8
                                   -------------    ------------    ------------
   Total net sales                    100.0            100.0            100.0
   Cost of sales                       54.7             52.4             51.8
                                   -------------    ------------    ------------
   Gross profit                        45.3             47.6             48.2
   Selling and administrative          30.8             32.0             32.0
   Research and technical services      1.8              2.0              2.1
   Amortization expense                 2.3              2.2              0.0
   Other charges (income), net          0.0              0.5              0.6
   Restructuring charge                 3.2              0.0              0.0
                                   -------------    ------------    ------------
   Operating income                     7.2  %          10.9  %          13.5  %
                                   =============    ============    ============



                                      -19-
<PAGE>

Fiscal 2003 Compared to Fiscal 2002

Net Sales.  Net sales in the year ended  September 30, 2003  increased  10.3% to
$316.4  million from $286.9  million in the year ended  September 30, 2002.  The
increase in sales was primarily  driven by organic growth in the Safety Products
segment, the impact of foreign currency translation, and acquisitions, partially
offset by declines in the Safety Prescription  Eyewear and Specialty  Composites
segments.  The  weakness of the U.S.  dollar  relative to other  currencies  and
acquisitions  favorably  impacted net sales by $13.7 million and $10.9  million,
respectively.  The Safety Products segment net sales in the year ended September
30, 2003 increased 16.2% to $242.3 million from $208.5 million in the year ended
September 30, 2002.  The increase in net sales resulted from a 5.9% increase due
to organic  growth,  a 6.5% increase due to foreign  currency  translation and a
3.8% increase due to acquisitions.  The Safety Prescription  Eyewear segment net
sales in the year ended  September 30, 2003 decreased 2.0% to $40.0 million from
$40.8 million in the year ended  September  30, 2002.  The decrease in net sales
resulted from a 9.9%  reduction in volume,  partially  offset by a 7.3% increase
due to  acquisitions,  with the remainder due to the impact of foreign  currency
translation.  The  Specialty  Composites  segment  net  sales in the year  ended
September  30, 2003  decreased  9.0% to $34.1  million from $37.5 million in the
year ended  September  30, 2002.  The decrease  was  primarily  driven by volume
declines in the automotive and truck markets.

Gross Profit.  Gross profit in the year ended September 30, 2003 increased 11.7%
to $152.4 million from $136.5 million in the year ended  September 30, 2002. The
increase  in  gross  profit  is  primarily  due  to  productivity  improvements,
acquisitions,  volume  and the impact of foreign  currency  translation,.  Gross
profit  as a  percentage  of net  sales in the year  ended  September  30,  2003
improved by 0.6% to 48.2% as compared to 47.6% in the year ended  September  30,
2002. The increase in gross margin  percentage was primarily due to product mix,
productivity   improvements,   volume  and  the   impact  of  foreign   currency
translation.

Operating  Expenses.  Operating  expenses in the year ended  September  30, 2003
increased 4.1% to $109.7 million from $105.3 million in the year ended September
30, 2002. The increase in operating expenses was primarily driven by an increase
in selling and  administrative  expenses  and research  and  technical  services
expense,  partially  offset by a decrease  in  amortization  expense.  The 10.2%
increase in selling and  administrative  expenses  resulted from a 3.3% increase
due to foreign currency translation, a 3.5% increase due to acquisitions, a 2.6%
increase  due to  compensation  expense,  which  includes the costs of increased
benefits and variable incentives, and the remaining 0.6% due to product launches
and marketing  support.  Research and technical  services expense increased $0.7
million due to product development  initiatives.  Amortization expense decreased
$6.0 million due to the  adoption of SFAS No. 142 which  requires the Company to
discontinue  amortizing  goodwill and other  intangible  assets with  indefinite
useful lives. Amortization expense would have been reduced by approximately $6.0
million  had the  provisions  of SFAS No.  142 been  adopted  in the year  ended
September 30, 2002. Selling and  administrative  expenses as a percentage of net
sales were  unchanged at 32.0% in the years ended  September  30, 2003 and 2002,
respectively.

Operating  Income.  Primarily  as a  result  of  the  factors  discussed  above,
operating  income  increased  $11.6 million or 37.2% in the year ended September
30, 2003 from $31.1  million in the year ended  September  30,  2002.  Operating
income as a  percentage  of net sales in the year ended  September  30, 2003 was
13.5% as compared to 10.9% in the year ended September 30, 2002.

Interest Expense,  Net.  Interest  expense,  net in the year ended September 30,
2003  decreased  2.5% to $19.6  million  from  $20.1  million  in the year ended
September 30, 2002.  The decrease is attributed to lower  interest  rates during
the year ended  September  30, 2003 as compared to the year ended  September 30,
2002.

Income (Loss) Before  Provision for (Benefit  From) Income Taxes.  Income before
provision for income taxes  increased $12.1 million to $23.2 million in the year
ended  September 30, 2003 compared to $11.1 million in the year ended  September
2002.

Provision for (Benefit From) Income Taxes. The provision for income taxes in the
year ended  September 30, 2003 was $2.6 million  compared to $1.8 million in the
year ended  September 30, 2002.  The Company's  effective tax rate was different
from the statutory rate due to the mix of income  between the Company's  foreign
and domestic subsidiaries. The Company's foreign subsidiaries had taxable income
in their foreign  jurisdictions  while the Company's domestic  subsidiaries have
net  operating  loss  carry-forwards  for  income  tax  purposes.   Due  to  the
uncertainty of realizing these tax benefits,  the tax benefits  generated by the
net  operating  loss  carry-forwards  have  been  fully  offset  by a  valuation
allowance.

Net Income.  For the year ended  September  30, 2003,  the Company  recorded net
income of $20.6 million as compared to $9.3 million for the year ended September
30, 2002.

                                      -20-
<PAGE>

Fiscal 2002 Compared to Fiscal 2001

Net Sales.  Net sales in the year ended  September  30, 2002  increased  1.1% to
$286.9  million from $283.9  million in the year ended  September 30, 2001.  The
increase in sales was primarily driven by new product launches and acquisitions.
The Safety  Products  segment  net sales in the year ended  September  30,  2002
increased 1.1% to $208.5 million from $206.3 million in the year ended September
30, 2001. The Safety Products  segment  included  approximately  $5.0 million of
sales from the  acquisition  of Leader  Industries in January  2002.  The Safety
Prescription  Eyewear  segment  net sales in the year ended  September  30, 2002
increased  4.3% to $40.8 million from $39.1 million in the year ended  September
30, 2001. The Safety  Prescription  Eyewear segment included  approximately $2.7
million of sales from the  acquisition  of Iron Age Vision in December  2001 and
Chesapeake  Optical in May 2002. The Specialty  Composites  segment net sales in
the year ended  September  30, 2002  decreased  2.3% to $37.6 million from $38.5
million in the year ended September 30, 2001. The decrease was primarily  driven
by volume declines in the industrial equipment market segment.

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

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

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

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

Restructuring Charge. On September 30, 2001 the Company recorded a restructuring
charge of $11.4 million related to a restructuring plan announced by the Company
to improve  its  competitive  position  and  long-term  profitability.  The plan
included the closure of its Ettlingen, Germany plant, significantly reorganizing
operations  at  the  Company's   Varnamo,   Sweden  plant,   rationalizing   the
manufacturing  assets and product mix of its Specialty  Composites business unit
and a reduction  of products and product  lines.  On  September  30,  2002,  the
Company  revised  its  estimate  relating to the  disposal  of certain  items of
inventory and to the closure of its  Ettlingen,  Germany  operation and adjusted
the  restructuring  provision  by  $0.6  million,  of  which  $0.5  million  was
classified  as cost of sales  relating to  inventory.  As of September 30, 2002,
there is approximately $4.2 million accrued relating to the restructuring.

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

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

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

                                      -21-
<PAGE>
Provision for (Benefit From) Income Taxes. The provision for income taxes in the
year ended  September  30, 2002 was $1.8  million  compared to a benefit of $1.9
million in the year ended  September 30, 2001. The Company's  effective tax rate
was lower than the statutory rate due to a decrease in the valuation  allowance.
The  valuation  allowance  at  September  30,  2002  and  2001  relates  to  the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss carryforwards.

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

Effects of Changes in Exchange Rates

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

Effects of Inflation

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

Liquidity and Capital Resources

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

On August 18,  2003,  the  Company  authorized  the  issuance  and sale of $15.0
million  aggregate  principal of Holding  Company  Notes due July 15, 2005.  The
proceeds of the Holding  Company  Notes were used along with $15.5  million from
the  Revolver  Credit  Facility  and $8.0 million cash to effect the Cabot Stock
Redemption.

The Company's debt structure includes:  (a) $98.0 million of Senior Subordinated
Notes (Notes) due 2005, which are publicly held and are redeemable at the option
of the Company,  in whole or in part, at various  redemption  prices,  (b) $15.0
million of Holding  Company Notes due 2005, and (c) up to an aggregate of $135.0
million under a credit  agreement with various banks  comprised of (i) a secured
term loan  facility  consisting of loans  providing for up to $100.0  million of
term  loans  (collectively  the "Term  Loans")  with a portion of the Term Loans
denominated in foreign currencies,  (ii) the Revolving Credit Facility providing
for up to $30.0 million of revolving loans for general corporate  purposes,  and
(iii) a U.K.  overdraft facility of up to an equivalent of $5.0 million in Great
Britain Pounds for working  capital  requirements  as needed  (collectively  the
"Senior  Bank  Facilities").  The  amount  outstanding  on the  Term  Loans  and
Revolving  Credit Facility at September 30, 2003, were  approximately  $85.1 and
$11.7  million,  respectively.  No  amounts  were  outstanding  under  the  U.K.
overdraft  facility.  At September 30, 2003,  the Company's  available  lines of
credit totaled approximately $22.3 million.

Under the terms of the Senior Bank  Facilities,  the Note Indenture and the Note
Purchase  Agreement for the Holding Company Notes,  Aearo Company is required to
comply with certain financial  covenants and restrictions.  Aearo Company was in
compliance with all financial covenants and restrictions at September 30, 2003.

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

Maturities  under the Company's Term Loans are: $17.4 million in fiscal 2004 and
$67.7 million in fiscal 2005. Other than upon a change of control or as a result
of certain asset sales,  or in the event that certain  excess funds exist at the
end of a fiscal  year,  the  Company  will not be  required  to make  additional
principal  payments  in respect of the Term Loans until  maturity  in 2005.  The
Company is required to make  interest  payments  with respect to the Senior Bank
Facilities,  the Notes and the Holding  Company Notes.  The Company's  Revolving
Credit Facility and Term Loans mature in March 2005.

                                      -22-
<PAGE>

The  Company's  net cash  provided by  operating  activities  for the year ended
September  30, 2003 totaled  $36.7  million as compared to $26.6 million for the
year ended  September 30, 2002.  The increase of $10.1 million was primarily due
to a $4.7 million  increase in net income adjusted for cash and non cash charges
(depreciation,  amortization,  deferred  taxes and other) and a $5.4 million net
change in assets  and  liabilities.  The  Company's  net  changes  in assets and
liabilities was primarily driven by an increase in cash from receivables, taxes,
and accrued liabilities, partially offset by a reduction of cash for inventories
and other, net.

The Company  typically  makes  capital  expenditures  related  primarily  to the
maintenance and improvement of manufacturing facilities.  The Company spent $9.9
million for capital expenditures,  plus an additional $0.4 million under capital
leases,  for the year ended  September  30, 2003 as compared to $8.2 million for
capital  expenditures for the year ended September 30, 2002 and $7.8 million for
the year ended September 30, 2001. The Company's  capital spending cycle is of a
relatively  short duration with a typical  project  completion time of less than
one  year.  The  Company  plans  to  spend  up  to  $11.0  million  for  capital
expenditures in fiscal year 2004.

Net cash used by  investing  activities  was $22.5  million  for the year  ended
September 30, 2003 as compared to $17.7 million for the year ended September 30,
2002.  The increase of $4.7 million in net cash used by investing  activities is
primarily  attributed to the acquisitions of VH Industries,  Inc. and Industrial
Protection Products, Inc.

Net cash used by financing  activities for the year ended September 30, 2003 was
$25.0 million compared with $10.7 million for the year ended September 30, 2002.
The change of $13.9  million is primarily  due to the Cabot Stock  Redemption of
$38.5 million,  which includes debt issuance costs of $4.0 million. In addition,
there was an  increased  use of cash of $4.6  million for the  repayment of Term
Loans,  partially  offset  by a lower  repayment  of Senior  Subordinated  Notes
compared to the prior year,  additional  borrowing  under the  Revolving  Credit
Facility  for $11.7  million and the  issuance of the Holding  Company  Notes of
$15.0 million.

The Company  maintains a  non-contributory  defined benefit cash balance pension
plan. The Company utilizes an outside actuarial firm to estimate pension expense
and funding  based on various  assumptions  including  the discount rate and the
expected  long-term  rate of return on plan assets.  In developing  the expected
long-term rate of return assumption,  the Company's  management  evaluates input
from outside  investment  advisors and  actuaries  as of the  measurement  date.
Actual  assets  returns for the  Company's  pension plan improved in fiscal 2003
after two years of negative returns.  Although recent trends have been positive,
the  Company  lowered the  long-term  rate of return on plan assets from 8.5% to
8.0% for the year ended  September 30, 2003. The Company's  management  believes
that  this rate is  reasonable  based on  historical  trends  over a 20-30  year
period.  The estimated  effect of a 1% change in the expected  long-term rate of
return on plan assets results in a $0.1 million impact on pension  expense.  The
discount  rate has also been  lowered  from 6.75% to 6.00% for the  fiscal  year
ended  September  30,  2003.  The  Company  bases  the  discount  rate on the AA
Corporate bond yields.  The estimated impact of a 1% change in the discount rate
results in a $0.2 million impact on pension expense.

The  variability of asset returns and discount rates may have either a favorable
or unfavorable  impact on the Company's pension expense and the funded status of
the  pension  plan.   Under  minimum  funding  rules,   no  additional   pension
contributions  were required to be made in fiscal 2003.  However,  contributions
may increase in future years.  Due to the  uncertainty  of the future returns of
the equity and corporate bond markets, it is difficult to estimate the impact of
pension contributions in the future.

The Company has a  substantial  amount of  indebtedness.  The Company  relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain  customary drawing  conditions) to
meet its liquidity needs. The Company  anticipates that operating cash flow will
be adequate to meet its operating and capital  expenditure  requirements for the
next several years,  although there can be no assurances that existing levels of
sales and normalized profitability, and therefore cash flow, will be maintained.
In  particular,  during  fiscal 2001 and 2002,  the Company was  affected by the
significant  slowdown in the manufacturing  sector of the economies in which the
Company  markets  its  products  that began in earnest  during the first  fiscal
quarter of fiscal 2001,  exacerbated  by the impact of the  terrorist  events of
September 11, 2001. The Company expects to arrange for new financing of both the
Senior  Bank  Facilities  and the Notes  before the  maturity of the Senior Bank
Facilities  in March  2005.  There  can be no  assurances  that  any  additional
financing  or other  sources  of capital  will be  available  to the  Company at
acceptable terms, or at all. The inability to obtain additional  financing would
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

                                      -23-
<PAGE>

Off-Balance Sheet Arrangements

The Company has no  off-balance  sheet  arrangements  or financing  arrangements
involving variable interest entities.

