UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
(Mark One)

[X]               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2005

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

                For the transition period from _______ to _______

                        Commission file number 333-116676

                                 AEARO COMPANY I

             (Exact name of registrant as specified in its charter)



              Delaware                                    13-3840356
(State or other jurisdiction of incorporation  (IRS Employer Identification No.)
        or organization)

      5457 West 79th Street                                  46268
      Indianapolis, Indiana                               (Zip Code)
  (Address of principal executive offices)

                                 (317) 692-6666
              (Registrant's telephone number, including area code)

                             _______________________

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

     The number of shares of the  registrant's  common stock, par value $.01 per
share, outstanding as of August 15, 2005 was 100.

<PAGE>


                                 AEARO COMPANY I
                                TABLE OF CONTENTS
             Form 10-Q for the Quarterly Period Ended June 30, 2005

PART I-FINANCIAL INFORMATION...................................................3

Item 1 Financial Statements....................................................3
Consolidated Balance Sheets - Assets...........................................3
Consolidated Balance Sheets - Liabilities and Stockholder's Equity.............4
Consolidated Statements of Operations..........................................5
Consolidated Statement of Stockholder's Equity.................................6
Consolidated Statements of Cash Flows..........................................7
Notes to Consolidated Financial Statements.....................................8
Item 2Management's Discussion and Analysis of Financial Condition
 and Results of Operations....................................................26
Item 3 Quantitative and Qualitative Disclosures About Market Risk ............37
Item 4 Controls and Procedures................................................38
PART II - OTHER INFORMATION...................................................39

Item 6 Exhibits and Reports on Form 8-K ......................................39
SIGNATURES....................................................................40

EXHIBIT INDEX.................................................................41

<PAGE>


                          PART I-FINANCIAL INFORMATION
     Item 1.      Financial Statements



<TABLE>
<CAPTION>

                        AEARO COMPANY I AND SUBSIDIARIES
                 Condensed Consolidated Balance Sheets - Assets
                                 (In Thousands)

                                                  June 30,       September 30,
                                                    2005             2004
                                              ---------------   ---------------
                                                 (Unaudited)
   CURRENT ASSETS:
<S>                                           <C>              <C>
    Cash and cash equivalents                 $    16,019      $    27,724
    Accounts receivable (net of allowance
    for doubtful accounts of $1,463 and
    $1,358 respectively)                           60,553           54,159
    Inventories                                    44,424           40,849
    Deferred and prepaid expenses                   5,602            4,146
                                              ---------------   ---------------
      Total current assets                        126,598          126,878
                                              ---------------   ---------------

   LONG TERM ASSETS:
    Property, plant and equipment, net             51,317           54,750
    Other intangible assets, net                  182,050          185,855
    Other assets                                   13,403           15,144
    Goodwill                                      116,596          133,745
                                             ----------------   ---------------
                  Total assets               $    489,964     $    516,372
                                             =================  ===============
</TABLE>

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



                                       3
<PAGE>


<TABLE>
<CAPTION>

                        AEARO COMPANY I AND SUBSIDIARIES
  Condensed Consolidated Balance Sheets - Liabilities and Stockholder's Equity
             (In Thousands, Except for Per Share and Share Amounts)


                                               June 30,           September 30,
                                                 2005                  2004
                                            ------------        ---------------
                                             (Unaudited)
CURRENT LIABILITIES:
<S>                                          <C>                <C>
   Current portion of long-term debt         $    3,455         $    1,639
   Accounts payable and accrued liabilities      55,684             46,730
   Accrued interest                               3,067              6,996
   Accrued income taxes                           1,947              1,648
                                             ------------      -----------------
         Total current liabilities               64,153              57,013
                                             -------------     ----------------

LONG TERM LIABILITIES:                          298,299             302,842
   Deferred income taxes                         40,587              59,699
   Other liabilities                             14,169              14,726
                                            --------------    -----------------
         Total liabilities                      417,208             434,280
                                            --------------    -----------------


STOCKHOLDER'S EQUITY:
   Common stock, $.01 par value-
    Authorized--100 shares
    Issued and outstanding--100 shares             -                   -
   Paid in capital                              101,640             101,610
   Accumulated deficit                         (26,848)            (19,415)
   Accumulated other comprehensive loss         (2,036)               (103)
                                            --------------    -----------------
Total stockholder's equity                       72,756              82,092
                                            --------------    -----------------
Total liabilities and stockholder's equity    $ 489,964         $   516,372
                                            ==============    =================
</TABLE>
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements


                                       4
<PAGE>


<TABLE>
<CAPTION>

                 Condensed Consolidated Statements of Operations
                                 (In Thousands)
                                   (Unaudited)





                                                                         Nine             Three                Six
                                                                        Months            Months              Months
                                      Three Months Ended                Ended             Ended               Ended
                                                    June 30,            June 30,          June 30,           March 31,
                                         2005                   2004      2005              2004                2004
                                                   Successor                              Successor                  Predecessor
<S>                                  <C>                  <C>                 <C>              <C>                  <C>
Net sales                            $    113,198         $        97,126     $    313,437     $        97,126   |  $       169,579
                                                                                                                 |
Cost of sales                               58,124                 68,144            159,757            68,144   |           89,056
                                     ------------------   ------------------  ---------------  ------------------|-----------------
                                                                                                                 |
   Gross profit                             55,074                 28,982            153,680            28,982   |           80,523
                                                                                                                 |
Selling and administrative                  34,172                 28,149             98,583            28,149   |           56,835
                                                                                                                 |
Research and technical services              2,234                  1,966              6,665             1,966   |            3,623
                                                                                                                 |
Amortization                                 1,313                    101              3,928               101   |              242
                                                                                                                 |
Other (income) charges, net                   (512)                 1,690               (200)            1,690   |            (506)
                                                                                                                 |
Restructuring                                   --                     --                 --                --   |          (1,091)
                                     ------------------   ------------------  ---------------  ------------------|-----------------
                                                                                                                 |
   Operating income (loss)                  17,867                 (2,924)            44,704            (2,924)  |           21,420
                                                                                                                 |
Interest expense, net                        5,856                 10,292             16,785            10,292   |           10,836
                                     ------------------   ------------------  ---------------  ------------------|-----------------
                                                                                                                 |
   Income (loss) before provision                                                                                |
   for income taxes                         12,011                (13,216)            27,919           (13,216)  |           10,584
                                                                                                                 |
Provision for income taxes                   1,569                  1,031                358             1,031   |            2,020
                                     ------------------   ------------------  ---------------  ------------------|-----------------
                                                                                                                 |
   Net income (loss)                 $      10,442        $       (14,247)    $       27,561   $       (14,247)  |  $         8,564
                                     ------------------   ------------------  ---------------  ------------------------------------
</TABLE>

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



                                       5
<PAGE>


<TABLE>
<CAPTION>

            Condensed Consolidated Statement of Stockholder's Equity
                      (In Thousands, Except Share Amounts)

                                                                               Accumulated
                                                          Paid                    Other                   Comprehensive
                                     Common Stock          In      Accumulated Comprehensive                 Income
Successor                           Shares  Amount       Capital    Deficit        Loss       Total          (Loss)


<S>                                        <C>         <C>        <C>        <C>            <C>          <C>
Balance, October 1, 2004               100  $     -     $  101,610 $  (19,415) $      (103)  $ 82,092


  Net income                             -        -             -      27,561             -    27,561     $    27,561
  Dividend to parent                                                 (34,994)                (34,994)               -
  Foreign currency translation
adjustment                               -        -             -           -       (1,689)   (1,689)          (1,689)
  Unrealized loss on derivative
instruments                              -        -             -           -         (244)     (244)            (244)
  Vesting of restricted stock            -        -            30                         -        30               -
                                                                                                          ------------
  Comprehensive income                   -        -             -           -             -         -      $   25,628
                                                                                                          ============
                                    ------- --------    ---------- ----------- ------------- --------
Balance, June 30, 2005                 100  $     -     $ 101,640  $           $   (2,036)   $ 72,756
                                                                   (26,848)
                                    ======= ========    ========== =========== ============= ========
</TABLE>
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements


                                       6
<PAGE>

<TABLE>
<CAPTION>
                 Condensed Consolidated Statements of Cash Flows
                                 (In Thousands)
                                   (Unaudited)

