February 6, 2002

Michael McLain
325 Willow Springs Road
Indianapolis, IN 46240

RE: FY 2002 Aearo Company Management Incentive Program

Dear Michael:

As a key  member  of the  Aearo  management  team,  you have  been  selected  to
participate in the Company's Management Incentive Program.  This letter provides
specific  information  about your  participation  in the plan.  It  details  the
potential payout you can earn based upon Aearo's  financial  performance and the
successful achievement of your individual goals.

Your target payout  opportunity is expressed as a percentage of your base annual
salary as stated  below.  The  target  payout is  comprised  of two  components.
Seventy-five  percent of the payout is based upon Aearo's Global  Operating Cash
Flow (OCF). The remaining  twenty-five  percent is based upon the achievement of
your individual goals.

The OCF  threshold,  target,  and stretch values are set at the beginning of the
fiscal year. If Aearo achieves its FY 2002 stretch goal of $54.8MM OCF, you will
earn 200% of your  target OCF  component  payout.  If OCF for the year is at the
threshold value, you will only earn 50% of your target OCF component payout. The
OCF component  payout will be prorated to reflect  actual Aearo OCF  performance
between the  threshold  and  stretch  values.  If OCF falls below the  threshold
value, no OCF component payout will be made.

How  much of the  goals-based  component  is paid  will  be  determined  by your
performance  against your goals as assessed by your manager and affirmed through
the process of two-level review. Further, if OCF performance is below threshold,
any funding for the goals-based component of the plan would be at the discretion
of the Board of Directors.

A summary of your FY 2002 payout potential follows:

Factors:

------------------------------------------------ ----------------------
Current Base Annual Salary:                                   $500,000
------------------------------------------------ ----------------------
Participation Level:                                               50%
------------------------------------------------ ----------------------
Target payout:                                                $250,000
------------------------------------------------ ----------------------



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Page Two


                          FY 2002 Threshold   FY 2002 Target  FY 2002 Stretch
                             $46.2MM OCF        $50.5MM OCF      $54.8MM OCF
------------------------ ------------------- ----------------- ---------------
------------------------ ------------------- ----------------- ---------------
OCF Component (75%)                $93,750          $187,500        $375,000
------------------------ ------------------- ----------------- ---------------
------------------------ ------------------- ----------------- ---------------
Goals Component (25%)              $62,500           $62,500         $62,500
------------------------ ------------------- ----------------- ---------------
------------------------ ------------------- ----------------- ---------------
Total Potential Payout                   $                 $               $
------------------------ ------------------- ----------------- ---------------

Base  annual  salary at the close of the fiscal year  (9/30/02)  will be used in
calculating payouts.  Participants who voluntarily terminate their employment or
who are involuntarily  terminated for  performance-related  reasons prior to the
close of the fiscal year forfeit any payout under the program. Employees who are
involuntarily  terminated prior to the close of the fiscal year as the result of
reductions-in-force,  redundancy,  or job  elimination  would  receive a prorata
portion of any payout made based on months worked during fiscal 2002.

Fiscal Year 2002  promises to be a  challenging  one.  Let's all stay focused on
achieving our financial  objectives  through  successful  new product  launches,
sales growth, and careful expense management.


Sincerely,

[OBJECT OMITTED]
Michael A. McLain

Note:  Global  Operating  Cash Flow (OCF) is  synonymous  with  Earnings  before
Interest, Taxes, Depreciation and Amortization (EBITDA).