Item 7A. Quantitative and Qualitative  Disclosures about Market Risk

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

Foreign Currency Risk

The  Company's  results  of  operations  are  subject to risks  associated  with
operating in foreign  countries,  including  fluctuations  in currency  exchange
rates.   While  many  of  the  Company's  selling  and  distribution  costs  are
denominated  in Canadian and  European  currencies,  a large  portion of product
costs are U.S. Dollar  denominated.  As a result,  a decline in the value of the
U.S.  Dollar  relative to other  currencies  can have a favorable  impact on the
profitability  of the Company  and an  increase in the value of the U.S.  Dollar
relative  to  these  other   currencies  can  have  a  negative  effect  on  the
profitability  of the Company.  As a result of the  acquisition  of Peltor,  the
Company's  operations are also affected by changes in exchange rates relative to
the  Swedish  Krona.  A  decline  in the value of the  Krona  relative  to other
currencies can have a favorable  impact on the  profitability of the Company and
an increase in the value of the Krona  relative to other  currencies  can have a
negative impact on the profitability of the Company.

To mitigate the effects of changes in foreign  currency  rates on  profitability
the Company executes two hedging programs,  one for transaction  exposures,  and
the other for cash flow exposures in foreign  operations.  The Company  utilizes
forward  foreign  currency  contracts  for  transaction  as well  as  cash  flow
exposures.  For the year ended  September 30, 2003,  2002 and 2001,  transaction
exposures  were a gain of $0.3  million  and  losses  of $0.2  million  and $0.4
million,  respectively.  For the year ended  September 30, 2003,  2002 and 2001,
cash flow exposures were losses of $2.0 million,  $0.6 million and $0.2 million,
respectively. In addition, the Company limits the foreign exchange impact on the
balance sheet with foreign  denominated  debt in Great  Britain Pound  Sterling,
Euros, Swedish Krona and Canadian dollars.

SFAS No. 133  requires  that every  derivative  instrument  be  recorded  in the
balance sheet as either an asset or liability  measured at its fair value.  As a
result of foreign  currency  contracts  the  Company has  recorded a  derivative
payable of $0.4 million as of September 30, 2003. The forward  foreign  currency
contracts will expire over the next twelve months.

Interest Rates

The Company is exposed to market  risk  changes in  interest  rates  through its
debt.  The Company  utilizes  interest rate  instruments to reduce the impact of
either increases or decreases in interest rates on its floating rate debt.

As a result of the current  economic  slowdown and  corresponding  interest rate
reductions,  the Company  entered into an interest  rate collar  arrangement  in
October 2001 to protect $25.0 million of the outstanding variable rate term loan
debt from future interest rate volatility through September 30, 2003. The collar
floor  was set at 2% LIBOR  (London  Interbank  Offering  Rate) and cap at 6.25%
LIBOR.  The  collar  was  not  designated  as a hedge  under  SFAS  No.  133 and
accordingly,   the  fair  value  gains  or  losses  were  charged  to  earnings.
Approximately  $0.2 million was expensed  during the fiscal year ended September
30, 2003. No amounts were recorded to income or expense  related to the interest
collar for the years ended September 30, 2001 and 2002, respectively.

As part of the August 2003 financing incurred to redeem the common and preferred
Aearo  stock  owned by Cabot,  the Company  entered  into an  interest  rate cap
arrangement to protect its $30.5 million of variable debt from LIBOR rates above
1.13% through  December 31, 2004. The cap was not designed as a hedge under SFAS
No. 133 and  accordingly,  the fair value of gains or losses  will be charged to
earnings.  Approximately $0.1 million was recorded as income as of September 30,
2003.


                                      -24-
<PAGE>

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

Commodity Risk

The Company is subject to market risks with respect to industry pricing in paper
and crude oil as it relates  to various  commodity  items.  The  Company is also
exposed to market  risks for  electricity,  fuel oil and natural gas consumed in
its  operations.  Items with potential risk of price  volatility are paperboard,
packaging films, nylons, resins, propylene,  ethylene,  plasticizer and freight.
The Company  manages  pricing  exposures on larger  volume  commodities  such as
polycarbonate,  polyols and polyvinyl chloride via price negotiations  utilizing
alternative  supplier competitive pricing. The Company sources some products and
parts  from Far East  sources  where  resource  availability,  competition,  and
infrastructure  stability has provided a favorable purchasing  environment.  The
Company does not enter into derivative instruments to manage commodity risks.


                                      -25-
<PAGE>



Item 8.  Financial Statements and Supplementary Data
Index to Financial Statements


INDEPENDENT AUDITORS' REPORT.................................................27
CONSOLIDATED BALANCE SHEETS..................................................28
CONSOLIDATED STATEMENTS OF OPERATIONS........................................29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY..............................30
CONSOLIDATED STATEMENTS OF CASH FLOWS........................................31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................32



                                      -26-
<PAGE>




                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of Aearo Corporation:

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Aearo
Corporation and  subsidiaries as of September 30, 2003 and 2002, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period ended  September 30, 2003. Our audits also
included the financial statement schedules listed in the Index at Item 15. These
financial statements and financial statement schedules are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Aearo Corporation and subsidiaries
as of September 30, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended  September  30, 2003,
in conformity with accounting principles generally accepted in the United States
of America.  Also, in our opinion,  such  financial  statement  schedules,  when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.

As discussed in Note 2 to the consolidated  financial  statements,  in 2003, the
Corporation  changed its method of accounting for goodwill and other  intangible
assets.



DELOITTE & TOUCHE LLP
Indianapolis, Indiana
December 12, 2003


                                      -27-
<PAGE>





                       AEARO CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in Thousands, Except Share Amounts)

                                                September 30, September 30,
                                                    2002          2003
                                                ------------- --------------

          ASSETS
Current Assets:
   Cash and cash equivalents                    $     14,480   $      7,301
   Accounts receivable
     (net of reserve for doubtful accounts
     of $1,524 and $1,358, respectively)              46,478         49,146
   Inventories                                        33,161         37,269
   Deferred and prepaid expenses                       3,449          7,321
                                                ------------- --------------
     Total current assets                             97,568        101,037
                                                ------------- --------------

Long Term Assets:
   Property, plant and equipment, net                 48,096         48,869
   Goodwill, net                                      67,821         81,770
   Other intangible assets, net                       54,158         57,887
   Other assets                                        2,526          3,953
                                                 ------------- -------------
     Total Assets                                $   270,169    $   293,516
                                                 ============= =============
          LIABILITIES
Current Liabilities:
   Current portion of long-term debt             $    12,847    $    17,767
   Accounts payable and accrued liabilities           36,410         44,043
   Accrued interest                                    2,568          2,736
   U.S. and foreign income taxes                       1,156          1,885
                                                 ------------- -------------
     Total current liabilities                        52,981         66,431
                                                 ------------- -------------
   Long-term debt                                    182,715        195,786
   Deferred income taxes                                 800          1,609
   Other liabilities                                  12,129         11,334
                                                 ------------- -------------
     Total Liabilities                               248,625        275,160
                                                 ------------- -------------
          COMMITMENTS AND CONTINGENCIES
Preferred stock, $.01 par value-
(Redemption value of $109,480 and $61,910,
   respectively)
   Authorized - 200,000 shares
   Issued and outstanding - 45,000 and 22,500,             -              -
      respectively)
Stockholders' Equity:
   Common stock $.01 par value-
     Authorized -- 200,000 shares
     Issued and outstanding -- 101,913 and                 1              1
        59,413, respectively
   Additional paid-in-capital                         33,614              -
   Stock subscription receivables                     (1,360)        (1,399)
   Retained earnings                                   6,825         26,541
   Accumulated other comprehensive loss              (17,536)        (6,787)
                                                  ------------- -------------
     Total Stockholders' Equity                       21,544         18,356
                                                  ------------- -------------
     Total Liabilities and Stockholders' Equity   $  270,169     $  293,516
                                                  ============= =============

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

                                      -28-
<PAGE>



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

                                                    Years Ended September 30,
                                                2001        2002        2003
                                            ----------- ----------- -----------

Net sales                                   $  283,862   $ 286,867  $ 316,428
Cost of sales                                  152,849     150,897    164,289
Restructuring charges (income)                   2,364       (500)       (270)
                                            ----------- ----------- -----------
   Gross profit                                128,649     136,470    152,409

Selling and administrative                      87,286      91,903    101,257
Research and technical services                  5,162       5,740      6,402
Amortization expense                             6,530       6,293        267
Other charges (income), net                        680       1,475      1,737
Restructuring charges (income)                   9,077       (100)          -
                                            ----------- ----------- -----------

   Operating income                             19,914      31,159     42,746
   Interest income                                (203)       (211)      (146)
   Interest expense                             23,869      20,266     19,733
                                            ----------- ----------- -----------

   Income (loss) before provision               (3,752)      11,104     23,159
      for (benefit from) income taxes
   Provision for (benefit from)                 (1,872)       1,785      2,551
      income taxes
                                            ----------- ----------- -----------

   Net income (loss)                        $   (1,880)  $   9,319  $   20,608
                                            =========== =========== ===========



                                      -29-
<PAGE>



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


<TABLE>
                                                              Additional                          Accumulated
                                                                Paid       Stock      Retained      Other             Comprehensive
                                 Preferred     Common           In      Subscriptions Earnings  Comprehensive             Income
                                  Shares    Shares  Amount     Capital   Receivables  (Deficit)      Loss      Total      (Loss)
                                 --------  ------- --------  ---------- ----------- ---------- ------------- -------  ------------
<S>                               <C>       <C>     <C>      <C>        <C>        <C>         <C>           <C>        <C>
Balance, October 1, 2000          45,000    102,088 $   1    $  33,709  $  (1,496)  $    (614)  $  (15,751)  $ 15,849

  Repayment of shareholder notes      -        -        -           -         161          -            -         161
  Foreign currency translation
    adjustment                        -        -        -           -          -           -        (4,252)    (4,252)  $    (4,252)
  Unrealized loss on derivative
    instruments                       -        -        -           -          -           -           (22)       (22)          (22)
  Net income                          -        -        -           -          -       (1,880)          -      (1,880)       (1,880)
                                                                                                                       -------------
  Comprehensive loss                  -        -        -           -          -           -                            $    (6,154)
                                 -------  ------- --------  ---------- ----------- ----------  ------------- --------  =============
Balance, September 30, 2001       45,000   102,088      1       33,709     (1,335)     (2,494)     (20,025)     9,856

  Accrued interest on shareholder
    notes                             -        -        -           -         (25)         -            -         (25)
  Redemption of common stock, net     -    (175)        -          (95)        -           -            -         (95)
  Foreign currency translation
    adjustment                        -        -        -           -          -           -         4,758      4,758  $      4,758
  Unrealized gain on derivative
    instruments                       -        -        -           -          -           -            22         22            22
  Net minimum pension liability
    adjustment                        -        -        -           -          -           -        (2,291)    (2,291)       (2,291)
  Net income                          -        -        -           -          -        9,319           -       9,319         9,319
                                                                                                                       -------------
  Comprehensive loss                  -        -        -           -          -           -            -          -    $    11,808
                                 -------  ------- --------  ---------- ----------- ----------  ------------ ---------- =============
Balance, September 30, 2002       45,000   101,913      1       33,614     (1,360)      6,825      (17,536)    21,544

  Redemption of stock            (22,500)  (42,500)     -      (33,614)        -         (892)          -     (34,506)
  Accrued interest on shareholder
    notes                             -        -        -           -         (39)         -            -         (39)
  Unrealized loss on derivative
    instruments                       -        -        -           -          -           -          (390)      (390)  $      (390)
  Foreign currency translation
    adjustment                        -        -        -           -          -           -         9,079      9,079         9,079
  Net minimum pension liability
    adjustment                        -        -        -           -          -           -         2,060      2,060         2,060
  Net income                          -        -        -           -          -       20,608           -      20,608        20,608
                                                                                                                       -------------
  Comprehensive income                -        -        -           -          -           -            -          -    $    31,357
                                                                                                                       =============
                                 -------  ------- --------  ---------- ----------- ----------  ------------ ----------
Balance, September 30, 2003       22,500   59,413 $     1   $       -  $   (1,399)  $  26,541    $  (6,787)  $ 18,356
                                 =======  ======= ========  ========== =========== ==========  ============ ==========

</TABLE>

                                      -30-
<PAGE>

<TABLE>
<CAPTION>


                       AEARO CORPORATION AND SUBSIDIRARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)


                                                                                             Years Ended September 30,
                                                                                        2001           2002           2003
                                                                                    -----------    -----------    -----------
Cash Flows from Operating Activities:

<S>                                                                                 <C>           <C>             <C>
   Net income (loss)                                                                $   (1,880)   $     9,319     $   20,608
   Adjustments to reconcile net income (loss) to cash provided by operating
   activities --
     Depreciation                                                                       10,123         10,958         11,102
     Amortization                                                                        8,715          7,848          1,775
     Deferred income taxes                                                                (101)           401           (986)
     Provision for restructuring charges                                                11,441           (600)          (270)
     Other non-cash items, net                                                          (2,993)           526            356
     Changes in assets and liabilities, net of effects of acquisitions--
         Accounts receivable, net                                                        1,210            (25)         1,067
         Inventories                                                                     1,758             (5)          (443)
         Accounts payable and accrued liabilities                                       (5,394)        (1,983)         4,620
         Income taxes, net                                                              (2,957)        (1,441)           805
         Other                                                                           1,616          1,553         (1,934)
                                                                                    -----------    -----------    -----------
              Net cash provided by operating activities                                 21,538         26,551         36,700
                                                                                    -----------    -----------    -----------

Cash Flows from Investing Activities:
   Cash paid for acquisitions, net of cash acquired                                         -          (9,515)       (12,600)
   Additions to property, plant and equipment                                           (7,799)        (8,232)        (9,886)
   Proceeds provided by disposals of property, plant and equipment                          38             13             28
                                                                                    -----------    -----------    -----------
              Net cash used by investing activities                                     (7,761)       (17,734)       (22,458)
                                                                                    -----------    -----------    -----------

Cash Flows from Financing Activities:
   Issuance of shareholder notes                                                           161            -            -
   Redemption of common and preferred stock                                                  -         (95)     (34,506)
   Debt issuance costs                                                                       -            -      (3,990)
   (Repayment of) issuance of senior subordinated notes                                      -      (2,000)       15,000
   (Repayment of) proceeds from revolving credit facility, net                        (10,000)            -       11,650
   (Repayment of) proceeds from of term loans                                           11,700      (8,178)     (12,826)
   Repayment on capital lease obligations                                                    -        (143)        (224)
   Repayment of other long-term debt                                                     (222)        (215)        (107)
                                                                                    -----------  -----------  -----------
              Net cash (used in) provided by financing activities                        1,639     (10,631)     (25,003)
                                                                                    -----------  -----------  -----------

Effect of Exchange Rate Changes on Cash                                                  (678)      (1,939)        3,582
                                                                                    -----------  -----------  -----------

Net increase (decrease) in cash and cash equivalents                                    14,738      (3,753)      (7,179)
Cash and cash equivalents, beginning of year                                             3,495       18,233       14,480
                                                                                    -----------  -----------  -----------
Cash and cash equivalents, end of year                                              $  18,233    $  14,480    $   7,301
                                                                                    ===========  ===========  ===========

Non Cash Investing and Financing Activities:
Capital Lease Obligations                                                           $       -    $   1,421    $     430
                                                                                    ===========  ===========  ===========

Cash Paid for:
   Interest                                                                         $  22,023    $  18,697    $  18,096
   Income Taxes                                                                     $   1,983    $   2,649    $   1,444
                                                                                    ===========  ===========  ===========


</TABLE>

                                      -31-
<PAGE>




                       AEARO CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Aearo  Corporation  was formed by Vestar Equity  Partners,  L.P.  ("Vestar") and
Cabot  Corporation   ("Cabot")  in  June  1995  to  effect  the  acquisition  of
substantially all of the assets and liabilities of Cabot Safety  Corporation and
certain  affiliates,  all of which were wholly owned by Cabot,  (the  "Formation
Acquisition").  Separate financial statements of Aearo Company are not presented
because they do not provide any additional information from what is presented in
the  consolidated  financial  statements  of  Aearo  Corporation  that  would be
meaningful  to  the  holders  of  the  senior  subordinated  notes  (the  Senior
Subordinated Notes) (see Note 7).