                                                                    Nine         Three           Six
                                                                   Months        Months        Months
                                                                   Ended         Ended          Ended
                                                                  June 30,      June 30       March 31,
                                                               --------------------------------------------
                                                                    2005          2004      |    2004
                                                               -----------------------------|--------------
Cash Flows from Operating Activities:                                   Successor           |  Predecessor
<S>                                                              <C>           <C>             <C>
Net income (loss)                                                $     27,561  $  (14,247)  |    $  8,564
Adjustments to reconcile net income (loss) to cash                                          |
   provided by operating activities-                                                        |
   Depreciation                                                         8,131       3,006   |       5,931
   Amortization of intangible assets                                    3,928         101   |         242
   Amortization of deferred financing costs                             1,068       4,234   |       2,026
   Inventory purchase accounting adjustment                                --      17,067   |          --
   Deferred income taxes                                               (3,310)         (7)  |          --
   Stock based compensation                                                30          10   |
   Restructuring                                                           --          --   |      (1,091)
   Loss on disposal of assets                                               3               |         682
   Changes in assets and liabilities-                                                       |
      Accounts receivable                                              (6,755)       (2,242)|      (1,113)
      Inventories                                                      (4,166)            2 |      (3,464)
      Accrued income taxes                                                432           522 |      (1,453)
      Accrued interest                                                 (3,928)          767 |            3
      Accounts payable and accrued liabilities                          7,107         2,667 |      (3,224)
      Prepaid expenses and other assets                                   427           986 |          633
      Other liabilities                                                 1,012           928 |        1,299
                                                                    ---------    ---------- |    ---------
      Net cash provided by operating activities                        31,540        13,794 |        9,035
                                                                    ---------    ---------- |    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |
   Additions to property, plant and equipment                          (5,404)       (2,810)|       (5,006)
   Proceeds provided by disposals of property, plant and                                    |
   equipment                                                               64            -- |           12
                                                                    ---------    ---------- |    ---------
       Net cash used by investing activities                           (5,340)       (2,810)|       (4,994)
                                                                     ---------    ----------|    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |
   Distribution to shareholder to effect the merger                        --       (86,852)|           --
   Repayment of old credit facility                                        --       (78,333)|           --
   Repayment of 12.5% senior subordinated notes                            --       (98,000)|           --
   Proceeds from 8.25 senior subordinated notes                            --       175,000 |           --
   Debt issue costs                                                        --       (10,408)|
   Dividend to parent                                                 (34,994)      (14,305)|           --
   Proceeds from  (repayment of) revolving credit facility, net            --       (15,600)|        3,950
   Proceeds from (repayment of) term loans                               (961)      125,000 |       (8,949)
   Repayment of capital lease obligations                                (200)          (61)|         (122)
   Repayment of long term debt                                           (273)          (26)|         (119)
                                                                     ---------    ----------|     ---------
       Net cash used for financing activities                         (36,428)       (3,585)|       (5,240)
                                                                     ---------    ----------|     ---------
EFFECT OF EXCHANGE RATE ON CASH                                        (1,477)         (858)|         (789)
                                                                     ---------    ----------|      ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (11,705)        6,541 |       (1,988)
                                                                                            |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         27,724         5,313 |        7,301
                                                                     ---------    ----------|      ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $     16,019  $     11,854 | $      5,313
                                                                     =========    ==========|      =========
CASH PAID FOR:                                                                              |
   Interest                                                      $     19,977  $      4,787 | $      8,862
                                                                      =========   ==========|      =========
   Income taxes                                                  $      3,674  $        552 | $      3,254
                                                                      =========   ==========|      =========

</TABLE>
The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements
<

                                       7
<PAGE>


                        AEARO COMPANY I AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements
                                  JUNE 30, 2005

                                   (Unaudited)

1)   Consolidated Financial Statements

     In the opinion of management,  the  accompanying  unaudited  condensed
     consolidated  financial  statements  of  Aearo  Company  I (the  "Company")
     contain all normal,  recurring  adjustments necessary to present fairly, in
     accordance  with  accounting  principles  generally  accepted in the United
     States of America,  the financial position,  results of operations and cash
     flows for the interim periods presented.  The results of operations for the
     interim  periods  shown in this report are not  necessarily  indicative  of
     results  for any  future  interim  period  or for the  entire  year.  These
     consolidated financial statements do not include all disclosures associated
     with  annual  financial  statements,  and  accordingly,  should  be read in
     conjunction  with the consolidated  financial  statements and notes thereto
     included in the Company's Annual Report on Form 10-K.

2)   Company Background, Merger and Basis of Presentation

     The  Company   manufactures  and  sells  products  under  the  brand  names
     AOSafety(R),  E-A-R(R), Peltor(R) and SafeWaze(TM). These products are sold
     through  three  reportable  segments,  which are  Safety  Products,  Safety
     Prescription Eyewear and Specialty Composites.

     On March 10, 2004,  Aearo  Corporation  ("Parent"),  the Company's  parent,
     entered into a merger agreement ("Merger Agreement") with AC Safety Holding
     Corp. and its subsidiary,  AC Safety Acquisition Corp. that closed on April
     7, 2004 (the "Merger").  Pursuant to the terms of the Merger Agreement,  on
     April 7, 2004 ("Acquisition Date"), AC Safety Acquisition Corp. merged with
     and into Aearo Corporation with Aearo Corporation surviving the Merger as a
     wholly-owned  subsidiary of AC Safety Holding Corp. The aggregate  purchase
     price was approximately  $409.3 million,  including fees and expenses.  The
     Merger was financed with approximately  $303.7 million of debt as discussed
     in Note 6, $3.7  million  of which was  assumed,  $4.3  million of cash and
     $101.3 million of equity. The Company continues to be wholly-owned by Aearo
     Corporation  after the  Merger.  The  purpose of the Merger was to effect a
     change of control from Aearo  Corporation to the Company's  ultimate parent
     AC Safety Holding Corp.

     Approximately  $87.0 million of proceeds from the Merger was distributed to
     our  Parent  and used to pay the  shareholders  of the Parent to effect the
     merger  transaction.  An additional $14.3 million distributed to our Parent
     was used to pay the outstanding debt of the Parent as of April 7, 2004.

     The  Merger  was a  business  combination  under  SFAS No.  141,  "Business
     Combinations," and the purchase price paid for our Parent reflects the push
     down of 100% of the purchase price resulting from the Merger.  Accordingly,
     the results of operations  subsequent to the Acquisition Date are presented
     on a different basis of accounting than the results of operations  prior to
     the Acquisition Date, and, therefore are not directly comparable.  The sale
     was  accounted  for as if it had occurred on March 31, 2004,  as management
     determined  that results of operations were not significant and no material
     transactions  occurred  during  the  period  from April 1, 2004 to April 7,
     2004.  The periods prior to April 7, 2004,  are referred to as  predecessor
     financial  statements  and the periods after April 7, 2004, are referred to
     as successor financial statements.

     The purchase  price is allocated to the Company's  tangible and  intangible
     assets and  liabilities  based upon estimated fair values as of the date of
     the Merger. The adjustment made to deferred tax liabilities and goodwill in
     fiscal 2005 reflect the  adjustment  of the purchase  price  allocation  to
     identifiable intangible assets and the related deferred tax liabilities for
     differences  between  book and tax  basis of those  assets  as a result  of
     finalizing  the tax basis of certain  assets.  The purchase  price has been
     allocated as follows (dollars in thousands):



     Working capital                                        $      77,357
     Fixed assets                                                  55,139
     Other assets and liabilities                                  16,073
     Deferred tax liabilities                                     (45,258)
     Finite lived intangible asset                                 74,104
     Indefinite lived intangible assets                           114,300
     Goodwill                                                     117,629

     Purchase price                                         $     409,344
                                                                  =======
     Goodwill  resulting  from the  Merger  is not  deductible  for  income  tax
     purposes.



                                       8
<PAGE>
3)   Significant Accounting Policies

     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  financial
     statements  and the reported  amounts of revenues  and expenses  during the
     reporting periods. Actual results could differ from those estimates.

     Revenue  Recognition  and  Allowance  for  Doubtful  Accounts.  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.  The Company offers its customers three types of
     incentive  programs:  a sales  rebate/volume  discount program, a marketing
     incentive  program  and  a  co-operative  advertising  program.  The  sales
     rebate/volume  discount  program is based on achieved  volume  levels along
     with  growth  incentives  over  the  prior  year's  sales  dollars.  Rebate
     obligations are estimated based on current sales levels and are recorded as
     a reduction of revenue when sales to the customer make progress towards the
     required sales level. The marketing  incentive program provides  qualifying
     customers  with funds to assist the customers  with marketing the Company's
     products.  The funds provided to the qualifying customers are recorded as a
     reduction of revenue when sales to the customer make  progress  towards the
     required sales level. The co-operative  advertising  program provides funds
     to specific customers to advertise the Company's  products.  The qualifying
     customers provide specific  documentation of the advertising to the Company
     to assure that the  benefit  received  is  comparable  to other arms length
     advertising   expenditures   undertaken  by  the  Company.  The  amount  of
     co-operative advertising charged to selling and administrative expenses for
     the three  months  ended June 30, 2005 and 2004 were $0.9  million and $0.4
     million,  respectively.  The amount of co-operative  advertising charged to
     selling and administrative expenses for the nine months ended June 30, 2005
     and six months  ended  March 31, 2004 were $2.0  million and $0.9  million,
     respectively.

     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 customer's credit  worthiness,  historical
     bad debt  experience,  changes in payment history and general  economic and
     market trends.

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

     Foreign  Currency  Transactions.  Foreign currency gains and losses arising
     from transactions by any of the Company's subsidiaries are reflected in net
     income.

     Cost of Goods Sold.  Cost of goods sold  includes all costs to  manufacture
     the Company's  products  including  raw  materials,  which include  inbound
     freight and import duties,  direct labor,  plant  supervision,  maintenance
     labor  and  parts,  quality  control,  receiving,  purchasing,   production
     planning,  manufacturing supplies, scrap, rework, utilities,  depreciation,
     property taxes, sales and use taxes and insurance.

     Selling and Administrative  Expenses.  Selling and administrative  expenses
     include  salaries and benefits for selling,  marketing,  customer  service,
     finance and human resources  personnel,  direct marketing  expenses,  trade
     show  expenses,  commissions,  selling  expenses,  bad debts,  advertising,
     travel and entertainment,  office supplies,  recruiting,  relocation, legal
     expenses,   accounting  fees,  consulting  and  warehousing  and  logistics
     expenses incurred after the point of manufacture.

     Income Taxes.  Deferred tax assets and liabilities are determined  based on
     the difference between the financial  statement and tax bases of assets and
     liabilities  using currently  enacted tax rates. At September 30, 2004, the
     Company's  deferred  tax  asset  for  domestic  net  operating  losses  was
     partially offset by a valuation allowance of $7.5 million. During the three
     month  period  ended March 31, 2005,  management  determined  that based on
     current  domestic  operating  results,  it is more  likely  than  not  that
     domestic net operating  losses will be realized and  consequently  reversed
     the $7.5 million valuation allowance.

     The Company is included in the  consolidated  tax return filed by AC Safety
     Holding  Corp.  All taxes are recorded as if separate,  stand alone returns
     were filed.