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


     Use of Estimates

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

     Reclassifications

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

     Revenue Recognition

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

     Advertising

The Company  expenses the costs of advertising as incurred.  These expenses were
approximately $5.9 million,  $6.1 million,  and $7.3 million for the years ended
September 30, 2001, 2002 and 2003, respectively.

                                      -32-
<PAGE>


     Cash Equivalents

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


Foreign Currency Translation and Transactions

     Foreign Currency Translation:

Assets and liabilities of the Company's  foreign  subsidiaries are translated at
the exchange rate as of the end of the year.  Income and expenses are translated
at the  approximate  average  exchange rates during the year.  Foreign  currency
translation  adjustments are recorded as a separate  component of  stockholders'
equity.


     Foreign Currency Transactions:

Foreign  currency  gains and  losses  arising  from  transactions  by any of the
Company's  subsidiaries are reflected in net income (loss).  For the years ended
September 30, 2001, 2002 and 2003 the  accompanying  consolidated  statements of
operations include approximately $0.4 million, $0.2 million, and ($0.3) million,
respectively,  of transaction (gains)/losses included in other (income) charges,
net.

To mitigate the effects of changes in foreign  currency  rates on  profitability
related to trade accounts  receivable and trade accounts payable  denominated in
foreign currencies,  the Company enters into forward foreign currency contracts.
Gains and losses  related to contracts  designated  as hedges of trade  accounts
receivable and trade  accounts  payable  denominated  in foreign  currencies are
accrued  as  exchange  rates  change  and  are  recognized  in the  accompanying
consolidated  statements  of operations  as  transaction  (gains) and losses and
included in other (income) charges,  net. As of September 30, 2003,  relative to
these exposures,  the Company had forward foreign currency contracts open in the
following amounts:

   Currency                        Amount (000s)          Contract Position
   --------                        -------------          -----------------
   British Pound                        3,981                    Buy
   Canadian Dollar                      1,625                    Sell
   Norwegian Krona                      2,862                    Sell
   Swedish Krona                      158,780                    Buy
   Swiss Franc                             80                    Sell
   Euro                                 9,521                    Sell
   Danish Krona                         2,412                    Sell


As of September 30, 2003,  the Company has recorded an  unrealized  gain of $1.0
million associated with the above forward foreign currency contract commitments.

In addition, the Company enters into forward foreign currency contracts to hedge
a portion of  anticipated  sales  denominated  in Great Britain Pound  Sterling,
Euro,  and  Canadian  Dollar to mitigate the impact of the effects of changes in
foreign  currency  rates on  profitability  related to cash  flows from  foreign
operations.  Gains  and  losses  on  these  hedge  contracts  are  deferred  and
recognized as an adjustment  to the other  charges  (income),  net. For the year
ended  September  30, 2002 and 2003,  the  consolidated  statement of operations
includes  approximately $0.6 million and $2.0 million,  respectively,  of losses
related to these instruments.

The Company has entered into  Canadian  dollar  hedges as of September 30, 2003.
The US dollar equivalent notional amount of outstanding  Canadian dollar forward
foreign currency contracts is approximately $14.2 million at September 30, 2003.
Deferred  losses  related to hedge of future  Canadian sales  transactions  were
approximately  $0.4 million at  September  30,  2003.  Contracts  will mature at
various  dates  through  September  30,  2004.  The Company  does not enter into
forward foreign contracts for trading purposes.

     Inventories

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

                                      -33-
<PAGE>



     Property, Plant and Equipment

Property,  plant and  equipment is recorded at cost.  Depreciation  of property,
plant and  equipment  is  calculated  using the  straight-line  method  based on
estimated  economic useful lives.  Expenditures  for maintenance and repairs and
minor  renewals  are charged to expense.  Expenses for  maintenance  and repairs
totaled  approximately $2.4 million, $2.6 million and $2.4 million for the years
ended September 30, 2001, 2002 and 2003, respectively.

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

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

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

     Income Taxes

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

     Goodwill and Intangible Assets

Effective October 1, 2002, the Company adopted Statement of Financial Accounting
Standards  ("SFAS")  No.  142,  "Goodwill  and  Other  Intangibles".  Under  the
provisions of SFAS No. 142,  goodwill and intangible assets that have indefinite
useful  lives are no longer  amortized  but are  tested  at least  annually  for
impairment. The Company performed its first annual impairment test as of January
1, 2003 and  determined  there was no  impairment.  Intangible  assets that have
finite useful lives will continue to be amortized  over their useful lives.  The
following presents a summary of the changes in goodwill and intangible assets as
of September 30, 2003 (dollars in thousands):


                                 Goodwill   Trademarks     Other        Total
                               ----------- ------------ ----------- ------------
    Balance October 1, 2001     $  61,323  $    55,678  $    1,199  $   118,200
   Additions                                                   394          394
   Acquisitions                     5,534                                 5,534
   Translation adjustment           4,143                                 4,143
   Amortization                    (3,179)      (2,965)       (148)      (6,292)
                               ----------- ------------ ----------- ------------
    Balance September 30, 2002  $  67,821   $   52,713  $    1,445  $   121,979
   Additions                                                    46           46
   Acquisitions                     6,808        1,600       2,350       10,758
   Translation adjustment           7,141                                 7,141
   Amortization                                               (267)        (267)
                               ----------- ------------ ----------- ------------
    Balance September 30, 2003  $  81,770   $   54,313  $    3,574  $   139,657
                               ----------- ------------ ----------- ------------



                                      -34-
<PAGE>



As a result of the non-amortization provisions of SFAS No. 142, the Company will
no longer record  approximately $6.1 million of annual amortization  relating to
goodwill and indefinite lived intangibles.  The following presents  amortization
expense and proforma net income for the years ended September 30, 2001, 2002 and
2003, respectively, as if SFAS No. 142 had been adopted (dollars in thousands):



                                                       September 30,
                                      ------------------------------------------
                                          2001          2002            2003
                                      -------------- ------------- -------------
     Net income (loss) as reported     $   (1,880)    $    9,319    $  20,608
     Goodwill amortization                  2,965          2,965         --
     Trademark amortization                 3,212          3,179         --
                                      -------------- ------------- -------------
      Adjusted net income              $    4,297     $   15,463    $  20,608
                                      ============== ============= =============



     Impairment

The Company accounts for long-lived and certain  intangible assets in accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The Company  continually  reviews its  long-lived  assets and  finite-lived
intangible assets for events or changes in circumstances that might indicate the
carrying amount of the assets may not be recoverable.  The Company  assesses the
recoverability  of the assets by determining  whether the  amortization  of such
assets  over  their   remaining  lives  can  be  recovered   through   projected
undiscounted  future cash flows.  The amount of impairment,  if any, is measured
based on projected discounted future cash flows using a discount rate reflecting
the Company's  average cost of funds.  During the year ended September 30, 2001,
the Company  identified  certain  manufacturing  assets in the Newark,  Delaware
facility that were  determined by the Company to be impaired.  As a result,  the
Company wrote off  approximately  $2.9 million related to those assets (see Note
16) as part of its restructuring plan. During the years ended September 30, 2002
and 2003, as a result of normal product/equipment  obsolescence and productivity
or capacity  enhancement  projects,  the Company  wrote off  approximately  $0.5
million and $0.3 million of manufacturing assets, respectively.


     Deferred Financing Costs

Deferred  financing  costs are stated at cost as a component of other assets and
amortized over the life of the related debt.  Amortization of deferred financing
costs is included in interest expense and aggregated $2.0 million,  $1.3 million
and $1.4  million  for the  years  ended  September  30,  2001,  2002 and  2003,
respectively.


     Fair Value of Financial Instruments

In accordance  with the  requirements of SFAS No. 107,  "Disclosures  about Fair
Value of Financial  Instruments",  the Company has determined the estimated fair
value of its financial  instruments  using  appropriate  market  information and
valuation  methodologies.  Considerable  judgment  is  required  to develop  the
estimates of fair value;  thus, the estimates are not necessarily  indicative of
the amounts that could be realized in a current market  exchange.  The Company's
financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable,  Senior Subordinated  Notes,  Holding Company Notes, bank debt
(including  Term  Loans,  the  Revolving  Credit  Facility  and other  debt) and
interest rate instruments. The carrying value of these assets and liabilities is
a reasonable estimate of their fair market value at September 30, 2003.

The Company has  approximately  $30.5  million of variable  rate debt  protected
under an interest rate cap arrangement through December 31, 2004. The fair value
of the cap at September 30, 2003 was $0.1  million.  The Company has not elected
to take hedge accounting treatment for the interest rate collar as defined under
SFAS No. 133 and, as a result,  any fair value  adjustment is charge directly to
other income/(expense).

The  Company  also uses  financial  instruments  in the form of forward  foreign
currency  contracts.  Current market prices were used to estimate the fair value
of the forward foreign currency contracts.

The future  value of the  forward  foreign  currency  contracts  and the related
currency  positions are subject to offsetting market risk resulting from foreign
currency exchange rate volatility.  The  counter-parties  to these contracts are


                                      -35-
<PAGE>


substantial  and  creditworthy  financial  institutions.  Neither  the  risks of
counter-party  non-performance  nor the economic  consequences of  counter-party
non-performance associated with these contracts are considered by the Company to
be material.


     Accounting for Stock-based Compensation

SFAS No. 123 "Accounting for Stock-Based  Compensation" addresses accounting and
reporting  requirements for stock options and other equity instruments issued or
granted  based on their fair  market  values.  The  Company  intends to continue
accounting for its  stock-based  compensation  plans for employees in accordance
with Accounting Principals Board ("APB") No. 25, "Accounting for Stock Issued to
Employees". Under SFAS No. 123, companies choosing to continue to use APB No. 25
to account for stock-based  compensation  plans for employees must make footnote
disclosure  of the pro forma effects on earnings per share,  had the  principles
contained within SFAS No. 123 been applied.  The following table illustrates the
effect  on net  income  as if the fair  value  method  had been  applied  to all
outstanding and unvested option awards:


                                                   2001        2002      2003
                                               ---------- ---------- ----------
      Net income (loss) as reported            $ (1,880)  $   9,319   $ 20,608
      Deduct:  Total stock-based employee
      compensation expense determined under
      fair value based method for all awards,
      net of tax                                    (94)       (188)      (147)
                                               ---------- ---------- ----------
      Adjusted net income (loss)               $ (1,974)   $  9,131   $ 20,461
                                               ========== ========== ==========

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

                                              2001         2002         2003
                                           ----------   ----------   ----------
   Risk-free interest rate                    5.22%        4.52%        4.71%
   Expected life of options granted         10 years     10 years     10 years
   Expected volatility of underlying stock       0%           0%           0%
   Dividend yield                                0%           0%           0%



     Shipping and Handling Fees and Costs

Shipping and handling  costs include  payments to third parties for the delivery
of products  to  customers,  as well as internal  salaries  and  overhead  costs
incurred to store, move and prepare finished products for shipment. Shipping and
handling  costs are  included  with selling and  administrative  expenses in the
accompanying  consolidated  statement of operations  and totaled $17.1  million,
$17.2 million and $18.3 million in fiscal 2001, 2002 and 2003, respectively. The
Company recovers a portion of its shipping and handling costs from its customers
and records this recovery in net sales.


     Accounting for Derivative Instruments and Hedging Activities

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

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


                                      -36-
<PAGE>


product sales affect  earnings for forward  foreign  currency  contracts or when
related interest payments affect earnings for interest rate swaps. There were no
forward foreign currency contracts or interest rate derivatives at September 30,
2002 as defined under SFAS No. 133. For the year ended  September 30, 2003, 2002
and 2001,  the Company  reclassified  into  earnings net losses of $2.0 million,
$0.6  million and $0.2  million,  respectively,  resulting  from the exercise of
forward  foreign  currency  contracts for cash flow hedges.  All forward foreign
currency   contracts  were  determined  to  be  highly   effective   whereby  no
ineffectiveness was recorded in earnings.

The Company entered into an interest rate collar  arrangement in October 2001 to
protect  $25.0  million  of the  outstanding  variable  rate term loan debt from
future interest rate volatility through September 30, 2003. The collar floor was
set at 2% LIBOR (London  Interbank  Offering  Rate) and cap at 6.25% LIBOR.  The
collar was not  designated  as a hedge under SFAS No. 133 and  accordingly,  the
fair value gains or losses were charged to earnings.  Approximately $0.2 million
was expensed  during the fiscal year ended  September  30, 2003. No amounts were
recorded to income or expense related to the interest collar for the years ended
September 30, 2001 and 2002, respectively.

The Company has  approximately  $30.5  million of variable  rate debt  protected
under an interest rate cap arrangement through December 31, 2004. The fair value
of the cap at September 30, 2003 was $0.1  million.  The Company has not elected
to take hedge accounting treatment for the interest rate collar as defined under
SFAS No. 133 and, as a result,  any fair value  adjustment is charge directly to
other income/(expense). Approximately $0.1 million was recorded as income during
the fiscal year ended September 30, 2003.

The Company also executes  forward foreign  currency  contracts for up to 30 day
terms to protect against the adverse effects that exchange rate fluctuations may
have on the foreign-currency-denominated trade activities (receivables, payables
and cash) of foreign  subsidiaries.  These contracts have not been designated as
hedges  under  SFAS No.  133 and  accordingly,  the gains and losses on both the
derivative  and  foreign-currency-denominated  trade  activities are recorded as
transaction  adjustments in current  earnings.  For the year ended September 30,
2003, 2002 and 2001, the impact on earnings for trade activities were a net gain
of $0.3 million, and net losses of $0.2 million and $0.4 million, respectively.


     New Accounting Pronouncements

Effective  October 1, 2002, the Company  adopted SFAS No. 143,  "Accounting  for
Asset Retirement  Obligations".  SFAS No. 143 requires the Company to record the
fair value of liabilities associated with the retirement of long-lived assets in
the  period in which  they are  incurred.  The  adoption  of SFAS No. 143 had no
material impact on the Company's results of operations or financial position.

Effective October 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived  Assets",  which  supercedes  SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and APB No. 30, "Reporting the Results of  Operations-Reporting
the Effects of Disposal of a Segment of a Business,  and Extraordinary,  Unusual
and Infrequently  Occurring Events and  Transactions".  SFAS No. 144 retains the
fundamental  provisions  with  respect to the  recognition  and  measurement  of
long-lived asset impairments but does not apply to goodwill and other intangible
assets.  The  adoption of SFAS No. 144 had no material  impact on the  Company's
results of operations or financial position.

Effective October 1, 2002, the Company adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections".  This statement  rescinds SFAS No. 4, "Reporting  Gains and Losses
from  Extinguishment of Debt", and an amendment of that Statement,  SFAS No. 64,
"Extinguishments  of  Debt  Made to  Satisfy  Sinking-Fund  Requirements".  This
Statement also rescinds SFAS No. 44,  "Accounting for Intangible Assets of Motor
Carriers".  This  Statement  amends SFAS No. 13,  "Accounting  for  Leases",  to
eliminate the inconsistency  between the required  accounting for sale-leaseback
transactions and the required  accounting for certain lease  modifications  that
have  economic  effects  that are similar to  sale-leaseback  transactions.  The
adoption  of SFAS No. 145 had no  material  impact on the  Company's  results of
operations or financial position.

Effective  October 1, 2002, the Company  adopted SFAS No. 146,  "Accounting  for
Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires that a
liability for costs  associated  with exit or disposal  activities be recognized
and measured at fair value only when the liability is incurred.  SFAS No. 146 is
effective for exit or disposal  activities that are initiated after December 31,
2002.  The  adoption of SFAS No. 146 did not  material  impact on the  Company's
results of operations or financial position.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation  - Transition  and  Disclosure,  an amendment of FASB Statement No.
123".  SFAS No 148 provides  alternative  methods of transition  for a voluntary


                                      -37-
<PAGE>


change to the fair value based  method of  accounting  for stock based  employee
compensation.  In addition, this statement amends the disclosure requirements of
SFAS No.  123 to  require  prominent  disclosures  in both  annual  and  interim
financial  statements  about the method of accounting  for stock based  employee
compensation and the effect of the method used on reported results. As permitted
under SFAS No. 148, the Company  adopted the disclosure  only provisions of SFAS
No. 148 in the 2nd quarter of fiscal 2003.

In April 2003, the FASB issued Statement of Financial  Accounting  Standards No.
149,  "Amendment  of  Statement  133  on  Derivative   Instruments  and  Hedging
Activities."  This  Statement  amends and  clarifies  financial  accounting  and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts  (collectively  referred to as derivatives)  and for
hedging  activities  under FASB  Statement No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities."  This statement is effective for contracts
entered  into or modified  after June 30,  2003,  and for hedging  relationships
designated  after June 30, 2003. In addition,  generally all  provisions of this
statement  should be applied  prospectively.  The adoption of this statement did
not have a  material  effect on the  Company's  financial  position,  results of
operations and its cash flows.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity".  SFAS No. 150
establishes standards for how an issuer classifies and measures three classes of
freestanding  financial instruments with characteristics of both liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a liability or an asset in some circumstances.  SFAS No. 150
is effective for  mandatorily  redeemable  financial  instruments  of non-public
entities for the first fiscal period  beginning after December 15, 2003, and for
all other  instruments  for interim  periods  beginning after June 15, 2003. The
Company has not entered into any financial  instruments within the scope of SFAS
No.  150  since  June 15,  2003 and  does  not  hold any  significant  financial
instruments within its scope.

In  November  2002,  the  FASB  issued  FASB  Interpretation   ("FIN")  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of Others".  FIN No. 45 expands upon the
disclosure  requirements  to be made by a  guarantor  in its  interim and annual
financial  statements regarding its obligations under certain guarantees that it
has issued.  Additionally,  FIN No. 45 requires that the guarantor recognize, at
the inception of a guarantee,  a liability for the fair value of the  obligation
undertaken  in issuing  the  guarantee.  Footnote  disclosures  are  required in
interim and  year-end  financial  statements  ending  after  December  15, 2002.
Liability   recognition  and  measurement   provisions  apply  prospectively  to
guarantees  issued or modified starting January 1, 2003. The adoption of FIN No.
45 had no effect on the Company's results of operations or financial position.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities,  an Amendment of ARB No. 51".  FIN No. 46 addresses  consolidation  of
business enterprises of certain variable interest entities, and is effective for
variable  interest  entities  created  after  January  31,  2003 and to variable
interest  entities in which an enterprise  obtains an interest  after that date.
The adoption of FIN No. 46 had no effect on the Company's  results of operations
or financial position.


                                      -38-
<PAGE>


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

                             2002                 2003
                       --------------      -----------------
    Raw materials      $       7,514        $         8,301
    Work in process           10,196                 11,976
    Finished goods            15,451                 16,992
                       --------------      -----------------
                       $      33,161        $        37,269
                       ==============      =================

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

                                             2002            2003
                                       -----------      -----------
    Land                               $    2,589       $    2,658
    Building and improvements              20,774           23,391
    Machinery and equipment                59,687           65,770
    Furniture and fixtures                 23,486           25,797
    Construction in progress                4,670            5,276
                                       -----------      -----------
                                          111,206          122,892
    Less - accumulated depreciation        63,110           74,023
                                       -----------      -----------
                                       $   48,096       $   48,869
                                       ===========      ===========


5. Intangible Assets
Intangible  assets  consisted  of the  following  at  September  30  (dollars in
thousands):

                                            2002                2003
                                      -------------      --------------
    Goodwill                          $     93,804       $     114,144
    Trademarks and trade names              74,122              74,122
    Patents                                  1,916               2,078
    Non-compete agreement                      701               1,335
    Other                                      215                 215
                                      -------------      --------------
                                      $    170,758       $     191,894
    Less - accumulated amortization         48,779              52,237
                                      -------------      --------------
                                      $    121,979       $     139,657
                                      -------------      --------------

The  weighted  average  life  of  patents  is  17  years.  The  Company  expects
amortization  expense to be approximately $0.3 million for each of the next five
years.


                                      -39-
<PAGE>




6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at September
30 (dollars in thousands):

                                                          2002           2003
                                                     -----------     -----------
    Accounts payable - trade                         $   15,733       $   21,205
    Accrued liabilities --
      Employee compensation and benefits (Note 8)        12,269           11,785
      Restructuring reserve                               3,497            2,405
      Other                                               4,911            8,648
                                                     -----------     -----------
                                                     $   36,410       $   44,043
                                                     ===========     ===========

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

                                                            2002          2003
                                                        ----------    ----------
     Term loans, due 2003                               $   12,529     $    --
     Term loans, due 2004                                   16,706        17,357
     Term loans, due 2005                                   64,641        79,349

     Senior subordinated notes, due 2005, 12.5%             98,000        98,000
     Holding Company subordinated notes, due 2005                -        15,000
     Mortgage note, due 1998 - 2006, 10.1%                   2,165         2,087
     Other                                                   1,521         1,760
                                                        ----------    ----------
                                                           195,562       213,553
     Less-- Current portion of long-term debt               12,847        17,767
                                                        ----------    ----------
          Total                                          $ 182,715     $ 195,786
                                                        ==========    ==========





     Senior Bank Facilities

The Company's debt structure includes up to an aggregate of $135.0 million under
its Credit  Agreement  with various  banks  comprised of (i) a secured term loan
facility  consisting of loans  providing for up to $100.0  million of term loans
(collectively  the "Term Loans") with a portion of the Term Loans denominated in
foreign currencies,  (ii) a secured revolving credit facility ("Revolving Credit
Facility")  providing  for up to $30.0  million of  revolving  loans for general
corporate  purposes,  and (iii) a U.K. overdraft facility of up to an equivalent
of $5.0 million in Great  Britain  Pounds for working  capital  requirements  as
needed (collectively,  the "Senior Bank Facilities"). The amounts outstanding on
the Term Loans and  Revolving  Credit  Facility  at  September  30,  2003,  were
approximately $85.1 and $11.7 million, respectively. No amounts were outstanding
under the U.K.  overdraft  facility.  The Revolving Credit Facility provides for
the  issuance  of letters of credit in an  aggregate  face amount of up to $10.0
million.  The Term Loans  amortize  quarterly over a four-year  period.  Amounts
repaid or prepaid in respect of the Term Loans may not be re-borrowed. Loans and
letters of credit under the Revolving  Credit  Facility will be available  until
the Revolving Loan Maturity Date, which is March 31, 2005.

At the Company's  option,  the interest rates per annum applicable to the Senior
Bank  Facilities  are either (a) an adjusted rate based on the London  Interbank
Offered  Rate  ("LIBOR")  plus a margin  of 3.25% in the case of Term  Loans and
2.75% for  revolving  loans or (b) the Base Rate,  as defined,  plus a margin of
2.25% in the case of Term Loans and 1.75% for revolving  loans. The Base Rate is
the  higher of Bankers  Trust  Company's  announced  prime  lending  rate or the


                                      -40-
<PAGE>


Overnight  Federal  Funds rate plus 0.50%.  The Company must pay certain fees in
connection with the Senior Bank  Facilities,  including a commitment fee ranging
from 0.375% to 0.50% on the undrawn portion of the commitments in respect of the
Revolving  Credit Facility based upon the Company's  leverage ratio, and a 0.25%
facing fee relating to the issuance of letters of credit.

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

Under the terms of the Senior Bank Facilities, the Company is required to comply
with a number of affirmative and negative  covenants.  Among other restrictions,
Aearo Company must satisfy  certain  financial  covenants and ratios,  including
interest  coverage  ratios,  leverage  ratios,  fixed charge coverage ratios and
limits  on the  amount  of  permitted  capital  acquisitions.  The  Senior  Bank
Facilities  also  impose  limitations  on  certain  business  activities  of the
Company. The Senior Bank Facilities restrict, among other things, the incurrence
of additional indebtedness,  creation of certain liens, the payment of dividends
on the  Company's  Common  Stock,  sales of certain  assets and  limitations  on
transactions  with  affiliates.  As of September 30, 2003,  Aearo Company was in
compliance  with the  covenants of the Senior Bank  Facilities.  The Senior Bank
Facilities are  unconditionally  guaranteed by Aearo  Corporation and secured by
first priority  security  interests in  substantially  all the capital stock and
tangible and intangible assets of the Company.

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

     Term Loans

At September 30, 2003, the total balance outstanding of the Term Loans was $85.1
million  and  interest  rates  were 4.4% for the U.S.  Dollar  Term Loan  ($46.3
million US dollars  outstanding  at September  30,  2003),  7.0% for the British
Pound Term Loan (13.6 million British Pounds outstanding at September 30, 2003),
5.4% for the Euro Term Loan (9.9  million  Euro  outstanding  at  September  30,
2003),  and 6.0% for the  Canadian  Term  Loan  (6.2  million  Canadian  dollars
outstanding at September 30, 2003).  For the year ended  September 30, 2003, the
weighted  average  interest rates paid were 4.7%,  7.1%,  6.0%, and 6.3% for the
U.S.  Dollar Term Loan, the British Pounds Term Loan, the Euro Term Loan and the
Canadian Term Loan, respectively.

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


     Revolving Credit Facility

At September  30, 2003 the balance on the  Revolving  Credit  Facility was $11.7
million,  which $5.0 million bore  interest at LIBOR (3.89%) and $6.7 million at
Base Rate (5.75%).  For the year ended  September 30, 2003,  the maximum  amount
outstanding  was $16.5  million,  the average was $1.7  million and the weighted
average interest rate paid was 5.7%. At September 30, 2003,  approximately $17.3
million was available  for  additional  borrowings  and $11.3 million to finance
additional permitted acquisitions.

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


     Senior Subordinated Notes

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

                                      -41-
<PAGE>


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

The Notes indenture contains affirmative and negative covenants and restrictions
similar  to those  required  under  the  terms  of the  Senior  Bank  Facilities
discussed  above.  As of September 30, 2003, the Company was in compliance  with
the various  covenants  of the Notes  agreement.  The Notes are  unconditionally
guaranteed on an unsecured senior subordinated basis by Aearo Corporation.

     Holding Company Notes

To finance part of the redemption of Aearo's common and preferred stock owned by
Cabot,  the Company  issued $15.0 million of Holding  Company Notes due in 2005.
The Holding Company Notes are unsecured  obligation of the Company.  The initial
applicable  interest  rate was 9.5%,  with an increase  of 50 basis  points each
subsequent  four-month  period  beginning  December  15,  2003.  The  applicable
interest  rate shall not exceed 12%.  Interest will be paid three times per year
on April 15,  August 15, and December 15. The first payment was made on December
15, 2003.

The Note Purchase  Agreement  contains  affirmative  and negative  covenants and
restrictions  similar  to those  required  under  the terms of the  Senior  Bank
Facility and Notes discussed  above. As of September 30, 2003 the Company was in
compliance with the various covenants of the Notes Purchase Agreement.

     Maturities

As of September 30, 2003, the scheduled maturity of indebtedness for each of the
next five years and thereafter is as follows (dollars in thousands):

                       Amount
                  -------------
2004               $    17,767
2005                   192,742
2006                     2,211
2007                       329
2008                       282
Thereafter                 222
                  -------------
                   $   213,553
                  =============




                                      -42-
<PAGE>




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

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

                                                   Years Ended September 30,
Change in benefit obligation                     2001        2002        2003
                                             ----------  ----------- -----------
Benefit obligation at beginning of year       $  9,887    $  11,343    $ 12,995
 Service cost                                    1,336        1,286       1,510
 Interest cost                                     721          790         833
 Plan amendments                                   --            30         --
 Benefits paid                                    (993)      (1,581)       (707)
 Actuarial gain (loss)                             392        1,127      (1,600)
                                             ----------  ----------- -----------
 Benefit obligation at end of year            $ 11,343    $  12,995    $ 13,031
                                             ----------  ----------- -----------


Change in plan assets
 Fair value of plan assets
  at beginning of year                        $ 10,535    $   9,259    $  7,956
 Actual return of plan assets                   (1,491)        (945)      1,119
 Employer contributions                          1,208        1,223         563
 Benefits paid                                    (993)      (1,581)       (707)
                                              ---------   ---------- -----------
 Fair value of plan assets at end of year     $  9,259    $   7,956  $    8,931
                                              ---------   ---------- -----------

Reconciliation of funded status
 Funded status                                $ (2,084)   $  (5,039) $   (4,101)
 Unrecognized prior service cost                    96          117         107
 Unrecognized actuarial (gain) loss               (572)       2,285         176
                                              ---------   ---------- -----------
 Net pension liability included in
  accrued liabilities                         $ (2,560)   $  (2,637) $   (3,818)
                                              ---------   ---------- -----------
Amounts recognized in
 statement of financial position
 Prepaid benefit cost                         $    --     $     --   $      --
 Accrued benefit liability                      (2,560)      (4,860)     (3,818)
 Intangible asset                                  --           116         --
 Accumulated other comprehensive income            --         2,107         --
                                              ---------   ---------- -----------
 Net amount recognized                        $ (2,560)   $  (2,637) $   (3,818)
                                              ---------   ---------- -----------
Components of net periodic benefit cost
 Service cost                                 $  1,336    $   1,286  $    1,510
 Interest cost                                     721          790         833
 Expected return on plan assets                   (842)        (785)       (672)
 Unrecognized prior service cost                     7            9           9
 Recognized actuarial gain (loss)                 (145)         --           63
                                              ---------   ---------- -----------
 Net periodic benefit cost                    $  1,077    $   1,300  $    1,743
                                              =========   ========== ===========



The weighted  average  assumptions used in determining net periodic benefit cost
and the projected benefit obligation were as follows:



                                      -43-
<PAGE>




                                                      Years Ended September 30,
                                                      2001      2002      2003
                                                   --------- --------- ---------
  Discount rate                                       7.50%     6.75%     6.00%
  Expected long-term rate of return of plan assets    8.00%     8.50%     8.00%
  Rate of compensation increase                       4.00%     4.00%     4.00%


In  addition,  the  Company has an  unfunded,  noncontributory  defined  benefit
pension plan, the Aearo Company Supplemental Executive Retirement Plan (the SERP
Plan),  which is also a cash balance plan. The SERP Plan,  effective  January 1,
1994,  covers certain  employees in the United States.  The costs to the Company
for the SERP Plan were  $148,000,  $111,000  and  $113,000  for the years  ended
September 30, 2001, 2002 and 2003, respectively. The aggregate liability for the
SERP Plan was $524,000,  $486,000 and $540,000 for the years ended September 30,
2001, 2002 and 2003, respectively.