     Goodwill  and Other  Intangibles.  Under the  provisions  of SFAS No.  142,
     "Goodwill and Other Intangibles",  goodwill and intangible assets that have
     indefinite  useful lives are not amortized but are tested at least annually
     for  impairment.  The Company will test its goodwill and  indefinite  lived
     intangible  assets as of September  30, 2005.  Intangible  assets that have
     finite useful lives are amortized  over their useful lives and reviewed for
     impairment at each reporting date.
                                       9
<PAGE>

     The  following  presents  a  summary  of  other  intangibles  assets  as of
     September 30, 2004 and June 30, 2005, resulting from the Merger (dollars in
     thousands):


<TABLE>
<CAPTION>

                                             Gross        Accumulated
     September 30, 2004                     Amount        Amortization    Additions  Carrying Amount

<S>                                      <C>            <C>               <C>         <C>
     Trademarks                          $    114,300   $            --   $       --  $   114,300
     Customer relationship list                73,000            (2,433)          --       70,567
     Patents                                      719              (122)          82          679
     Other                                        385               (76)          --          309
                                              -------            -------        ----      -------
     Total Intangibles                   $    188,404   $        (2,631)  $       82  $   185,855
                                              =======            =======        ====      =======
</TABLE>


<TABLE>
<CAPTION>

                                             Gross        Accumulated
     June 30, 2005 (Unaudited)              Amount        Amortization    Additions  Carrying Amount

<S>                                      <C>            <C>               <C>         <C>
     Trademarks                          $    114,300   $            --   $       --  $   114,300
     Customer Relationship List                73,000            (6,083)          --       66,917
     Patents                                      802              (316)         122          608
     Other                                        385              (160)          --          225
                                              -------           -------        ------     -------
     Total Intangibles                   $    188,487   $        (6,559)  $      122  $   182,050
                                              =======           =======        =======    =======
</TABLE>

<TABLE>
<CAPTION>

     Estimate of Aggregate Amortization Expense (dollars in thousands):


<S>                                                    <C>
                  Year ending September 30, 2005        $         5,241
                  Year ending September 30, 2006                  5,225
                  Year ending September 30, 2007                  5,114
                  Year ending September 30, 2008                  4,904
                  Year ending September 30, 2009                  4,913

</TABLE>

     The following presents the allocation of goodwill resulting from the Merger
     and the  changes in the  carrying  amount of  goodwill  for the nine months
     ended June 30, 2005 (dollars in thousands):


<TABLE>
<CAPTION>

                                                           Nine Months
                                                              Ended
                                                             June 30,
                                                               2005
<S>                                                    <C>
     Beginning balance                                  $       133,745
     Allocation adjustment                                     (15,491)
     Translation adjustment                                     (1,658)
                                                                -------
     Ending balance                                     $       116,596
                                                                =======
</TABLE>


                                       10
<PAGE>

     The  allocation  adjustment in fiscal 2005  reflects the  adjustment of the
     purchase price allocation to identifiable intangible assets and the related
     deferred  tax  liabilities  for  differences  between book and tax bases of
     those assets as a result of finalizing the tax basis of certain assets.

     Stock-based Compensation. The Company accounts for stock-based compensation
     under the recognition and measurement  principles of Accounting  Principals
     Board  ("APB")  No.  25,   "Accounting  for  Stock  Issued  to  Employees".
     Accordingly,  no compensation expense for stock options has been recognized
     as all options granted had an exercise price equal to or above the price of
     the  underlying  common  stock on the grant date.  The  Company  recognizes
     compensation  expense related to restricted  stock awards and amortizes the
     expense over the vesting  period based on the  estimated  fair value of the
     stock at the date of grant.



                                       11
<PAGE>


     The following table illustrates the effect on net income if the Company had
     applied the fair value recognition  provisions of SFAS No. 123, "Accounting
     for  Stock-Based  Compensation"  as amended by SFAS No. 148 "Accounting for
     Stock-Based  Compensation  - Transition  and  Disclosure,"  to  stock-based
     employee compensation (dollars in thousands):


<TABLE>
<CAPTION>

                                                                     Nine         Three          Six
                                                                    Months       Months         Months
                                           Three Months Ended       Ended         Ended         Ended
                                                June 30,           June 30      June 30,      March 31,
                                           2005         2004         2005         2004           2004
                                                Successor                 Successor          Predecessor
<S>                                       <C>        <C>           <C>         <C>            <C>
     Net income (loss) as reported        $ 10,442   $   (14,247)  $   27,561  $   (14,247)   $     8,564
       Stock based compensation expense
       recorded under APB No. 25, net
       of tax                                   10            --           30           10             --
       Stock-based compensation expense
       determined under the fair value
       method, net of tax                      (44)           --         (127)        (10)           (67)
                                           -------       -------       ------      -------        -------
     Proforma net income (loss)           $ 10,408   $   (14,247)  $   27,464  $   (14,247)   $     8,497
                                           =======       =======       ======       =======       =======
</TABLE>


     Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
     "Accounting  for Derivative  Instruments and Hedging  Activities"  requires
     that every derivative instrument be recorded in the balance sheet as either
     an asset or a liability measured at its fair value.

     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.  Amounts accumulated in other  comprehensive  income
     will be  reclassified  to earnings  when the related  product  sales affect
     earnings for forward foreign  currency  contracts or when related  interest
     payments  affect  earnings for interest rate swaps.  During the three month
     period  ended June 30,  2005,  the Company  entered  into three new forward
     foreign  currency  contracts that will protect the Company against exchange
     rate  movement  during  fiscal  year  2006.  As result  of the new  forward
     currency  contracts,  the Company has recorded a derivative payable of $0.4
     million at June 30, 2005.  For the three month  periods ended June 30, 2005
     and 2004, the Company had no gains or losses resulting from the exercise of
     forward  foreign  currency  contracts.  For the nine and six month  periods
     ended June 30,  2005 and March 31,  2004,  the  Company  reclassified  into
     earnings net losses of $0 million and $0.5 million,  respectively resulting
     from the  exercise  of forward  foreign  currency  contracts.  All  forward
     foreign currency  contracts were determined to be highly effective  whereby
     no ineffectiveness was recorded in earnings.

     The Company had approximately $30.5 million of variable rate debt protected
     under an interest rate cap  arrangement,  which expired  December 31, 2004.
     The Company did not elect hedge accounting  treatment for the interest rate
     cap as  defined  under  SFAS No.  133,  and,  as a result,  any fair  value
     adjustment was charged directly to other charges  (income),  net. There was
     $0.1 million of expense charges to earnings for the period ended,  June 30,
     2004 for the change in the fair value of the interest rate cap.



                                       12
<PAGE>


     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 other charges
     (income),  net.  The impact on earnings was a gain of  approximately  $ 0.3
     million and $ 0.1 million for the three and nine month  periods  ended June
     30,  2005,  respectively,  compared  to net loss of $ 0.3  million and $0.4
     million,  respectively  for the three and six month  periods ended June 30,
     2004 and March 31, 2004, respectively.

     On June 30, 2005, the FASB issued Derivatives  Implementation Group ("DIG")
     B39,  "Application  of Paragraph 13(b) to Call Options That are Exercisable
     Only by the  Debtor",  which  provides an explicit  scope  exception to the
     provisions of paragraph  13(b) of SFAS No. 133 when the right to accelerate
     a  repayment  can only be  exercise  by the debtor  (issuer/borrower).  The
     Company has adopted DIG B39 as of April 1, 2005.  Prior to the  adoption of
     DIG B39, the Company determined under the provisions of DIG B16, "Calls and
     Puts in Debt  Instruments",  that the embedded call option in the Company's
     Senior  Subordinated  Notes was not clearly and closely related to the debt
     host contract and therefore  required  bifurcation.  The carrying values of
     the derivative asset and liability were $2.0 million at September 30, 2004.
     Prior to the  adoption of DIG B39,  the Company had  recorded  $0.2 million
     loss in other (income) charges,  net for the mark to market  revaluation of
     the embedded call option and $0.2 million for the reduction of interest due
     to the  amortization of the  corresponding  liability during 2005. Upon the
     adoption  of  DIG  B39,  the  Company   reversed  a  derivative   asset  of
     approximately  $1.8  million  and  the  corresponding  liability  that  was
     previously recorded.

4)   Other Comprehensive Income

     The  following  table  presents  the  reclassification  amounts  related to
     unrealized   holding  gains  and  losses  presented  in  the  statement  of
     stockholder's  equity for the three month  periods  ended June 30, 2005 and
     2004 and the nine and six month  periods  ended June 30, 2005 and March 31,
     2004, respectively (dollars in thousands):


<TABLE>
<CAPTION>

                                                                     Nine         Three          Six
                                                                    Months       Months         Months
                                           Three Months Ended       Ended         Ended         Ended
                                                June 30,           June 30      June 30,      March 31,
                                           2005         2004         2005         2004           2004
                                                Successor                 Successor          Predecessor
     Unrealized holding losses on                                              $      (138)
<S>                                       <C>        <C>           <C>                        <C>
        derivatives during the period     $   (244)  $      (138)  $     (244)                $      (133)
       Less:  reclassification
       adjustment for gains (losses)
       included in the statements of
       operations                               --            25           --           25            523
                                             -------       -------      -------      -------       -------
     Total                                $   (244)  $      (113)  $     (244) $      (113)   $       390
                                             =======       =======      =======      =======       =======
</TABLE>




                                       13
<PAGE>


5)   Inventories

     Inventories consist of the following (dollars in thousands):


<TABLE>
<CAPTION>

                                                              June 30,               September 30,
                                                                2005                      2004
                                                         -------------------       -------------------
                                                            (Unaudited)

<S>                                                      <C>                       <C>
     Raw materials                                       $        11,029           $      9,302
     Work in process                                               9,415                 12,087
     Finished goods                                               23,980                 19,460
                                                         -------------------       -------------------
                                                         $        44,424           $     40,849
                                                         ===================       ===================
</TABLE>


     Inventories, which include materials, labor and manufacturing overhead, are
     stated at the lower of cost or  market,  cost  being  determined  using the
     first-in, first-out method.