A 401(k) plan, the Aearo Company Employees' 401(k) Savings Plan, was established
as of May 1, 1990. Employees normally scheduled to work a minimum of 1,000 hours
per year can join the plan  immediately  and may  contribute  up to 60% of their
compensation.  The Company  contributes  amounts equal to 50% of the  employee's
contribution  to a maximum of 3% of the employee's pay. The costs to the Company
for this Plan were $903,000, $866,000 and $891,000 for the years ended September
30, 2001, 2002 and 2003, 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, 2001, 2002 and 2003,
the  Company  contributed   approximately  $212,000,   $197,000,  and  $228,000,
respectively.

9.    Related Party Transactions

Pursuant to an agreement  with Cabot and Vestar,  dated as of July 11, 1995,  an
annual  management  fee is payable by the  Company  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.  Payments  totaled  approximately  $728,000,  $519,000 and $611,000
during the years ended  September 30, 2001, 2002 and 2003,  respectively.  Until
August 18, 2003, this annual management fee was shared by Cabot and Vestar based
on their  relative  equity  ownership  of the Company.  On August 18, 2003,  the
Company  redeemed all of the shares of common and preferred stock of Aearo owned
by Cabot in the Cabot Stock  Redemption,  which had no effect on the calculation
of the  management  fee. All payments  subsequent  August 18, 2003 have been and
will be paid to Vestar.  Of the $611,00 in  management  fees paid by the Company
during the year ended  September 30, 2003,  the Company paid Vestar  $167,000 in
management  fees for the interim  period from August 18, 2003 through  September
30, 2003.

See  Note 12 for a  description  of  certain  ongoing  liability  retention  and
indemnity  agreements  between  the Company  and Cabot  relating to  respiratory
medical conditions.  The Company paid Cabot $400,000 for each of the years ended
September 30, 2001, 2002 and 2003.

The Company has made  available to certain  members of  management  ("Management
Investors") loans in order to provide such Management Investors with funds to be
applied to a portion of the purchase price of the Common Stock purchased by such
Management  Investors  under the Stock  Purchase  Plan.  Each such  loans (i) is
secured by Common Stock purchased with the proceeds thereof, (ii) bears interest
at an annual rate of 2.73%, and (iii) is subject to mandatory  prepayment in the
event the  employment  of the  Management  Investor  terminates  or of maturity.
Maturity,  at the  earliest,  is at the  option  of the  note-holder,  or at the
latest,  at  the  time  of  the  Vestar  realization  event  as  defined  in the
Stockholder's  Agreement.  The aggregate amount of these loans was approximately
$1,363,000 and $1,399,000 at September 30, 2002 and 2003, respectively.


                                      -44-
<PAGE>



10. Income Taxes
Income  (loss)  before  provision  for income  taxes was as follows  (dollars in
thousands):

                                              Years Ended September 30,
                                        2001          2002              2003
                                    ----------      ---------       -----------
 Domestic                           $  10,865)     $   4,762       $    12,128
 Foreign                                7,113          6,342            11,031
                                    ----------      ---------       -----------
 Total                              $  (3,752)     $  11,104       $    23,159
                                    ==========      =========       ===========


A summary of provision  (benefit)  for income  taxes was as follows  (dollars in
thousands):
                                               Years Ended September 30,
U.S. Federal and State:                 2001          2002               2003
                                    ----------      ---------       -----------
    Current                         $  (3,525)     $     125       $       620
    Deferred                              --             203               --
                                    ----------      ---------       -----------
                                    $  (3,525)     $     328       $       620
                                    ==========      =========       ===========
Foreign:

    Current                             1,957          1,226             1,148
    Deferred                             (304)           231               783
                                    ----------      ---------       -----------
                                        1,653          1,457             1,932
                                    ----------      ---------       -----------
    Total                           $  (1,872)     $   1,785       $     2,551
                                    ==========      =========       ===========

The provision  (benefit)  for income taxes at the  Company's  effective tax rate
differed from the provision  (benefit) for income taxes at the statutory rate as
follows (dollars in thousands):


                                               Years Ended September 30,
                                              2001        2002        2003
                                           ---------   ---------   ---------
Computed tax expense (benefit) at the      $  (1,277)  $   3,740   $   7,875
 expected statutory rate
 State taxes, net of federal effect              (51)         82          85
 Foreign income taxed at different rates      (1,172)       (166)     (1,174)
 Foreign dividends                               --          324         --
 Non-deductible goodwill amortization            308         309         --
 Non-deductible expenses                         267          99         125
 Increase (decrease) in valuation
  allowance                                      110      (2,302)     (4,710)
 Other, net                                      (57)       (301)        350
                                           ---------   ---------   ---------
Provision (benefit) for income taxes       $  (1,872)  $   1,785   $   2,551
                                           =========   =========   =========

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



                                            As of September 30,
Deferred tax assets                          2002         2003
                                          ---------    ---------
 Pension and other benefits               $   1,862    $   1,673
 Property, plant and equipment               (3,158)      (2,422)
 Intangible assets                              459       (4,940)
 Restructuring charges                        1,349          530
 Inventory                                    1,147        1,759
 Unrealized foreign currency exchange            --        1,254
 Net operating loss and credit
  carryforwards - Domestic                   11,298        8,096
 Accrued expenses and other                     345        1,705
                                          ---------    ---------
 Subtotal                                    13,302        7,655
 Valuation allowances                       (14,102)      (9,263)
                                          =========    =========
 Total deferred tax liability             $    (800)   $  (1,608)
                                          =========    =========

                                      -45-
<PAGE>


The  valuation  allowance  at  September  30,  2002  and  2003  relates  to  the
uncertainty of realizing the tax benefits of reversing temporary differences and
net  operating  loss  carryforwards.  The gross amount of domestic net operating
loss carryforwards,  before the tax effect, is approximately $22.6 million as of
September  30, 2003.  The net  operating  loss  carryforwards  expire at various
periods  ranging from 2010 to 2021.  Of the valuation  allowance  recorded as of
September 30, 2003,  approximately  $6.9 million will be used to reduce goodwill
if the benefits are realized.

11.   Stockholders' Equity

Stock Ownership and Stockholders' Agreement

As of  September  30,  2003,  Vestar,  and its  affiliates,  owns  71.5%  of the
outstanding  shares  of  Aearo  Common  Stock  (42,500  shares)  and 100% of the
outstanding  shares of Aearo  Preferred  Stock  (22,500  shares) and  Management
Investors  and  certain  other  employees  of  the  Company  own  28.5%  of  the
outstanding  shares of Aearo Common Stock  (16,912.5  shares).  At September 30,
2002, Vestar, and its affiliates, owned 41.7% of the outstanding shares of Aearo
Common  Stock  (42,500  shares)  and  50% of the  outstanding  shares  of  Aearo
Preferred Stock (22,500 shares),  Cabot owned 41.7% of the outstanding shares of
Aearo Common Stock (42,500  shares) and 50% of the  outstanding  shares of Aearo
Preferred Stock (22,500  shares) and the Management  Investors and certain other
employees of the Company owned 16.6% of outstanding shares of Aearo Common Stock
(16,912.5  shares).  Vestar  and  the  Management  Investors  are  parties  to a
stockholders'  agreement  (the  "Stockholders'  Agreement").  The  Stockholders'
Agreement contains stock transfer  restrictions,  as well as provisions granting
certain   tag-along  rights,   drag-along   rights,   registration   rights  and
participation rights.

The  Aearo  Preferred  Stock is  cumulative  redeemable  $.01 par  value  stock.
Dividends accrue whether or not dividends are declared or funds are available at
an annual rate of 12.5%,  compounded quarterly.  To date, no dividends have been
declared.  Accrued  dividends  may be paid in cash or in  additional  shares  of
preferred stock.  Shares are redeemable for cash at any time, subject to certain
exceptions,  at the option of the  Company at a  redemption  price  equal to the
actual or implied purchase price ($22.5 million) plus a redemption payment based
on the dividend rate. As of September 30, 2002 and 2003, the redemption value of
the preferred stock was $109.5 million and $61.9 million, respectively.

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

Stock Option Plans

On June 27, 1996,  Aearo's Board of Directors adopted the Executive Stock Option
Plan (the "Executive Plan") under which non-qualified  options to purchase up to
5,000 shares of Aearo  Common  Stock may be granted to certain  officers and key
employees of Aearo and its  subsidiaries.  In July 1997, the Company's  Board of
Directors  adopted and the  stockholders  subsequently  approved  the 1997 Stock
Option Plan (the "1997 Option  Plan") under which 10,000  shares of Aearo Common
Stock were reserved for issuance.  During the year ended  September 30, 2002, an
additional  1,800 shares were reserved for issuance  under the 1997 Option Plan.
Under the 1997 Option Plan,  non-qualified  and qualified options may be granted
to employees,  directors and consultants of Aearo and its subsidiaries.  Options
granted under the  Executive  Plan and the 1997 Option Plan will vest and become
exercisable  upon  the  earlier  of the date on which a  stipulated  return  (as
defined)  is achieved  by Vestar on its  investment  in the Company or the tenth
anniversary of the date of grant. The option term will be 10 years,  except that
options shall expire in certain  instances of termination of employment and upon
the sale of the Company.  As of September 30, 2003,  options to purchase a total
of 3,993  shares  were  outstanding  under the  Executive  Plan and  options  to
purchase a total of 7,930 shares were outstanding  under the 1997 Option Plan. A
total of 1,077  options are  available  for grant under the  Executive  Plan and
3,800 options are available for grant under the 1997 Option Plan.

                                      -46-
<PAGE>

Pro Forma Stock-Based Compensation Expense

SFAS  No.  123,  "Accounting  for  Stock-Based   Compensation",   sets  forth  a
fair-value-based  method of recognizing  stock-based  compensation  expense.  As
permitted  by SFAS No. 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based compensation plans.

Stock Option Activity

Stock option data for the Executive Plan and the 1997 Option Plan for the years
ended September 30, 2001, 2002 and 2003, respectively, was as follows:


                                             Number           Weighted Average
                                           of Shares           Exercise Price

Outstanding, October 1, 2000                   9,883              $     630
Granted                                        2,500                    800
Forfeited                                       (218)                   600
Forfeited                                        (94)                   800
Outstanding, September 30, 2001               12,071                    664
Granted                                        4,274                    600
Granted                                           31                    800
Forfeited                                       (456)                   600

Outstanding, September 30, 2002               15,920                    649
Forfeited                                     (3,997)                   800
                                             -------              ---------
Outstanding, September 30, 2003               11,923              $     600
                                             =======              =========




                                      -47-
<PAGE>





The following table sets forth information regarding options outstanding at
September 30, 2003:
                                                                 Weighted
                                                   Weighted       Average
 Number                                Weighted     Average      Exercise
of Shares                 Number        Average    Remaining     Price for
Covered by   Exercise    Currently     Exercise   Contractual    Currently
 Options      Price     Exercisable     Price       Life        Exercisable
---------   ---------   -----------   ---------   ----------    -----------
 11,923     $  600.00       --        $  600.00   5.74 years        N/A



12.  Commitments and Contingencies


     Lease Commitments

The Company leases certain transportation vehicles, warehouse facilities, office
space, and machinery and equipment under cancelable and non-cancelable operating
leases. Rent expense under such arrangements totaled $5.8 million,  $6.0 million
and $6.4  million  for the  years  ended  September  30,  2001,  2002 and  2003,
respectively.  Future minimum rental commitments under non-cancelable  leases in
effect at September 30, 2003 are as follows (dollars in thousands):

2004            $      4,336
2005                   3,702
2006                   2,341
2007                   1,053
2008                   1,053
Thereafter             2,070
                --------------
Total           $     14,555
                ==============

     Contingencies

Various  lawsuits and claims arise against the Company in the ordinary course of
its business.  Most of these lawsuits and claims are products  liability matters
that  arise out of the use of  safety  eyewear  and  respiratory  product  lines
manufactured by the Company as well as products purchased for resale.

In addition,  the Company is a defendant in lawsuits by plaintiffs alleging that
they  suffer  from  respiratory  medical  conditions,   such  as  asbestosis  or
silicosis, relating to exposure to asbestos and silica, and that such conditions
result, in part, from the use of respirators that,  allegedly,  were negligently
designed or  manufactured.  The defendants in these lawsuits are often numerous,
and include,  in addition to  manufacturers  and  distributors  of  respirators,
manufacturers,  distributors  and  installers  of sand (used in sand  blasting),
asbestos and  asbestos-containing  products. Most of these claims are covered by
the Asset  Transfer  Agreement  entered into on June 13, 1995 by the Company and
Aearo Company,  on the one hand, and Cabot and certain of its subsidiaries  (the
"Sellers"), on the other hand (the "1995 Asset Transfer Agreement"). In the 1995
Asset  Transfer  Agreement,  so long as the Company  makes an annual  payment of
$400,000  to Cabot,  the  Sellers  agreed to retain,  and Cabot and the  Sellers
agreed to defend and indemnify the Company against,  any liability or obligation
relating to or otherwise arising under any proceeding or other claim against the
Company or Cabot or their  respective  affiliates or other parties with whom any
Seller directly or indirectly has a contractual  liability  sharing  arrangement
which  sounds in product  liability or related  causes of action  arising out of
actual or alleged  respiratory  medical conditions caused or allegedly caused by
the use of respirators or similar devices sold by Sellers or their  predecessors
(including  American Optical Corporation and its predecessors) prior to July 11,
1995.  To date,  the  Company  has  elected to pay the annual fee and intends to
continue to do so. The Company could  potentially be liable for claims currently
retained by Sellers if the Company  elects to cease  paying the annual fee or if
Cabot and the Sellers no longer are able to perform their  obligations under the
1995  Asset  Transfer  Agreement.  Cabot  acknowledged  in  the  Stock  Purchase
Agreement that it and the Company  entered into on June 27, 2003  (providing for
the sale by Cabot to the Company of all of the common and preferred stock of the
Company owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer
Agreement remain in effect.  The 1995 Asset Transfer Agreement does not apply to
claims relating to the business of Eastern Safety Equipment,  the stock of which
the Company acquired in 1996.

                                      -48-
<PAGE>

At September 30, 2003,  the Company has recorded  liabilities  of  approximately
$4.5 million, which represents reasonable estimates of its probable liabilities,
for product  liabilities  substantially  related to asbestos and  silica-related
claims  as  determined  by the  Company  in  consultation  with  an  independent
consultant.  This reserve is re-evaluated periodically and additional charges or
credits to operations may result as additional  information  becomes  available.
Consistent with the current  environment being experienced by companies involved
in asbestos  and  silica-related  litigation,  there has been an increase in the
number of asserted claims that could  potentially  involve the Company.  Various
factors   increase  the  difficulty  in  determining  the  Company's   potential
liability,  if any, in such claims,  including  the fact that the  defendants in
these  lawsuits are often  numerous and the claims  generally do not specify the
amount  of  damages  sought.  Additionally,  the  bankruptcy  filings  of  other
companies  with  asbestos  and  silica-related  litigation  could  increase  the
Company's cost over time. In light of these and other uncertainties  inherent in
making  long-term  projections,  the Company has  determined  that the five-year
period  through  fiscal 2008 is the most  reasonable  time period for projecting
asbestos and  silica-related  claims and defense costs.  It is possible that the
Company  may incur  liabilities  in an amount  in  excess of  amounts  currently
reserved.   However,   taking  into  account  currently  available  information,
historical  experience,  and the 1995 Asset Transfer Agreement,  but recognizing
the  inherent  uncertainties  in the  projection  of any  future  events,  it is
management's  opinion  that  these  suits or claims  should  not result in final
judgments  or  settlements  in  excess of the  Company's  reserve  that,  in the
aggregate,  would have a material effect on the Company's  financial  condition,
liquidity or results of operations.

13.  Acquisitions

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

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

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

On October 7, 2002, the Company acquired the Safety Prescription  Eyewear assets
Industrial  Protection Products,  Inc. ("IPP") of Wilmington,  Massachusetts for
$1.5 million.  The acquisition has been accounted for as a purchase  transaction
in accordance with SFAS No. 141, and,  accordingly,  the consolidated  financial
statements  for the periods  subsequent  to October 7, 2002 reflect the purchase
price,  including transaction costs, allocated to tangible and intangible assets
acquired and  liabilities  assumed,  based on their  estimated fair values as of
October 7, 2002.  The purchase  price of $1.5 million,  inclusive of acquisition
fees and costs to restructure operations,  was allocated based on the fair value
of assets acquired, which consisted primarily of inventory,  receivables,  fixed
assets  and  accrued  liabilities.  The excess of  purchase  price over the fair
market  value of assets  acquired of $1.4  million  consisted of $0.9 million of
goodwill and $0.5 million of other intangibles.

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


                                      -49-
<PAGE>

On March 14, 2003, the Company  acquired VH Industries,  Inc. ("VH") of Concord,
North Carolina for $11.6 million.  The  acquisition  has been accounted for as a
purchase  transaction  in accordance  with SFAS No. 141, and,  accordingly,  the
consolidated  financial  statements for the periods subsequent to March 14, 2003
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 March 14, 2003. The purchase price of $11.6 million, inclusive
of  acquisition  fees and costs to  restructure  operations,  was allocated on a
preliminary  basis based on the fair value of assets  acquired,  which consisted
primarily of inventory,  receivables,  fixed assets and accrued liabilities. The
excess of purchase  price over the fair market value of assets  acquired of $9.4
million consisted of $5.9 million of goodwill and $1.6 million of trademarks and
$1.9 million of other intangibles.  The following unaudited proforma information
presents  results as if the  acquisition  had  occurred at the  beginning of the
respective periods (dollars in thousands):



                                 2001          2002         2003
                            -----------   -----------   ----------
Sales as reported           $   283,862   $   286,867   $  316,428
Proforma sales                  292,456       297,223      320,918


Net income (loss)as
reported                         (1,880)        9,319       20,608
Proforma net income (loss)       (1,212)        9,803       21,296




14.  Segment Data

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

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

                                     2001            2002            2003
                                 ----------      ----------       ----------
Safety Products                  $   206,311     $   208,538      $  242,263
Safety Prescription Eyewear           39,076          40,834          40,028
Specialty Composites                  38,475          37,495          34,137
                                 -----------     -----------      ----------
Total                            $   283,862     $   286,867      $  316,428
                                 ===========     ===========      ==========


Profit by business  segment and  reconciliation  to income before (benefit from)
provision for income taxes (dollars in thousands):

                                    2001             2002            2003
                                 ----------       ----------      ----------
Safety Products                  $   43,102       $   42,608      $   50,670
Safety Prescription Eyewear           2,922            1,714             462
Specialty Composites                  1,984            3,488           2,713
                                 ----------      -----------     -----------
 Segment profit                  $   48,008       $   47,810      $   53,845
                                 ==========       ==========      ==========

Depreciation                         10,123           10,958          11,102
Amortization of intangibles           6,530            6,293             267
Restructuring charges                11,441             (600)           (270)
Interest, net                        23,666           20,055          19,587
                                 ----------       ----------      -----------
 Income (loss) before provision
 for/(benefit from)
 income taxes                    $  (3,752)       $   11,104      $   23,159
                                 ==========       ==========      ==========



                                      -50-
<PAGE>

Segment  profit  is  defined  as  earnings  before  depreciation,  amortization,
interest  expense and income  taxes and  presents  the measure used by the chief
operating decision maker to assess segment  performance and make decisions about
the allocation of resources to business segments.

Intersegment  sales of the Specialty  Composites  segment to the Safety Products
segment totaled $4.2 million,  $3.5 million and $3.2 million for the years ended
September 30, 2001, 2002 and 2003, respectively. The intersegment sales value is
generally  determined at fully  absorbed  inventory  cost at standard rates plus
25%.

Depreciation by business segment (dollars in thousands):

                                          2001            2002             2003
                                   -----------     -----------      -----------
Safety Products                    $     7,966     $     8,657      $     8,978
Safety Prescription Eyewear                378             717              707
Specialty Composites                     1,779           1,584            1,417
                                   -----------     -----------      -----------
Total                              $    10,123     $    10,958      $    11,102
                                   ===========     ===========      ===========


Identifiable assets by business segment (dollars in thousands):

                                                     2002              2003
                                              -----------       -----------
Safety Products                               $   217,091       $   249,553
Safety Prescription Eyewear                        18,088            17,748
Specialty Composites                               20,510            18,914
Cash                                               14,480             7,301
                                              -----------       -----------
Total                                         $   270,169       $   293,516
                                              ===========       ===========
Cash is not allocated to segments.

Capital expenditures including capital leases by business segment (dollars in
thousands):

                                      2001            2002            2003
                                  ----------      ----------       -----------
Safety Products                   $     5,788     $     7,921      $     8,888
Safety Prescription Eyewear               425             499              379
Specialty Composites                    1,075             791              619
Reconciling items                         511             442              430
                                  -----------     -----------      -----------
Total                             $     7,799     $     9,653      $    10,316
                                  ===========     ===========      ===========

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




                                      -51-
<PAGE>



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

                                         2001            2002             2003
                                  -----------     -----------      -----------
United States of America          $   179,398     $   175,358      $   187,106
Canada                                 20,370          20,997           22,965
United Kingdom                         13,501          13,115           15,562
Germany                                11,447          10,984           11,859
Sweden                                 10,981          10,710           15,392
France                                  6,975          10,097            9,967
Italy                                   5,156           4,933            7,044
All others                             36,034          40,673           46,533
                                  -----------     -----------      -----------
Total                             $   283,862     $   286,867      $   316,428
                                  ===========     ===========      ===========


The sales as shown above  represent the value of shipments  into the  customer's
country of residence.  For the years ended September 30, 2001, 2002 and 2003, no
single customer accounted for more than 10% of sales.

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

                                       2001            2002             2003
                                -----------     -----------      -----------
United States of America        $   173,076     $   173,068      $   183,910
Canada                                9,584          10,252           10,293
United Kingdom                       19,304          18,426           21,870
Germany                               2,138             144              299
Sweden                               56,673          61,860           70,744
France                                   43           5,869            5,773
All others                              484             550              627
                                -----------     -----------      -----------
Total                           $   261,302     $   270,169      $   293,516
                                ===========     ===========      ===========

15.  Quarterly Financial Data (Unaudited)

The following table contains  selected  unaudited  quarterly  financial data for
fiscal years 2002 and 2003.

<TABLE>
<CAPTION>


                                          QUARTERLY FINANCIAL DATA
                                    (In Thousands, Except Per Share Amounts)
                    -----------------------------------------------------------------------------------------
                              Fiscal Year                                         Fiscal Year
                                  2002                                                2003
                    ------------------------------------------     ------------------------------------------
                      First     Second      Third     Fourth         First     Second      Third      Fourth
                    ---------  ---------  ---------  ---------     ---------  ---------  ---------  ---------
<S>                 <C>        <C>        <C>        <C>           <C>        <C>        <C>        <C>
Net Sales           $ 61,644   $ 70,683  $ 76,435    $ 78,105      $ 68,717   $ 76,686   $ 86,723   $ 84,302
Cost of Sales         32,928     37,360    40,024      40,085        35,645     39,912     45,767     42,695
                    ---------  ---------  --------   ---------     ---------  ---------  ---------  ---------
Gross Profit          28,716     33,323    36,411      38,020        33,072     36,774     40,956     41,607
Restructuring Charge     --         --        --         (100)          --         --         --         --

Income (Loss)
before provision
for (benefit from)
income taxes            (188)     2,580     3,132       5,580         1,652      4,765      7,750      8,992

Net Income (Loss)       (711)     2,017     2,282       5,731         1,042      2,691      6,383     10,492

</TABLE>


16.  Restructuring

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



                                      -52-
<PAGE>

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

During  2003,  the Company  reversed  $0.3  million of  reserves  related to the
September 30, 2001 restructuring  provision.  The adjustment represents a change
in estimate of the plan for the disposal of certain  items of inventory  and was
classified as a reduction in cost of sales.

The  following  table  displays the  activity and balances of the  restructuring
reserve account as of and for the year ended September 30, 2003 (in thousands):

                               September 30,                September 30,
                                  2002           Charges      2003
                               -------------   ---------    -------------
Employee termination costs     $         730   $    (506)   $         224
Lease agreements                       2,352        (896)           1,456
Loss on disposal of assets               700          (9)             691
Other                                     47         (30)              17
                               -------------   ---------    -------------
 Total                          $      3,829   $  (1,541)   $       2,388
                                ------------   ---------    -------------


The Company expects that all charges related to the restructuring provision will
be settled in fiscal 2004 except for the lease agreement which will end in March
2005.





                                      -53-
<PAGE>




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


None.





                                      -54-
<PAGE>




Item 9A. Controls and Procedures

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

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





                                      -55-
<PAGE>




                                    PART III

Item 10.  Directors and Executive Officers

The following table sets forth certain information with respect to the directors
and executive officers of the Company as of December 22, 2003.

Name                            Age    Position
----------------------------   ----   ---------- -------- ----------------------
Michael A. McLain (1)            53   Chief  Executive  Officer,  President,
                                      and  Chairman  of the Board of Directors

Jeffrey S. Kulka                 46   Senior Vice President, Chief Financial
                                      Officer, Treasurer, and Secretary

James H. Bernhardt               59   Senior Vice President and Chief Marketing
                                      Officer

James H. Floyd                   48   President, Aearo Europe, Managing
                                      Director, International

Joseph C. Marlette               60   Senior Vice President, Operations and
                                      Research and Development

M. Rand Mallitz                  61   Senior Vice President, Specialty
                                      Composites

D. Garrad (Gary) Warren, III     51   President, North American Safety
                                      Products Group

James M. Phillips                51   Senior Vice President, Human Resources

Rahul Kapur                      52   Senior Vice President, Corporate
                                      Development and Chief Strategy Officer

Norman W. Alpert (1)             44   Director

Daniel S. O'Connell              48   Director

Arthur J. Nagle                  67   Director

Bryan P. Marsal (2)              52   Director

William E. Kassling (2)          58   Director

John D. Curtin, Jr.              70   Director


1.    Member of Compensation Committee
2.    Member of Audit Committee


                                      -56-
<PAGE>



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

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

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

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

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

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

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

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

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

Norman W. Alpert is a Managing  Director of Vestar  Capital  Partners  and was a
founding  partner of Vestar at its inception in 1988. In addition to Aearo,  Mr.
Alpert is a director of MCG Capital  Corporation and Cluett American Group,  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.  In addition to Aearo,  Mr. O'Connell is a director of Cluett American
Corporation,  Insight  Communications  Company, Inc., Sunrise Medical, Inc., St.
John Knits Co., Inc. and Agrilink Foods,  Inc. All are companies in which Vestar
or its affiliates have a significant  equity  interest.  He became a director of
the Company in July 1995.

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

Bryan P. Marsal,  is  co-founder  of Alvarez & Marsal,  Inc.  ("A&M"),  a global
professional  services firm  specializing  in providing  corporate  advisory and
management services to distressed and underperforming companies.  Previously, he
served as Director of Republic Health Corporation,  Anthony  Manufacturing,  and
Gitano.  He was also Chief Operating Officer of Alexander's  Department  Stores.
Mr. Marsal holds both a B.B.A.  and a M.B.A from the University of Michigan.  He
currently  serves  on the  boards  of Timex  Corporation,  and  Cluett  American
Corporation  (Gold Toe  Socks).  He became a director  of the Company in October
1998.

                                      -57-
<PAGE>

William E.  Kassling was named  Chairman of the Board of Wabtec  Corporation  in
February 2001, after having served as Chairman and Chief Executive Officer since
1990.  Between  1984 and 1990,  Mr.  Kassling  served as Vice  President,  Group
Executive  for the Railway  Products  Group of American  Standard  Incorporated.
Prior to 1984, he held various operating and strategic planning assignments with
American  Standard,  Clark Equipment  Company and Boston  Consulting  Group. Mr.
Kassling  earned an MBA from the  University  of Chicago and a BS in  industrial
management from Purdue University. In addition to Aearo, Mr. Kassling is a board
member of the Pittsburgh  Penguins and Scientific  Atlanta. He became a director
of the Company in July 1998.

John D.  Curtin,  Jr.  retired as Chairman  and Chief  Executive  Officer of the
Company in February  1998. Mr. Curtin was named Chief  Executive  Officer of the
Company in April 1994 and became a  director  of the  Company in July 1995.  Mr.
Curtin  joined  Cabot in 1989 as Chief  Financial  Officer  and  Executive  Vice
President.  Prior to joining Cabot he was President, Chief Executive Officer and
Director of Curtin & Co., Inc., a private investment-banking firm. Mr. Curtin is
also a director of Harbor Global  Company,  LTD,  Hamilton  Thorne  Biosciences,
Inc., and Nano-C, LLC.