6)   Debt

     The Company's debt structure  includes:  (a) $175.0 million of 8.25% Senior
     Subordinated  Notes ("8.25%  Notes") due 2012,  which are publicly held and
     redeemable  at the  option of the  Company,  in whole or in part at various
     redemption  prices,  (b) up to an  aggregate  of $175.0  million  under its
     Credit  Agreement  with various banks  comprised of (i) a secured term loan
     facility  consisting of loans  providing  for up to $125.0  million of term
     loans  (collectively  the "Term  Loans")  with a portion  of the Term Loans
     denominated in Euros, (ii) a secured revolving credit facility  ("Revolving
     Credit Facility")  providing for up to $50.0 million of revolving loans for
     general corporate purposes, and (iii) an uncommitted  incremental term loan
     facility of up to $75.0 million for acquisitions (collectively, the "Senior
     Bank Facilities").  Since the Acquisition Date, the Company's debt has been
     negatively  impacted by $0.3 million related to the fluctuation of the Euro
     relative to the U.S dollar as of June 30,  2005.  The Company does not plan
     to take any measure to minimize  the  foreign  exchange  impact of its Euro
     denominated   debt.  The  amounts   outstanding  on  the  Term  Loans  were
     approximately  $123.8  million  and  $126.0  million  at June 30,  2005 and
     September 30, 2004,  respectively.  There were no amounts outstanding under
     the  Revolving  Credit  Facility  at June 30, 2005 and  September  30, 2004
     respectively.  The Revolving  Credit Facility  provides for the issuance of
     letters of credit in an aggregate face amount of up to $15.0  million.  The
     Company  had  approximately  $1.4  million  and $1.6  million of letters of
     credit  outstanding at September 30, 2004 and June 30, 2005,  respectively.
     The Term Loans amortize quarterly over a seven-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 April 7, 2010. The Term
     Loans mature on April 7, 2011.  Effective  December  31, 2004,  the Company
     received a 0.25%  reduction in the interest rate paid on its Term Loans for
     meeting certain financial covenants. The Company was in compliance with all
     financial covenants and restrictions as of June 30, 2005.

     On April 28, 2005,  the Company  amended its credit  agreement to allow the
     Company to make,  prior to September  30,  2005,  up to $35 million of cash
     distributions to Aearo Corporation,  its parent corporation for the purpose
     of paying cash dividends to AC Safety Holding Corp., its parent, to be used
     by AC Safety Holding Corp.  primarily to redeem,  pro rata, its outstanding
     preferred shares and to pay accrued  dividends on the preferred  shares. In
     addition,  the  amendment (i) modified the amount of the  incremental  Term



                                       14
<PAGE>

     Loan  commitment  from $60.0 million to $75.0 million (ii)  eliminated  the
     termination date for the incremental Term Loan commitment and (iii) allowed
     for incremental Term Loans in Euros.

7)   Commitments and Contingencies

     Lease  Commitments.  The Company  leases certain  transportation  vehicles,
     warehouse  facilities,  office space,  and  machinery  and equipment  under
     cancelable and non-cancelable  leases, most of which expire within 10 years
     and may be renewed by the Company.

     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.

     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.
     Many of these claims are covered by the Asset  Transfer  Agreement  entered
     into on June 13,  1995 by the  Company  and Aearo  Corporation,  on the one
     hand,  and  Cabot   Corporation  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 Aearo Corporation makes an annual
     payment of $400,000 to Cabot,  the Sellers agreed to retain,  and Cabot and
     the  Sellers  agreed to defend  and  indemnify  Aearo  Corporation  and its
     subsidiaries  against, any liability or obligation relating to or otherwise
     arising under any proceeding or other claim against Aearo  Corporation  and
     its subsidiaries 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,  Aearo
     Corporation has elected to pay the annual fee and intends to continue to do
     so. In  addition,  under the terms of the Merger  Agreement  with AC Safety
     Acquisition  Corp.,  Aearo Corporation agreed to make the annual payment to
     Cabot  for a  minimum  of seven  years  from the  Acquisition  Date.  Aearo
     Corporation  and its  subsidiaries  could  potentially be liable for claims
     currently  retained by Sellers if Aearo Corporation  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 a stock purchase  agreement that it and Aearo  Corporation
     entered  into on June 27,  2003  (providing  for the sale by Cabot to Aearo
     Corporation of all of the common and preferred  stock of Aearo  Corporation
     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.

     In fiscal 2003 and 2004,  the  Company  settled 259 claims in which it
     was named as a  defendant  for an  average  settlement  amount of $24.36 in
     silica claims and $83.24 in asbestos claims, while an additional 200 claims
     were dismissed  without any payment  (43.6% of cases  closed),  because the
     Company was not a proper defendant or did not make the product in question.
     As of September  30, 2004,  the number of open claims where the Company was
     named as a defendant in silica and asbestos  related matters was 11,087 and
     4,282, respectively. For the nine months ended June 30, 2005, the increases
     in number of claims  where the Company  was named as a defendant  in silica
     and asbestos  related matters was 2,122 and 1,010  respectively.  The 1,010
     new asbestos claims include 114


                                       15
<PAGE>

     claims that allege  exposure  from  clothing,  which the Company never
     manufactured.  One claim was settled for $17.85 where the Company was named
     as a defendant in silica related  matters during the nine months ended June
     30, 2005. No claims were settled where the Company was named as a defendant
     in asbestos  related matters during the nine months ended June 30, 2005. As
     of June 30, 2005,  the number of open claims where the Company was named as
     a defendant  in silica and asbestos  related  matters was 12,739 and 4,095,
     respectively.

     In addition to the above claims,  the Company may agree to pay a share
     of the  settlement  and defense costs in  particular  cases even though the
     Company is not named as a defendant because of agreements with prior owners
     of the brand  and/or  because  of  allegations  that Aearo has some risk of
     legal  liability  as a  successor  ("Additional  Claims").  During the nine
     months  ended  June 30,  2005,  Aearo  paid a total of  $1.67  million  for
     settlement, administrative and defense costs resulting in the settlement of
     4,325 silica and asbestos  claims that were settled between October 1, 2002
     and September 30, 2004  involving both claims in which Aearo was named as a
     defendant and Additional Claims.  During the period October 1, 2004 to June
     30,  2005 Aearo paid a total of $164.72  for three  additional  claims that
     were  settled  during that time period and paid a total of $0.4 million for
     administrative  and defense costs  involving both claims in which Aearo was
     named as a defendant and Additional Claims. In addition,  Aearo may receive
     the benefit of releases in some additional  cases settled by the AO Defense
     Group regardless of whether or not any claim was made against Aearo.

     The above  information  was based on data  provided by Simon  Peragine
     Smith, an outside law firm which tracks numbers of cases and settlements on
     behalf  of the  "AO  Defense  Group",  and  is  believed  to be  materially
     accurate.  This information may be subject to future adjustment in light of
     new  information  becoming  available.  The AO Defense Group is a voluntary
     association of current and former manufacturers of the "AO Safety" brand of
     respirators and certain of their insurers in which Aearo  participates  and
     through  which all of its  settlements  have been  handled in the  relevant
     years. Also, between October 1, 2004 and June 30, 2005, there may have been
     claims  settled  by and fully  funded by the  insurers  of  Eastern  Safety
     Equipment Co., Inc., a dissolved former subsidiary of Aearo.

     At June 30, 2005 and  September  30,  2004,  the Company has  recorded
     liabilities of approximately  $4.6 million and $5.4 million,  respectively,
     which  represents  reasonable  estimates  of its probable  liabilities  for
     product  liabilities  substantially  related to asbestos and silica-related
     claims as determined  by the Company in  consultation  with an  independent
     consultant.  The $0.8 million reduction in the reserve, net of new accruals
     which  added  to  the  reserve,  since  September  30,  2004  is  primarily
     attributed to the payment of $1.67  million,  as referenced  above,  to pay
     costs attributed to settlement,  administrative  and defense costs that had
     been  reached  over the  prior  two  year  time  period.  This  reserve  is
     re-evaluated  periodically and additional  charges or credits to results of
     operations may result as additional information becomes available.  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  2009 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.



                                       16
<PAGE>

8)   Segment Reporting

     The  Company   manufactures  and  sells  products  under  the  brand  names
     AOSafety(R),  E-A-R(R), Peltor(R) and SafeWaze(TM). These products are sold
     through  three  reportable  segments,  which 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,  fall  protection  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  Company's  Safety
     Prescription  Eyewear  segment  purchases  component  parts (lenses and the
     majority of its frames) from various suppliers,  grinds, shapes and applies
     coatings to the lenses in accordance with 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.  The factors used for  determining the
     Company's  reportable  segments were predominantly  based on the nature and
     type of product sold.

     Net Sales by Business Segment (dollars in thousands):


<TABLE>
<CAPTION>

                                                              Nine         Three          Six
                                                             Months       Months         Months
                                    Three Months Ended       Ended         Ended         Ended
                                         June 30,           June 30      June 30,      March 31,
                                    2005         2004         2005         2004           2004
                                         Successor                 Successor          Predecessor
<S>                                <C>        <C>           <C>         <C>            <C>
     Safety Products               $ 86,161   $    73,966   $  235,926  $    73,966    $   127,964
     Safety Prescription Eyewear     10,493        10,126       29,706       10,126         20,337
     Specialty Composites            16,544        13,034       47,805       13,034         21,278
                                    -------       -------       ------      -------        -------
     Total                         $113,198   $    97,126   $  313,437  $    97,126    $   169,579
                                    =======       =======      =======      =======        =======
</TABLE>



     Inter-segment  sales from the  Specialty  Composites  segment to the Safety
     Products segment totaled $1.1 million and $0.7 million for the three months
     ended June 30, 2005 and 2004,  respectively.  Inter-segment  sales from the
     Specialty  Composites  segment to the Safety Products  segment totaled $3.1
     million and $1.5  million  for the nine and six months  ended June 30, 2005
     and  March  31,  2004,  respectively.  The  inter-segment  sales  value  is
     determined at fully absorbed inventory cost at standard rates plus 25%. The
     Company  does not have a single  customer  in any of its  three  reportable
     segments that accounts for more than 10% of segment  revenues in any of the
     periods presented.



                                       17
<PAGE>

     Profit  (loss) by business  segment  and  reconciliation  to income  (loss)
     before income taxes (dollars in thousands):


<TABLE>
<CAPTION>

                                                                     Nine         Three          Six
                                                                    Months       Months         Months
                                           Three Months Ended       Ended         Ended         Ended
                                                June 30,           June 30      June 30,      March 31,
                                           2005         2004         2005         2004           2004
                                                Successor                 Successor          Predecessor
<S>                                       <C>        <C>           <C>         <C>            <C>
     Safety Products                      $ 18,526   $    16,122   $   46,374  $    16,122  |  $    23,704
     Safety Prescription Eyewear               275            37          (66)          37  |          (57)
     Specialty Composites                    3,504         2,623       10,455        2,623  |        2,855
                                            ------       -------       ------        ------        -------
     Segment profit                         22,305        18,782       56,763       18,782  |       26,502
                                                                                            |
     Depreciation                            3,125         3,006        8,131        3,006  |         5,931
     Amortization of intangibles             1,313           101        3,928          101  |          242
     Inventory purchase accounting              --        17,067           --       17,067  |           --
     Bond call premium                          --         1,532           --        1,532  |           --
     Restructuring                              --            --           --           --  |      (1,091)
     Interest                                5,856        10,292       16,785       10,292  |       10,836
                                            -------      -------       ------       ------- |      -------
     Income (loss) before income taxes      12,011   $   (13,216)  $   27,919  $   (13,216) |  $    10,584
                                            ======       ========      ======      ========       ========
</TABLE>



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



9)   Pension

     The following  table presents the  components of net periodic  pension cost
     for the three month periods ended June 30, 2004 and 2005,  and the nine and
     six month  periods  ended June 30,  2005 and March 31,  2004,  respectively
     (dollars in thousands):


<TABLE>
<CAPTION>

                                                                     Nine         Three          Six
                                                                    Months       Months         Months
                                           Three Months Ended       Ended         Ended         Ended
                                                June 30,           June 30      June 30,      March 31,
                                           2005         2004         2005         2004           2004
                                                Successor                 Successor          Predecessor
<S>                                       <C>        <C>           <C>         <C>            <C>
     Service cost                         $    364   $       335   $    1,089  $       335  | $       669
     Interest cost                             206           186          618          186  |         371
     Expected return on plan assets           (184)         (167)        (552)        (167) |        (332)
     Amortization of prior service cost         --             2           --            2  |           5
                                             ------       ------        -----         ----- |       -----
     Total                                $    386   $       356   $    1,155  $       356  | $       713
                                             ======       ======        =====         =====         =====
</TABLE>



     The Company previously  disclosed in its Annual Report on Form 10-K for the
     year ended  September 30, 2004, that it expected to contribute $1.2 million
     to its pension plan in 2005. As of June 30, 2005,  the Company has not made
     any  contributions  to its pension  plan and plans to  contribute a revised
     amount of $1.8 million in the fourth quarter of fiscal 2005.



                                       18
<PAGE>


10)  Dividend

     On May 5, 2005, the Company's  Board of Directors  declared and paid a cash
     dividend to the Company's  parent,  Aearo  Corporation,  the sole holder of
     common stock, of approximately  $35 million.  Aearo Corporation then paid a
     cash dividend to AC Safety Holding Corp.,  the Company's  ultimate  parent,
     who used the proceeds to make a partial  redemption of its preferred stock.
     The Company used available cash to fund the dividend.

11)  Summarized Financial Information

     The  Company's  8.25%  Senior  Subordinated  Notes  due 2012 are  fully and
     unconditionally  guaranteed, on a joint and several basis, by substantially
     all  of  the  Company's  wholly-owned  domestic  subsidiaries  ("Subsidiary
     Guarantors").  The  non-guarantor  subsidiaries  are the Company's  foreign
     subsidiaries.

     The following  financial  information  illustrates  the  composition of the
     combined  Subsidiary  Guarantors.  The Company  believes that the separate,
     complete  financial  statements  of the  respective  guarantors  would  not
     provide additional material  information which would be useful in assessing
     the  financial   composition  of  the  Subsidiary  Guarantors  (dollars  in
     thousands).

<TABLE>
<CAPTION>

Consolidated Statement of Operations (Unaudited)
Nine Months Ended June 30, 2005


                                                                        Successor
                                              -------------------------------------------------------------
                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  SubsidiariesSubsidiariesEliminationsConsolidated

<S>                                              <C>         <C>         <C>         <C>         <C>
     Net sales.................................  $234,381    $     --    $114,004    $ (34,948)  $ 313,437
     Cost of sales.............................   132,127          --      62,454      (34,824)    159,757
                                                  -------      ------      ------      -------     -------
       Gross profit............................   102,254          --      51,550         (124)    153,680

     Selling and administrative................    71,843       2,871      23,869           --      98,583
     Research and technical services...........     4,186          --       2,479           --       6,665
     Amortization..............................     2,774         194         960           --       3,928
     Other charges (income), net...............    13,686     (20,911)      7,025           --       (200)
                                                   ------     -------      ------       ------     -------
        Operating income (loss)................     9,765      17,846      17,217         (124)     44,704
     Interest expense (income).................    16,374      (2,172)      2,583           --      16,785
                                                  -------     -------      ------       ------     -------
     Income (loss) before income taxes.........    (6,609)     20,018      14,634         (124)     27,919
     Income tax provision (benefit)............   (11,984)      8,232       4,110           --         358
     Equity in subsidiaries' earnings..........    22,310      10,524                  (32,834)         --
                                                   -------    -------      ------       -------     ------
        Net income.............................  $ 27,685    $ 22,310    $ 10,524    $ (32,958)  $  27,561
                                                   ======     =======     =======       =======     ======
</TABLE>



                                       19
<PAGE>

<TABLE>
<CAPTION>

    Consolidated  Statement of  Operations  (Unaudited)
    Three Months Ended June 30, 2004



                                                                        Successor
                                               ------------------------------------------------------------
                                                                            Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  SubsidiariesSubsidiariesEliminationsConsolidated

<S>                                              <C>         <C>         <C>         <C>         <C>
     Net sales.................................  $ 72,522    $     --    $ 35,388    $ (10,784)  $  97,126
     Cost of sales.............................    52,065          --      26,893      (10,814)     68,144
                                                  -------       ------     ------      -------      ------
       Gross profit............................    20,457          --       8,495           30      28,982

     Selling and administrative................    20,797         344       7,008           --      28,149
     Research and technical services...........     1,251          --         715           --       1,966
     Amortization..............................        83          18          --           --         101
     Other charges (income), net...............     5,582      (6,743)      2,851           --       1,690
                                                  -------       ------      -----         ----      ------
        Operating income.......................    (7,256)      6,381      (2,079)          30      (2,924)
     Interest expense (income), net............    10,152        (399)        539           --      10,292
                                                   -------      ------     ------         ----     -------
     Income (loss) before income taxes.........   (17,408)      6,780      (2,618)          30     (13,216)
     Income tax provision (benefit)............    (2,875)      2,700       1,206           --       1,031
     Equity in subsidiaries' earnings..........       256      (3,824)                   3,568          --
                                                  --------     -------     -------      -------    --------
        Net income (loss)......................  $(14,277)   $    256    $ (3,824)   $   3,598   $ (14,247)
                                                  ========     =======     =======      =======    ========
</TABLE>

<TABLE>
<CAPTION>

     Consolidated Statement of Operations (Unaudited)
     Six Months Ended March 31, 2004



                                                                       Predecessor
                                               -------------------------------------------------------------
                                                                            Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  SubsidiariesSubsidiariesEliminationsConsolidated

<S>                                              <C>         <C>         <C>         <C>         <C>
     Net sales.................................  $122,913    $     --    $ 65,030    $ (18,364)  $ 169,579
     Cost of sales.............................    71,142          --      36,348      (18,434)     89,056
                                                  -------        ----      ------      -------     -------
       Gross profit............................    51,771          --      28,682           70      80,523

     Selling and administrative................    42,612         674      13,549           --      56,835
     Research and technical services...........     2,351          --       1,272           --       3,623
     Amortization..............................       168          74          --           --         242
     Other charges (income), net...............     6,815     (12,283)      4,962           --        (506)
     Restructuring charges (income)............    (1,091)         --          --           --      (1,091)
                                                   -------     -------     ------      -------      -------
        Operating income.......................       916      11,535       8,899           70      21,420
     Interest expense (income), net............    10,117        (983)      1,702           --      10,836
                                                   -------     -------     ------      -------      -------
     Income (loss) before income taxes.........    (9,201)     12,518       7,197           70      10,584
     Income tax provision (benefit)............    (4,642)      5,022       1,640           --       2,020
     Equity in subsidiaries' earnings..........    13,053       5,557                  (18,610)         --
                                                   -------     ------      ------      -------      ------
        Net income.............................  $  8,494    $ 13,053    $  5,557    $ (18,540)  $   8,564
                                                   ======      ======      ======      ========     ======
</TABLE>


                                       20
<PAGE>


<TABLE>
<CAPTION>
     Consolidated Statement of Operations (Unaudited)
     Three Months Ended June 30, 2005



                                                                        Successor
                                               -------------------------------------------------------------
                                                                            Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  Subsidiaries Subsidiaries Eliminations Consolidated

<S>                                              <C>         <C>         <C>         <C>         <C>
     Net sales.................................  $ 86,049    $     --    $ 40,402    $ (13,253)  $ 113,198
     Cost of Sales.............................    48,648          --      22,657      (13,181)     58,124
                                                   ------        -----     ------      -------     -------
        Gross profit...........................    37,401          --      7,745          (72)     55,074