Prior to the Cabot Stock  Redemption on August 18, 2003, the number of directors
of the Company was fixed at nine.  Since that time,  the number of directors has
been fixed at seven. Under the Stockholders' Agreement,  Vestar has the right to
designate  five  directors  and the  Management  Investors  have  the  right  to
designate  two  directors.  Prior to the Cabot Stock  Redemption,  Cabot had the
right to designate two directors. Messrs. Alpert, O'Connell, Nagle, Kassling and
Marsal are the directors  designated by Vestar and Mr. McLain and Mr. Curtin are
currently the directors  designated by the  Management  Investors.  See Item 13,
"Certain   Relationships  and  Related   Transactions  --  Stock  Ownership  and
Stockholders'  Agreement  --  Election  and Removal of  Directors."  The term of
office for each director  ends when his or her  successor  elected at the annual
meeting of stockholders or upon his or her removal or resignation.

The Board of Directors has established an audit committee  consisting of William
E.  Kassling and Bryan P. Marsal (the "Audit  Committee").  The Audit  Committee
recommends  the  firm  to be  appointed  as  independent  accountants  to  audit
financial  statements and to perform services related to the audit,  reviews the
scope and results of the audit with the  independent  accountants,  reviews with
management  and the  independent  accountants  the  Company's  annual  operating
results, considers the adequacy of the internal accounting procedures, considers
the effect of such procedures on the  accountants'  independence and establishes
policies for business values, ethics and employee relations. Mr. Marsal has been
designated  as the  audit  committee  financial  expert  and is  independent  of
management.

The  Company has adopted a code of ethics that  applies to,  among  others,  its
Chief Executive Officer,  Chief Financial Officer,  and Controller.  The Code of
Ethics is available  upon request by contacting  the Corporate  Counsel at (508)
764-5500.  If the Company makes substantive  amendments to the Code of Ethics or
grant any waiver,  including any implicit  waiver,  from a provision of the Code
applicable  to  our  Chief  Executive   Officer,   Chief  Financial  Officer  or
Controller,  the  Company  will make a public  disclosure  of the nature of such
amendment or waiver.

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


                                      -58-
<PAGE>




Item 11.  Executive Compensation

The compensation of executive officers of the Company is determined by the Board
of Directors.  The following  table sets forth  certain  information  concerning
compensation  received  by the Chief  Executive  Officer and the other four most
highly-compensated  executive  officers  of the  Company  serving  at the end of
fiscal  2003 (the  "Named  Executive  Officers")  for  services  rendered to the
Company in all  capacities  (including  service as an  officer or  director)  in
fiscal 2003.

                                    Summary Compensation Table
                                        Annual Compensation
                            Fiscal                             All Other Annual
                             Year     Salary        Bonus       Compensation
Michael A. McLain
Chief Executive Officer,    2003   $  515,007    $  398,125     $   81,855 (1)
President, and Chairman     2002   $  500,004    $  225,069     $   86,797
of the Board of Directors   2001   $  496,667    $   56,250     $   84,977

D. Garrad Warren, III       2003   $  250,281    $  155,284     $   44,496 (2)
President, North American   2002   $  243,000    $   87,507     $   64,250
Safety Products Group       2001   $  240,833    $   21,870     $   43,316

James H. Floyd              2003   $  216,300    $   133,988    $   34,934 (3)
President, Aearo Europe,    2002   $  207,934    $    75,623    $   52,721
Managing Director,          2001   $  195,066    $    17,784    $   42,122
International

M. Rand Mallitz             2003   $  212,832    $   131,626    $   27,882 (4)
Senior Vice President and   2002   $  206,604    $    74,399    $   22,907
General Manager,            2001   $  205,267    $    18,594    $   25,180
Specialty Composites

Rahul Kapur                 2003    $  202,152    $  125,458    $   33,394 (5)
Senior Vice President,      2002    $  192,108    $   69,177    $   40,495
Corporate Development       2001    $  190,873    $   17,289    $   34,336
and Chief Strategy
Officer




1.   Includes contributions made on behalf of Mr. McLain to the Company's 401(k)
     Savings Plan  ($5,800) and to the  Company's  Cash Balance Plan  ($12,541).
     Also includes expenses recognized by the Company for unfunded accruals made
     on Mr. McLain's behalf to the Company's  Supplemental  Executive Retirement
     Plan  ($43,206)  as well as  Company  match  and  interest  credits  to the
     Company's Deferred Compensation Plan ($20,308).

2.   Includes contributions made on behalf of Mr. Warren to the Company's 401(k)
     Savings Plan  ($5,800) and to the  Company's  Cash Balance Plan  ($12,541).
     Also includes expenses recognized by the Company for unfunded accruals made
     on Mr. Warren's behalf to the Company's  Supplemental  Executive Retirement
     Plan  ($11,023)  as well as  Company  match  and  interest  credits  to the
     Company's Deferred Compensation Plan ($15,132).

3.   Includes  contributions made on behalf of Mr. Floyd to the Company's 401(k)
     Savings Plan ($5,700);  to the Company's Cash Balance Plan ($12,541).  Also
     includes  expenses  recognized by the Company for unfunded accruals made on
     Mr. Floyd's behalf to the Company's  Supplemental Executive Retirement Plan
     ($7,354) as well as Company  match and  interest  credits to the  Company's
     Deferred Compensation Plan ($9,339).

4.   Includes  contributions  made on behalf  of Mr.  Mallitz  to the  Company's
     401(k)  Savings  Plan  ($5,945)  and to the  Company's  Cash  Balance  Plan
     ($12,541).  Also includes  expenses  recognized by the Company for unfunded
     accruals  made  on  Mr.  Mallitz's  behalf  to the  Company's  Supplemental
     Executive  Retirement  Plan  ($6,978) as well as Company match and interest
     credits to the Company's Deferred Compensation Plan ($2,418).



                                      -59-
<PAGE>

5.   Includes  contributions made on behalf of Mr. Kapur to the Company's 401(k)
     Savings Plan  ($6,522) and to the  Company's  Cash Balance Plan  ($12,541).
     Also includes expenses recognized by the Company for unfunded accruals made
     of Mr. Kapur's behalf to the Company's  Supplemental  Executive  Retirement
     Plan  ($5,706)  as  well as  Company  match  and  interest  credits  to the
     Company's Deferred Compensation Plan ($8,625).


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  2003.  None  of the  Named  Executive  Officers
exercised any options during fiscal 2003.

<TABLE>
<CAPTION>

                                                                              Value of Outstanding
                                              Number of Shares Covered by     In-the-money Options
                         Shares               Options at Fiscal Year-end      At Fiscal Year-end (1)
                       Acquired On    Value
Name                    Exercise    Realized  Exercisable   Unexercisable    Exercisable   Unexercisable
---------------------   --------    --------  -----------   --------------   -----------   -------------
<S>                          <C>         <C>          <C>              <C>            <C>            <C>
Michael A. McLain             --          --           --            1,100   $        --   $          --
D. Garrad Warren, III         --          --           --            1,250            --              --
M. Rand Mallitz               --          --           --              256            --              --
Rahul Kapur                   --          --           --              275            --              --
James H. Floyd                --          --           --              300            --              --

</TABLE>

1.   There was no public  market for the Aearo Common Stock as of September  30,
     2003.  Accordingly,  these values have been  calculated  on the basis of an
     assumed fair market value of $600 per share as established by the Company's
     Board of Directors.


Director Compensation

Directors  (other than two  Directors  unaffiliated  with  Vestar (the  "Outside
Directors")) serve without  compensation  (other than reimbursement of expenses)
in connection  with rendering  services as such. The Outside  Directors  receive
$10,000  annually for their service as Directors  and an  additional  $2,500 per
meeting,  plus reimbursement of expenses.  In connection with their appointment,
Outside  Directors   appointed  in  prior  fiscal  years  have  been  given  the
opportunity  to purchase a limited  number of shares of Aearo Common  Stock.  No
Outside  Directors  were  appointed  to the Board during  fiscal  2003.  Outside
Directors may also elect to participate in the Deferred Compensation Plan.

Employee Stock and Other Benefit Plans

Stock Purchase Plan. In connection with the Formation  Acquisition,  the Company
adopted the Cabot Safety  Holdings  Corporation  1995 Stock  Purchase  Plan,  as
amended  and  restated  (the  "Stock  Purchase  Plan"),  in order  to  encourage
ownership  of  Aearo  Common  Stock  by  selected  officers  and  employees  and
independent  directors of the Company.  Under the Stock  Purchase  Plan,  15,000
shares of Aearo  Common Stock have been  reserved for purchase by the  Company's
executive  officers and other senior  members of management as determined by the
Board of  Directors.  As of December 1, 2003,  13,200 of such shares were issued
and outstanding.

Aearo  Common  Stock  acquired  under  the Stock  Purchase  Plan is  subject  to
forfeiture  through  various  puts and calls.  In the event of death,  permanent
disability or  retirement,  which  retirement  occurs at age 65 or older with at
least 3 years of service,  such stock may be put to the Company by the holder at
fair market value and the Company has a call on such stock at the same price. In
the event of  termination  for cause,  the  Company  has a call at the lesser of
initial cost and fair market value.  In the event of  termination by the Company
other than for cause and in the case of voluntary resignation, the Company has a
call (i) with respect to a percentage of such stock equal to the number of years
elapsed since the Formation Acquisition  multiplied by 20% at fair market value,
and (ii) with  respect to the  remainder  of such stock at the lesser of initial
cost and fair  market  value.  Shares  repurchased  by the  Company  are held in
reserve,  and may be issued to existing  and future  employees  or  non-employee
directors.  These  puts  and  calls  expire  (i) on the  date on  which  certain
financial performance benchmarks (which, following an initial public offering of
the Aearo Common  Stock,  depend in part on the future market value of the Aearo
Common  Stock)  are  achieved  by the  Company or (ii) on  various  dates,  none
exceeding five years from the date of purchase. Each Management Investor is also
required to be a party to the  Stockholders'  Agreement.  See Item 13,  "Certain
Relationships and Related Transactions -- Stockholders' Agreement."



                                      -60-
<PAGE>

Stock Option Plans.  In June 1996,  Aearo'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.  Under the Executive Plan,  non-qualified  options may be
granted to officers and key  employees of the Company and its  subsidiaries.  In
July 1997, Aearo's Board of Directors adopted and the stockholders  subsequently
approved the 1997 Stock Option Plan (the "1997 Option  Plan") under which 11,800
shares of Aearo Common Stock have been  reserved  for  issuance.  Under the 1997
Option Plan  non-qualified  and  qualified  options may be granted to employees,
directors and consultants of the Company.

Each of the  Executive  Plan  and the  1997  Option  Plan is  administered  by a
committee of the Board of Directors consisting of all non-employee directors. As
of September 30, 2003, non-qualified options to acquire 11,923 shares at a price
of $600 per share have been granted to officers and key employees of the Company
and its  subsidiaries  under the Company's  stock option plans and 4,877 options
remain available for issuance.  Of outstanding  options,  3,181 in the aggregate
have been granted to Named Executive Officers,  including Mr. McLain (options to
purchase 1,100 shares), Mr. Warren (options to purchase 1,250 shares), Mr. Floyd
(options to purchase 300 shares), Mr. Kapur (options to purchase 275 shares) and
Mr. Mallitz  (options to purchase 256 shares).  Each option will vest and become
exercisable  upon  the  earlier  of:  (i) the date on  which  certain  financial
performance  benchmarks  (which depend in part on the future market value of the
Aearo Common  Stock) are achieved by the Company and (ii) the tenth  anniversary
of the date of grant.  The  option  term is 10 years;  provided,  however,  that
unexercised  options  expire  earlier in certain  instances  of  termination  of
employment  of the  option  holder  and may  expire  in the event of a merger or
liquidation  of the  Company  or a sale of  substantially  all the assets of the
Company.  Aearo Common Stock acquired upon exercise of options granted under the
Executive  Plan or  1997  Option  Plan  is  subject  to the  same  restrictions,
including  puts and calls and  drag-along  rights as Aearo Common Stock acquired
under the Stock Purchase Plan. See "Stock Purchase Plan."

There  were no  option  grants  for Named  Executive  Officers  pursuant  to the
Executive  Plan and the 1997  Option Plan  during the year ended  September  30,
2003.

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

Phantom  Equity Plan.  Aearo  maintains a  management  phantom  equity  program,
pursuant to which  specified  members of  management  may be entitled to receive
proceeds upon Aearo's  achievement of specified  financial goals relating to the
value of the common equity.  In general,  subject to a  participant's  continued
employment,   the  participant's  right  to  receive  such  proceeds  will  vest
immediately  upon  an  outright  sale  of the  majority  of  Aearo  by  existing
shareholders or a recapitalization  which results in a significant  distribution
to the common  equity  (each,  a  "realization  event").  However,  the Board of
Directors  of  Aearo  has  the  right  to  accelerate   vesting  for  individual
participants. The proceeds under the management phantom equity program generally
will be distributed upon a realization event.

Supplemental  Severance  Pay Policy.  The  Company  has adopted a severance  pay
policy providing  executive officers and key employees with salary  continuation
in the event of a termination.  Termination  resulting  from cause,  retirement,
death and disability are not eligible.  Subject to the Company's discretion, the
policy generally provides for one month's base pay for each full year of service
with a minimum  amount  payable of three month and a maximum  amount  payable of
twelve months.

Deferred Compensation Plan. The Company has adopted a Deferred Compensation Plan
which is a  non-qualified  savings  plan  under the IRS code and which  provides
executive  officers and paid  directors the  opportunity to defer the receipt of
base salary and/or bonus.  The plan is effective for fiscal years beginning with
fiscal year 2000 and provides  unfunded  deferred  compensation  payments upon a
participant's retirement or termination from the Company.  Participant deferrals
are credited  annually  with  amounts  based upon the prime rate (plus 450 basis
points) and with amounts replicating the Company match in the 401(k) for savings
from income above the qualified plan limits.

401(k) Plan. The Company has adopted a savings plan (the "Savings Plan"),  which
is qualified under Section 401(a) and 401(k) of the Code. All regular  employees
of the  Company in the United  States of America  normally  scheduled  to work a

                                      -61-
<PAGE>
minimum of 1,000 hours per year are eligible to  participate in the Savings Plan
immediately. For each employee who elects to participate in the Savings Plan and
makes a contribution thereto, the Company will make a matching contribution. The
Company matches 50.0% of the first 6.0% of compensation contributed. The maximum
contribution  for any  participant  for any year is 60.0% of such  participant's
eligible compensation, not to exceed the 401(k) plan elective deferral limit set
forth by the IRS.  Contributions  to the Savings Plan will be  invested,  as the
employee directs, in any combination of investment options.

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

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

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

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

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

Michael A. McLain                                   $     82,672
 Chief Executive Officer, President,
 and Chairman of the Board of Directors

D. Garrad Warren, III                               $     34,785
 President, North American Safety Products Group

M. Rand Mallitz                                     $     25,158
 Senior Vice President and General Manager,
 Specialty Composites

Rahul Kapur                                         $     29,045
 Senior Vice President, Corporate Development
 and Chief Strategy Officer

James H. Floyd                                      $     41,119
 President, Aearo Europe, Managing Director,
 International

Compensation Committee Interlocks and Insider Participation

The  Company  has a  Compensation  Committee  of the Board of  Directors.  As of
December  1, 2003,  the  committee  consists of Messrs.  Alpert and McLain,  two
directors of the Company.  Mr.  McLain is also the Chief  Executive  Officer and
President  of the Company as well as Chairman  of the Board of  Directors.  This
committee makes all executive officer  compensation  decisions,  with Mr. McLain
abstaining with respect to decisions affecting his own compensation, and submits
them to the full  Board  of  Directors  of the  Company  for  final  review  and
approval.


                                      -62-
<PAGE>


Item 12. Security Ownership of Certain Beneficial Owners and Management

The  following  table  sets  forth  certain  information  with  respect  to  the
beneficial  ownership of Aearo Common Stock,  including  beneficial ownership by
each person or entity known by the Company to own beneficially 5% or more of the
Company's voting capital stock, by the Directors,  the Named Executive  Officers
and all of the  Company's  Directors  and  executive  officers  as a group as of
December 1, 2003. All of the Subsidiary's  issued and outstanding  capital stock
is owned by Aearo.



Name and Address of Beneficial Owner     Number of Shares of      Percentage of
                                          Aearo Common Stock        Outstanding
                                                                        Shares
Vestar Equity Partners, L.P. (1)             42,500                      71.5%
 245 Park Avenue
 New York, New York 10167

Norman W. Alpert (2)                         42,500                      71.5%

Daniel S. O'Connell (2)                      42,500                      71.5%

Arthur J. Nagle (2)                          42,500                      71.5%

Michael A. McLain                             4,050                      6.82%

John D. Curtin, Jr.                           3,713                      6.25%

Rahul Kapur                                   1,000                      1.68%

James H. Floyd                                1,000                      1.68%

M. Rand Mallitz                                 950                      1.68%

D. Garrad Warren, III                           600                      1.01%

Bryan P. Marsal                                 250                         *

William E. Kassling                             250                         *

Directors and executive officers
as a group (15 persons)(3)                   55,863                      94.0%

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



                                      -63-
<PAGE>




1.   The  general  partner  of  Vestar  is  Vestar  Associates  L.P.,  a limited
     partnership  whose  general  partner  is  Vestar   Associates   Corporation
     ("V.A.C.").  In such capacity,  V.A.C. exercises sole voting and investment
     power with  respect to all of the shares held of record by Vestar.  Messrs.
     Alpert,  O'Connell  and  Nagle,  who  are  directors  of the  Company,  are
     affiliated  with Vestar in the capacities  described  under  "Management --
     Directors and Executive Officers" and are stockholders of V.A.C.

2.   Messrs.  Alpert,  O'Connell  and Nagle are  affiliated  with  Vestar in the
     capacities described under "Directors and Executive Officers." Ownership of
     Aearo Common Stock for these  individuals  includes  42,500 shares of Aearo
     Common  Stock  included  in the above table  beneficially  owned by Vestar,
     although  such  persons  believe  that  they do not  have  such  beneficial
     ownership.  Each  such  person's  business  address  is c/o  Vestar  Equity
     Partners, L.P. at the address set forth above.

3.   Vestar and the  Management  Investors  have  entered  into a  Stockholders'
     Agreement,  the terms of which are  described  more  fully  under  Item 13,
     "Certain  Relationships  and Related  Transactions  -- Stock  Ownership and
     Stockholders'  Agreement."  Does not include  3,550  shares of Aearo Common
     Stock held by Management Investors who are not executive officers.


                                      -64-
<PAGE>




Item 13. Certain Relationships and Related Transactions

The Asset Transfer Agreement

The Company is a party to the 1995 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 1995 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 Cabot , and has
elected  to make  this  payment,  with  the  result  that  Cabot  and the  other
subsidiaries retain  responsibility and liability for, and indemnify the Company
against,  certain  legal claims  alleged to arise out of the use of  respirators
sold prior to July 11, 1995. See Item 3, Legal Proceedings,  for a more detailed
discussion of the  respective  rights and  obligations of the parties under this
arrangement.

Stock Ownership and Stockholders' Agreement

As of September 30, 2003, Vestar and its affiliates own 71.5% of the outstanding
shares of Aearo Common Stock (42,500 shares) and 100% of the outstanding  shares
of Aearo Preferred Stock (22,500 shares). Management Investors and certain other
employees of the Company own 28.5% of Aearo Common Stock (16,912.5 shares).

Under a Stockholders'  Agreement  originally among Aearo,  Vestar, Cabot and the
Management Investors, the parties agreed to various stock transfer restrictions,
as well as provisions  granting certain  tag-along  rights,  drag-along  rights,
registration rights and participation  rights, which are described below. Vestar
and Cabot had identical or similar rights until Cabot's  rights  terminated as a
result of the Cabot Stock Redemption on August 18, 2003.

Election  and Removal of  Directors.  Prior to the Cabot Stock  Redemption,  the
number of  directors  of the  Company  was fixed at nine.  Since that time,  the
number of directors has been fixed at seven. Under the Stockholders'  Agreement,
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 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) Vestar may designate two additional directors
who are not partners,  officers or employees of any of Vestar or its  affiliates
so long as 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,  and (iii) the Management Investors may designate two
directors so long as the Management  Investors  together own  beneficially  on a
fully  diluted  basis at least 3,750  shares of Aearo  Common  Stock (25% of the
shares  of Aearo  Common  Stock  acquired  by all  Management  Investors  in the
Formation  Acquisition),  provided  that  the two  designees  of the  Management
Investors  must be initial  designees as of the closing date, and in the case of
subsequent designees other than the initial designees, shall be officers serving
in similar  capacities.  The  foregoing  provisions  relating to the election of
directors  terminate in the event that Vestar and its  affiliates 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).  Messrs.
Alpert, O'Connell and Nagle were designated by Vestar as described in clause (i)
above,  Messrs.  Kassling and Marsal were  designated  by Vestar as described in
clause  (ii)  above  and  Mr.  McLain  and Mr.  Curtin  were  designated  by the
Management  Investors as described in clause (iii) 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.

                                      -65-
<PAGE>

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

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
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,  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 and its affiliates is permitted.

Participation  Rights. Under certain  circumstances,  if Aearo proposes to issue
any capital stock to Vestar 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 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 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, 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)
Vestar will be entitled to request more than two  registrations.  Under  certain
circumstances, if the Company proposes to register shares of Aearo Common Stock,
it will, upon the written request of any stockholder, use all reasonable efforts
to effect the registration of such stockholders' Aearo Common Stock.

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

                                      -66-
<PAGE>

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.  Until the Cabot Stock  Redemption on August 18, 2003,  the fee was
shared by Cabot and  Vestar  based on their  relative  equity  ownership  of the
Company.  Thereafter,  the fee has been and will be paid solely to Vestar. These
payments totaled approximately $728,000,  $519,000 and $611,000 during the years
ended  September  30,  2001,  2002 and 2003,  respectively.  Of the  $611,000 in
manegment  fees paid by the Company in the year ended  September  30, 2003,  the
Company  paid Vestar  $167,000 in  management  fees for the interim  period from
August 18, 2003 through September 30, 2003. Messrs. Alpert, O'Connell and Nagle,
three of the  directors  of the  Company,  are  affiliated  with  Vestar  in the
capacities  described  under Item 10,  "Directors  and Executive  Officers" and,
accordingly, benefit from any payments received by Vestar.


Management and Director Loans.

The Company has made available to certain Management Investors loans in order to
provide such  Management  Investors with funds to be applied to a portion of the
purchase price of the Aearo Common Stock purchased by such Management  Investors
under the Stock  Purchase  Plan.  Such loans (i) are secured by the Aearo Common
Stock purchased with the proceeds thereof,  (ii) bear interest at an annual rate
of 2.73%  and  (iii)  are  subject  to  mandatory  prepayment  in the  event the
employment  of such  Management  Investor  terminates  or event of maturity.  At
December 1, 2003, amounts outstanding in thousands of dollars were:


                                                    Aggregate
                                  Amount              Amount
                                Outstanding        Outstanding at      Interest
Management Investors           December 1, 2003   September 30, 2003    Rate
----------------------------   ----------------   ------------------   ---------
Michael A. McLain              $            665   $              661       2.73%
D. Garrad (Gary) Warren, III                248                  246       2.73%
Rahul Kapur                                  72                   72       2.73%
Joseph C. Marlette                           72                   72       2.73%
James H. Floyd                               72                   72       2.73%
M. Rand Mallitz                              82                   81       2.73%





                                      -67-
<PAGE>




Item 14. Principal Accountant Fees and Services



Audit Fees

The firm of Deloitte  and Touche,  LLP  (Deloitte)  has served as the  Company's
independent  public  accountants  for each of the last three  fiscal years ended
September 30, 2001, 2002 and 2003. The aggregate fees billed by Deloitte for the
audit of our financial  statements included in the Annual Report on Form 10-K405
and for the review of our financial statements included in our Quarterly Reports
on Form 10-Q for the fiscal years ended  September 30, 2001,  2002 and 2003 were
$221,000, $256,000 and $275,000, respectively.

Tax Fees

The  aggregate  fees billed by Deloitte  for the tax  compliance  for the fiscal
years ended September 30, 2001, 2002 and 2003 were $80,000, $76,000 and $84,000,
respectively.

Other Fees

The aggregate fees billed by Deloitte for additional  professional  services for
the fiscal years ended September 30, 2001, 2002 and 2003 were $60,000,  $132,000
and $312,000, respectively.



                                      -68-
<PAGE>



                                     PART IV

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

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

a) 1. Financial Statements:
      See Index to financial statements under Item 8 on page 26 of this report.


      2. Financial Statement Schedules: See Schedule II on page 70 of this
      report.

      3.  Exhibits:
      See Index of Exhibits on pages 72 to 75 hereof.


b)    Current Reports on Form 8-K
      On July 24, 2003, the Company filed a Current Report on Form 8-K to
      announce its third quarter results of operations.

      On August 18, 2003, the Company filed a Current Report on Form 8-K to
announce the Cabot Stock Redemption.

c)    Exhibits
      See Index of Exhibits on pages 72 to 75 hereof.

d)    Financial Statement Schedule See Schedule II on page 70 of this report.





                                      -69-
<PAGE>


<TABLE>
<CAPTION>


                                   SCHEDULE II
                                AEARO CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS
                     For the years ended September 30, 2001,
                                 2002, and 2003
                             (Dollars in thousands)
                                                          Additions
                                    Balance at     Provisions   Charged to
                                    beginning of   Charged to    Other       Net Deductions       Balance at
                                      Period       Operations    Accounts    From Allowances     end of Period
                                   -------------   ----------   ----------   ----------------    -------------

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

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

Year ended September 30, 2003
 Bad Debt Reserve                          1,524          243          --                (409)           1,358


</TABLE>



                                      -70-
<PAGE>








                                   SIGNATURES

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

                                            Aearo Corporation
  Date:  December 22, 2003                  By: /s/ Michael A. McLain
                                            ---------------------
                                            Michael A. McLain
                                            Chief Executive Officer,
                                            President, and Chairman
                                            of the Board of Directors

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


Date: December 22, 2003                     /s/ Michael A. McLain
                                            ---------------------
                                            Michael A. McLain
                                            President, Chief Executive
                                            Officer and Chairman
                                            (Principal Executive Officer)

Date: December 22, 2003                     /s/ Jeffrey S. Kulka
                                            --------------------
                                            Jeffrey S. Kulka
                                            Senior Vice President,
                                            Chief Financial Officer,
                                            Treasurer and Secretary

                                            /s/ John D. Curtin, Jr.*
                                            ------------------------
                                            John D. Curtin, Jr., Director

                                            /s/ Norman W. Alpert*
                                            ---------------------
                                            Norman W. Alpert, Director

                                            /s/ Arthur J. Nagle*
                                            --------------------
                                            Arthur J. Nagle, Director

                                            /s/ Daniel S. O'Connell*
                                            ------------------------
                                            Daniel S. O'Connell, Director

                                            /s/ William Kassling*
                                            ---------------------
                                            William Kassling, Director

                                            /s/ Bryan Marsal*
                                            -----------------
                                            Bryan Marsal, Director

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


Date: December 22, 2003                     /s/ Michael A. McLain
                                            ----------------------
                                            Michael A. McLain
                                            Attorney-In-Fact





                                      -71-
<PAGE>



                                INDEX OF EXHIBITS

Exhibit
Number    Description

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

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

2.4       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.)

2.7       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.)

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

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


                                      -72-
<PAGE>

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.)

2.21*     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.

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

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

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

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

4.3       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).)

4.5       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.)

10.2*     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.

10.5*     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.

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

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


                                      -73-
<PAGE>

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

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

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

10.27     Aearo Corporation 1997 Stock Option Plan (incorporated by reference to
          the same numbered  exhibit of the Company's Annual Report on 1998 10-K
          for the year ended September 30, 1998), adopted June 3, 1997. (M)

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

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

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

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

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

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

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

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

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

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

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

10.40     Stock  Purchase   Agreement,   dated  June  27,  2003,  between  Aearo
          Corporation,  Cabot  Corporation and Cabot CSC  Corporation,  a wholly
          owned  subsidiary of Cabot  Corporation  (incorporated by reference to
          the same numbered exhibit of the Company's  Current Report on Foam 8-K
          dated August 18, 2003).

10.41     Second  Amendment to the Amended and Restated  Credit  Agreement as of
          July 13, 2001, dated August 15, 2003 (incorporated by reference to the
          same  numbered  exhibit of the  Company's  Current  Report on Foam 8-K
          dated August 18, 2003).

10.42     Note Purchase  Agreement,  dated August 18, 2003,  for  $15,000,000 of
          Senior Subordinated Notes due July 15, 2005 (incorporated by reference
          to the same numbered  exhibit of the Company's  Current Report on Foam
          8-K dated August 18, 2003).

10.43+    Promissory  Note,  Indenture of Mortgage and  Assignment  of Rents and
          Leases,  each  dated  April 16,  1991,  pertaining  to a loan to Cabot
          Safety Corporation by American United Life Insurance Company

10.44+    Assignment and  Assumption  Agreement,  dated April 11, 1995,  between
          Cabot  Safety  Corporation  and Cabot Safety  Acquisition  Corporation
          (currently  Aearo  Company)  for  Assignment  of Rents  and  Leases to
          American United Life Insurance Company

10.45+    Assignment and  Assumption  Agreement,  dated April 11, 1995,  between
          Cabot  Safety  Corporation  and Cabot Safety  Acquisition  Corporation
          (currently Aearo Company) for Indenture of Mortgage to American United
          Life Insurance Company

10.46+    Summary of Phantom Equity Program (M)

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12.1+     Statements re: Computation of Ratios.

14.1+     Code of Ethics

21.1+     List of Subsidiaries.

24.1+     Powers of Attorney (see page 71 of this report).

31.1+     Certification of Principal Executive Officer

31.2+     Certification of Principal Financial Officer



*  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).

** Incorporated by reference to the same numbered exhibit of the Company's
Annual Report on Form 10-K dated September 30, 2002.

+     Filed herewith.

(M) Identifies management contract or compensatory plan.


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