     Selling and administrative................    25,628         344       8,200           --      34,172
     Research and technical services...........     1,401          --         833           --       2,234
     Amortization..............................       923          70         320           --       1,313
     Other charges (income), net...............     5,134      (7,547)      1,901           --        (512)
                                                   ------       ------     ------      -------     -------
        Operating income.......................     4,315       7,133       6,491          (72)     17,867
     Interest expense (income).................     5,687        (531)        700           --       5,856
                                                   ------       ------     ------      -------     -------
     Income (loss) before income taxes.........    (1,372)      7,664       5,791          (72)     12,011
     Income tax provision (benefit)............    (2,313)      3,140         742           --       1,569
     Equity in subsidiaries' earnings..........     9,573       5,049          --      (14,622)         --
                                                   ------      -------     ------      -------     -------
        Net income.............................  $ 10,514    $  9,573    $  5,049    $ (14,694)  $  10,442
                                                   ======       =====       =====      ========     ======
</TABLE>


                                       21
<PAGE>



     Consolidated Balance Sheet (Unaudited)
     June 30, 2005




<TABLE>
<CAPTION>
                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  Subsidiaries Subsidiaries Eliminations Consolidated

     Current Assets:
<S>                                              <C>         <C>         <C>         <C>         <C>
        Cash and cash equivalents..............  $  6,169    $    397    $  9,453    $      --   $  16,019
        Receivables, net.......................    39,813         229      20,511           --      60,553
        Inventories............................    33,091          --      11,766         (433)     44,424
        Deferred and prepaid expenses..........     4,533          --       1,069           --       5,602
                                                   ------       -----      ------      -------     -------
     Total current assets......................    83,606         626      42,799         (433)    126,598
                                                   ------       -----      ------      -------     -------
     Long Term Assets:
        Property plant and equipment...........    37,349          --      13,968           --      51,317
        Goodwill and other intangibles, net....    90,228     122,243      86,175           --     298,646
        Inter-company receivables (payables)...   (54,417)     94,199     (39,782)          --          --
        Investment in subsidiaries ............   242,966      67,292        (664)    (309,594)         --
        Other assets...........................    13,392          --          11           --      13,403
                                                  -------     -------     -------      --------    -------
     Total assets..............................  $413,124    $284,360    $102,507    $(310,027)  $ 489,964
                                                  =======     =======     =======     =========    =======
     Current Liabilities:
        Current portion of long term debt......  $  3,455    $     --    $     --    $      --   $   3,455
        Accounts payable and accrued
        liabilities............................    40,675         435      14,574           --      55,684
        Accrued interest.......................     3,067          --          --           --       3,067
        Income tax payables (receivables)......     2,012      (2,150)      2,085                    1,947
                                                  -------     -------     -------      --------    -------
     Total current liabilities.................    49,209      (1,715)     16,659           --      64,153

     Long Term Liabilities:
        Long term debt.........................   298,299          --          --           --     298,299
        Deferred income taxes..................     3,719      23,860      13,008           --      40,587
        Other liabilities......................    14,169          --          --           --      14,169
                                                  -------     -------     -------      --------    -------
     Total liabilities.........................   365,396      22,145      29,667           --     417,208

     Stockholder's Equity:
        Common.................................        --          --       4,222       (4,222)         --
        Paid in capital........................   101,640     267,796      41,865     (309,661)    101,640
        Accumulated deficit....................   (54,445)     (8,638)     36,695         (460)    (26,848)
        Accumulated other comprehensive income
        (loss).................................       533       3,057      (9,942)       4,316      (2,036)
                                                   -------     -------     -------      --------    -------
     Total stockholder's equity................    47,728     262,215      72,840     (310,027)     72,756
                                                  -------     -------     -------      --------    -------
     Total liabilities and stockholder's equity  $413,124    $284,360    $102,507    $(310,027)  $ 489,964
                                                  =======     =======     =======      ========    =======
</TABLE>


                                       22
<PAGE>


     Consolidated Balance Sheet
     September 30, 2004



<TABLE>
<CAPTION>

                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  Subsidiaries Subsidiaries Eliminations Consolidated

     Current Assets:
<S>                                              <C>         <C>         <C>         <C>         <C>
        Cash and cash equivalents..............  $ 18,309    $    140    $  9,275    $      --   $  27,724
        Receivables, net.......................    34,823          --      19,336           --      54,159
        Inventories............................    29,956          --      11,202         (309)     40,849
        Deferred and prepaid expenses..........     3,014          --       1,132           --       4,146
                                                  -------     -------     -------      --------    -------
     Total current assets......................    86,102         140      40,945         (309)    126,878
                                                  -------     -------     -------      --------    -------
     Long Term Assets:
        Property plant and equipment...........    40,040          --      14,710           --      54,750
        Goodwill and other intangibles, net....   134,567     131,786      53,247           --     319,600
        Inter-company receivables (payables)...    64,478     (12,147)    (52,331)          --          --
        Investment in subsidiaries ............   154,350      40,981        (713)    (194,618)         --
        Other assets...........................    15,133          --          11           --      15,144
                                                  -------     -------     -------      --------    -------
     Total Assets..............................  $494,670    $160,760    $ 55,869    $(194,927)  $ 516,372
                                                  =======     =======      ======     =========    =======
     Current Liabilities:
        Current portion of long term debt......  $  1,618    $     --    $     21    $      --   $   1,639
        Accounts payable and accrued
        liabilities............................    32,623         577      13,530           --      46,730
        Accrued interest.......................     6,996          --          --           --       6,996
        Income tax payables (receivables)......     2,324      (2,317)      1,641           --       1,648
                                                  -------     -------     -------      --------    -------
     Total current liabilities.................    43,561      (1,740)     15,192           --      57,013

     Long Term Liabilities:
        Long term debt.........................   302,662          --         180           --     302,842
        Deferred income taxes..................    58,073          --       1,626           --      59,699
        Other liabilities......................    14,726          --          --           --      14,726
                                                  -------     -------     -------      --------    -------
     Total liabilities.........................   419,022      (1,740)     16,998           --     434,280

     Stockholder's Equity:
        Common.................................        --          --       7,396       (7,396)         --
        Paid in capital........................   101,610     167,519      12,280     (179,799)    101,610
        Accumulated deficit....................   (24,824)     (8,664)     26,168      (12,095)    (19,415)
        Accumulated other comprehensive income
        (loss).................................    (1,138)      3,645      (6,973)       4,363        (103)
                                                  -------     -------     -------      --------    -------
     Total stockholder's equity................    75,648     162,500      38,871     (194,927)     82,092
                                                  -------     -------     -------      --------    -------
     Total liabilities and stockholder's equity  $494,670    $160,760    $ 55,869    $(194,927)  $ 516,372
                                                 ========     =======      ======     =========    =======
</TABLE>


                                       23
<PAGE>


     Consolidating Statement of Cash Flows (Unaudited)
     Nine Months Ended June 30, 2005



<TABLE>
<CAPTION>
                                                                  Successor
                                                -------------------------------------------------
                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  Subsidiaries Subsidiaries Consolidated

<S>                                              <C>         <C>         <C>         <C>
     Net cash provided by operating activities.  $ 16,140    $ 12,605    $  2,795    $  31,540

     Net cash used for investing activities....    (3,508)         --      (1,832)      (5,340)

     Net cash provided by (used for) financing
        activities.............................   (24,768)    (11,660)          -      (36,428)

     Effect of exchange rate on cash...........        (4)       (688)       (785)      (1,477)
                                                   -------     -------     ------       ------
     Increase (decrease) in cash and cash
        equivalents............................   (12,140)        257         178      (11,705)

     Cash and cash equivalents at the
        beginning of the period................    18,309         140       9,275       27,724
                                                   ------      -------     ------       ------
     Cash and cash equivalents at the end of
        the period.............................  $  6,169    $    397    $  9,453    $  16,019
                                                   ======      =======     ======       ======

     Consolidating Statement of Cash Flows (Unaudited)
     Three Months Ended June 30, 2004

</TABLE>


<TABLE>
<CAPTION>
                                                                 Predecessor
                                               -------------------------------------------------
                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  SubsidiariesSubsidiariesConsolidated

<S>                                              <C>         <C>         <C>         <C>
     Net cash provided by operating activities.  $  5,096    $  5,352    $  3,346    $  13,794

     Net cash used for investing activities....    (2,196)         --        (614)      (2,810)

     Net cash provided by (used for) financing
        activities.............................    (2,814)     (5,796)      5,025       (3,585)

     Effect of exchange rate on cash...........     2,051        (210)     (2,699)        (858)
                                                   -------     -------      --------    -------
     Increase (decrease) in cash and cash
        equivalents............................     2,137        (654)      5,058        6,541

     Cash and cash equivalents at the
        beginning of the period................       893         751       3,669        5,313
                                                   ------      ------     -------       ------

     Cash and cash equivalents at the end of
        the period.............................  $  3,030    $     97    $  8,727    $  11,854
                                                   ======      ======     =======       ======
</TABLE>


                                       24
<PAGE>


     Consolidating Statement of Cash Flows (Unaudited)
     Six Months Ended March 31, 2004



<TABLE>
<CAPTION>
                                                                 Predecessor
                                               -------------------------------------------------
                                                                           Non-
                                                  Aearo     Guarantor   Guarantor
                                                Company I  Subsidiaries Subsidiaries Consolidated

     Net cash provided by (used for) operating
<S>                                              <C>         <C>         <C>         <C>
        activities.............................  $ (1,359)   $  6,407    $  3,987    $    9,035

     Net cash used for investing activities....    (3,326)         --      (1,668)      (4,994)

     Net cash provided by (used for) financing
        activities.............................     3,255      (6,840)     (1,655)      (5,240)

     Effect of exchange rate on cash...........       779         978      (2,546)        (789)
                                                    -----       -----      ------        ------
     Increase (decrease) in cash and cash
        equivalents............................      (651)        545      (1,882)      (1,988)

     Cash and cash equivalents at the
        beginning of the period................     1,544         206       5,551         7,301
                                                  -------      ------       -----       -------
     Cash and cash equivalents at the end of
        the period.............................  $    893    $    751    $  3,669    $    5,313
                                                    =====      ======       =====       =======
</TABLE>


                                       25
<PAGE>



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

This  report  contains  forward-looking  statements  within  the  meaning of the
federal  securities laws.  Statements that are not historical  facts,  including
statements about the Company's  beliefs and  expectations,  are  forward-looking
statements. Forward-looking statements included statements preceded by, followed
by or that  include the words  "may,"  "could,"  "would,"  "should,"  "believe,"
"expect,"  "anticipate,"  "plan," "estimate,"  "target," "project," "intend," or
similar  expressions.   These  statements  include,  among  others,   statements
regarding the Company's  expected  business outlook,  anticipated  financial and
operating  results,  the Company's  business strategy and means to implement the
strategy,  the  Company's  objectives,  the amount and timing of future  capital
expenditures,  future  acquisitions,  the likelihood of the Company's success in
developing and introducing  new products and expanding its business,  the timing
of the introduction of new and modified  products or services,  financing plans,
working capital needs and sources of liquidity.

Forward-looking  statements  are  only  predictions  and are not  guarantees  of
performance. These statements are based on management's beliefs and assumptions,
which  in  turn  are  based  on  currently  available   information.   Important
assumptions  relating to the forward-looking  statements include,  among others,
assumptions  regarding demand for our products,  the cost, timing and success of
product upgrades and new product  introductions,  expected  pricing levels,  the
timing and cost of planned capital  expenditures and expected synergies relating
to  acquisitions.  These  assumptions  could prove  inaccurate.  Forward-looking
statements  also  involve  risks and  uncertainties,  which could  cause  actual
results  to  differ  materially  from  those  contained  in any  forward-looking
statements. Many of these factors are beyond the Company's ability to control or
predict. You should read this report in conjunction with the more detailed risks
included in the  Company's  Annual Report on Form 10-K for the fiscal year ended
September 30,2004.

The Company believes these forward-looking  statements are reasonable;  however,
undue reliance should not be placed on any forward-looking statements, which are
based on current expectations. Further, forward-looking statements speak only as
of the date they are made,  and  except as  otherwise  required  by the  federal
securities  laws,  the Company  undertakes  no  obligation to update any of them
publicly in light of new information or future events.

Merger Agreement

On March 10, 2004, Aearo Corporation  ("Parent"),  the Company's parent, entered
into a merger  agreement  ("Merger  Agreement") with AC Safety Holding Corp. and
its subsidiary,  AC Safety  Acquisition  Corp. that closed on April 7, 2004 (the
"Merger").  Pursuant  to the  terms of the  Merger  Agreement,  on April 7, 2004
("Acquisition  Date"),  AC Safety  Acquisition  Corp. merged with and into Aearo
Corporation  with  Aearo  Corporation  surviving  the  Merger as a  wholly-owned
subsidiary  of  AC  Safety  Holding  Corp.  The  aggregate  purchase  price  was
approximately  $409.3  million,  including  fees and  expenses.  The  Merger was
financed with approximately  $303.7 million of debt as discussed in Note 6, $3.7
million of which was assumed, $4.3 million of cash and $101.3 million of equity.
The Company  continues to be wholly-owned by Aearo Corporation after the Merger.
The  purpose  of the  Merger  was to  effect  a change  of  control  from  Aearo
Corporation to the Company's ultimate parent AC Safety Holding Corp.

Approximately  $87.0 million of proceeds from the Merger was  distributed to our
Parent  and used to pay the  shareholders  of the  Parent to effect  the  merger
transaction.  An additional $14.3 million  distributed to our Parent was used to
pay the outstanding debt of the Parent as of April 7, 2004.



                                       26
<PAGE>


The  Merger  was  a  business   combination   under  SFAS  No.  141,   "Business
Combinations," and the purchase price paid for our Parent was pushed down to the
Company.  Accordingly,  the results of operations  subsequent to the Acquisition
Date are  presented  on a  different  basis of  accounting  than the  results of
operations  prior to the  Acquisition  Date,  and  therefore,  are not  directly
comparable.  The sale was accounted for as if it had occurred on March 31, 2004,
as management  determined that results of operations were not significant and no
material  transactions occurred during the period from April 1, 2004 to April 7,
2004.



Results of  Operations  -- Three  Months  Ended June 30, 2005  Compared to Three
Months Ended June 30, 2004.

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



                              Results of Operations
                             (Dollars in Thousands)




<TABLE>
<CAPTION>
                                                                Three Months Ended June 30,
                                                     2005             %             2004            %
 Net sales:
<S>                                         <C>                   <C>     <C>                    <C>
   Safety Products                          $       86,161        76.1    $       73,966         76.2
   Safety Prescription Eyewear                      10,493         9.3            10,126         10.4
   Specialty Composites                             16,544        14.6            13,034         13.4
                                                   -------     -------           -------        -----
     Total net sales                               113,198       100.0            97,126        100.0
 Cost of sales                                      58,124        51.3            68,144         70.2
                                                   -------     -------           -------        -----
 Gross profit                                       55,074        48.7            28,982         29.8

 Operating expenses:
   Selling and administrative                       34,172        30.1            28,149         29.0
   Research and technical services                   2,234         2.0             1,966          2.0
   Amortization                                      1,313         1.2               101          0.1
   Other charges (income), net                        (512)       (0.4)            1,690          1.7
                                                   -------     -------           -------        -----
     Total operating expense                        37,207        32.9            31,906         32.8
   Operating income (loss)                          17,867        15.8            (2,924)        (3.0)
   Interest expense, net                             5,856         5.2            10,292         10.6
                                                   -------     -------           -------        -----
     Income (loss) before income taxes              12,011        10.6           (13,216)       (13.6)
   Provision for income taxes                        1,569         1.4             1,031          1.1
                                                   -------     -------           -------        -----
     Net income (loss)                        $     10,442         9.2    $      (14,247)       (14.7)
                                                  ========       ======          ========       ======
</TABLE>


Net sales for the three  months  ended June 30, 2005  increased  16.6% to $113.2
million from $97.1 million in the three months ended June 30, 2004. The increase
in net sales was primarily  driven by organic growth in the Safety  Products and
Specialty Composites segments and foreign currency translation.  The weakness of
the U.S.  dollar  favorably  impacted  net  sales by $1.8  million.  The  Safety
Products  segment net sales for the three months  ended June 30, 2005  increased
16.5% to $86.2  million  from $74.0  million in the three  months ended June 30,
2004. The increase in net sales resulted from a 14.2% increase in organic growth
and a 2.3% increase due to foreign currency translation. Organic sales



                                       27
<PAGE>

for the Safety Products segment, defined as net sales less the impact of foreign
currency  translation and acquisitions,  have increased for thirteen consecutive
quarters,  when  compared  to the same  quarter of the prior  year.  The Company
attributes  this growth to an improved  economy and its ability to  successfully
introduce  new  products  into the  markets it serves.  The Safety  Prescription
Eyewear  segment net sales for the three  months  ended June 30, 2005  increased
3.6% to $10.5  million  from $10.1  million for the three  months ended June 30,
2004.  The increase in net sales resulted from a 2.8% increase in organic growth
and a 0.8% increase from foreign currency translation. Specialty

Composites'  net sales for the three months ended June 30, 2005 increased  26.9%
to $16.5  million from $13.0  million in three  months ended June 30, 2004.  The
increase was  primarily  driven by market  share gains and an improving  economy
driving  volume  increases in the  precision  electronics,  truck,  aircraft and
industrial markets.  The Company tracks measures such as computer and electronic
production  data and truck  build rates to gauge the  momentum in the  Specialty
Composites  segment,  which has been  experiencing  positive sales trends in the
last eight quarters.

Gross profit for the three months ended June 30, 2005 increased to $55.1 million
from $29.0 million for the three months ended June 30, 2004. Gross profit in the
three months ended June 30, 2004 was  negatively  impacted by the  non-recurring
charge of $17.1  million  resulting  from the write-up in inventory  required by
SFAS No. 141 on the merger date and subsequent sale of such inventory. Excluding
the effects of the SFAS No. 141 adjustment,  gross profit as a percentage of net
sales for the three  months  ended June 30,  2005 was 48.7% as compared to 47.4%
for the three months ended June 30, 2004. The 130 basis point improvement in the
gross  profit  percentage  is  primarily  due to product  mix and  productivity,
accounting for approximately 100 basis points,  with the remainder due primarily
to the impact of foreign  currency  translation.  The Company's gross profit may
not be comparable to the gross profit of other entities who record  shipping and
handling  expenses as a component of cost of sales.  The Safety Products segment
gross profit in the three months  ended June 30, 2005  increased  20.0% to $43.3
million from $36.1 million in the three months ended June 30, 2004. The increase
in gross profit is  primarily  due to an  improvement  in sales volume due to an
improved  economy  and the  Company's  ability  to  successfully  introduce  new
products into the markets it serves, productivity improvements and the favorable
impact of foreign currency  translation.  Volume and  productivity  improvements
contributed  approximately  16.9% of the  increase in gross  profit with foreign
currency translation contributing the remaining 3.1% of the increase. The Safety
Prescription  Eyewear  segment  gross  profit in the three months ended June 30,
2005  increased 0.4% to $4.6 million from $4.5 million in the three months ended
June 30, 2004. The increase was primarily the result of a 3.6%  improvement  due
to sales volume and a 3.2% reduction due to product mix.  Specialty  Composites'
gross  profit in the three months  ended June 30, 2005  increased  33.3% to $7.2
million from $5.4 million in the three months ended June 30, 2004.  The increase
was  primarily  driven by market  share gains and an improving  economy  driving
volume increases in the precision  electronics,  truck,  aircraft and industrial
markets,   aided  by  productivity   and  improved   manufacturing   absorption.
Approximately 26.9% of the increase in the Specialty Composites gross profit was
due to volume  increases  with the remaining 6.4% of the increase due to product
mix.

Operating  expenses for the three months ended June 30, 2005 increased  16.6% to
$37.2 million from $31.9  million for the three months ended June 30, 2004.  The
increase in operating  expenses was  primarily  driven by an increase in selling
and  administrative,   amortization  expense,  restructuring  and  research  and
technical  partially offset by other charges,  net.  Selling and  administrative
expenses  included  approximately  $2.1 million due to variable selling expenses
such as freight,  commissions,  travel and marketing,  $1.5 million of legal and
consulting fees related to strategic  alternatives such as acquisitions and debt
financing and a $0.4 million  increase due to foreign currency  translation.  In
addition,  in the  three  months  ended  June 30,  2004,  the  Company  adjusted



                                       28
<PAGE>

approximately $1.0 million of expenses incurred as a result of the merger due to
the  allocation  of purchase  price as  required  by SFAS No.  141.  Selling and
administrative  expenses as a percentage of net sales increased to 30.1% for the
three months ended June 30, 2005 as compared to 29.0% for the three months ended
June 30, 2004.  Amortization expense increased approximately $1.2 million due to
the allocation of purchase price to finite lived  intangible  assets required by
SFAS No. 141 due to the Merger Agreement.  Other charges (income),  net included
approximately  $0.5 million  favorable  impact of foreign  currency  transaction
expenses in the three  months ended June 30, 2005 as compared to $1.7 million of
expense in the three months ended June 30, 2004,  which  included  approximately
$1.5 million of expense to call the Company's 12.5% senior subordinated notes to
effect the Merger.

Interest  expense,  net, for the three  months ended June 30, 2005  decreased to
$5.9  million  from $10.3  million  for the three  months  ended June 30,  2004.
Interest expense in the three months ended June 30, 2004 included  approximately
$4.0 million of expense related to the write off of deferred  financing fees and
approximately  $1.0  million  of  incremental  interest  expense  related to the
redemption of the 12.5% senior subordinated notes as a result of the Merger.

The  provision  for  income  taxes  for the three  months  ended  June 30,  2005
increased  to $1.6 million from $1.0 million for the three months ended June 30,
2004. The 2005 estimated  annual  effective income tax rate was lowered to 29.5%
in the three months ended June 30, 2005,  which reduced the provision for income
taxes by $1.6 million.

The following  discussion provides a comparison of the results of operations for
the successor  company and that of the  predecessor  company for the nine months
ended June 30, 2005 and 2004,  respectively.  The  discussion  is  provided  for
comparative  purposes  only,  but the value of such  comparison  may be limited.
Material  variances  that are caused by the different  basis of accounting  have
been disclosed where applicable.


                                       29
<PAGE>


<TABLE>
<CAPTION>
                              Results of Operations
                             (Dollars in Thousands)




                                                                Nine Months Ended June 30,
                                                   2005 (1)           %           2004 (1)           %
     Net sales:                                          Successor                     Predecessor
<S>                                              <C>                   <C>     <C>                    <C>
        Safety Products                          $      235,926        75.3  |  $      201,930         75.7
        Safety Prescription Eyewear                      29,706         9.5  |          30,463         11.4
        Specialty Composites                             47,805        15.2  |          34,312         12.9
                                                        -------     -------  |          -------        -----
           Total net sales                              313,437       100.0  |         266,705        100.0
     Cost of sales                                      159,757        51.0  |         157,200         58.9
                                                        -------     -------  |         -------        -----
     Gross profit                                       153,680        49.0  |         109,505         41.1
                                                        -------     -------  |         -------        -----
     Operating expenses:                                                     |
        Selling and administrative                       98,583        31.5  |          84,984         31.9
        Research and technical services                   6,665         2.1  |           5,589          2.1
        Amortization                                      3,928         1.3  |             343          0.1
        Other charges (income), net                        (200)       (0.1) |           1,184          0.4
        Restructuring                                        --          --  |          (1,091)        (0.4)
                                                        -------     -------  |         -------        -----
           Total operating expense                      108,976        34.8  |          91,009         34.1
     Operating income                                    44,704        14.2  |          18,496          6.9
     Interest expense, net                               16,785         5.3  |          21,128          7.9
                                                        -------     -------  |         -------        -----
        Income (loss) before income taxes                27,919         8.9  |          (2,632)        (1.0)
     Provision for income taxes                             358         0.1  |           3,051          1.1
                                                        -------     -------  |          -------        -----
        Net income (loss)                        $       27,561         8.8  |  $       (5,683)        (2.1)
                                                        =======       =====             =======       ======
</TABLE>

     (1) Reflects a new basis of  accounting  subsequent to April 7, 2004 due to
         the Merger.



     Net sales for the nine months ended June 30, 2005 increased 17.5% to $313.4
     million from $266.7  million in the nine months  ended June 30,  2004.  The
     increase in net sales was primarily  driven by organic growth in the Safety
     Products  and   Specialty   Composites   segments   and  foreign   currency
     translation.  The weakness of the U.S. dollar favorably  impacted net sales
     by $7.0 million.  The Safety Products segment net sales for the nine months
     ended June 30, 2005  increased  16.8% to $235.9 million from $201.9 million
     in the nine months ended June 30, 2004.  The increase in net sales resulted
     from a 13.5%  increase in organic growth and a 3.3% increase due to foreign
     currency  translation.  Organic  sales  for the  Safety  Products  segment,
     defined as net sales less the impact of foreign  currency  translation  and
     acquisitions,  have  increased  for  thirteen  consecutive  quarters,  when
     compared to the same quarter of the prior year. The Company attributes this
     growth to an improved economy and its ability to successfully introduce new
     products  into the  markets it  serves.  The  Safety  Prescription  Eyewear
     segment net sales for the nine months ended June 30, 2005 decreased 2.5% to
     $29.7  million from $30.5  million for the nine months ended June 30, 2004.
     The  decrease  in  net  sales  resulted  from a 3.3%  reduction  in  volume
     partially  offset  by 0.8%  increase  from  foreign  currency  translation.
     Specialty  Composites'  net sales for the nine  months  ended June 30, 2005
     increased  39.3% to $47.8  million from $34.3  million in nine months ended
     June 30, 2004. The increase was primarily  driven by market share gains and
     an




                                       30
<PAGE>

     improving   economy   driving   volume   increases  in  the  precision
     electronics,  truck,  aircraft and industrial  markets.  The Company tracks
     measures such as computer and  electronic  production  data and truck build
     rates to gauge the momentum in the Specialty Composites segment,  which has
     been experiencing positive sales trends in the last eight quarters.

     Gross profit for the nine months ended June 30, 2005  increased  40.3%
     to $153.7  million  from $109.5  million for the nine months ended June 30,
     2004.  Gross profit in the nine months  ended June 30, 2004 was  negatively
     impacted by the  non-recurring  charge of $17.1 million  resulting from the
     write-up  in  inventory  required  by SFAS No. 141 on the  merger  date and
     subsequent  sale of such  inventory.  Excluding the effects of the SFAS No.
     141  adjustment,  gross  profit as a  percentage  of net sales for the nine
     months  ended  June 30,  2005 was 49.0% as  compared  to 47.5% for the nine
     months ended June 30, 2004.  The 150 basis point  improvement  in the gross
     profit  percentage  is  primarily  due to  product  mix  and  productivity,
     accounting  for  approximately  120 basis  points,  with the  remainder due
     primarily  to the impact of foreign  currency  translation.  The  Company's
     gross profit may not be  comparable  to the gross profit of other  entities
     who record shipping and handling  expenses as a component of cost of sales.
     The Safety Products  segment gross profit in the nine months ended June 30,
     2005  increased  20.9% to $119.5  million  from  $98.9  million in the nine
     months ended June 30, 2004.  The increase in gross profit is primarily  due
     to an  improvement  in sales  volume  due to an  improved  economy  and the
     Company's  ability to successfully  introduce new products into the markets
     it serves,  productivity  improvements  and the favorable impact of foreign
     currency  translation.  Volume and  productivity  improvements  contributed
     approximately  19.8% of the increase in gross profit with foreign  currency
     translation  contributing  the remaining  1.0% of the increase.  The Safety
     Prescription  Eyewear segment gross profit in the nine months ended June 30
     2005  decreased 6.3% to $13.3 million from $14.2 million in the nine months
     ended  June 30,  2004.  The  decrease  was  primarily  the result of a 2.5%
     reduction  due to a decrease in sales  volume and a 3.9%  reduction  due to
     product mix.  Specialty  Composites'  gross profit in the nine months ended
     June 30, 2005  increased  52.9% to $20.8  million from $13.6 million in the
     nine months ended June 30,  2004.  The  increase  was  primarily  driven by
     market share gains and an improving economy driving volume increases in the
     precision  electronics,  truck,  aircraft and industrial markets,  aided by
     productivity and improved manufacturing absorption.  Approximately 39.3% of
     the  increase in the  Specialty  Composites  gross profit was due to volume
     increases with the remaining 14.3% of the increase due to product mix.

     Operating  expenses for the nine months ended June 30, 2005  increased
     19.7% to $109.0  million from $91.0  million for the nine months ended June
     30, 2004.  The increase in operating  expenses was  primarily  driven by an
     increase in selling and administrative, amortization expense, restructuring
     and research and technical partially offset by other charges,  net. Selling
     and  administrative  expenses  included  approximately  $2.2 million due to
     performance based incentives related to the increase in sales volume,  $2.0
     million related to variable marketing programs and travel, $1.6 million due
     to foreign  currency  translation,  $1.8  million  related  to freight  and
     distribution  with the remaining  increase  consistent with the increase in
     sales volume.  Selling and  administrative  expenses as a percentage of net
     sales improved to 31.5% for the nine months ended June 30, 2005 as compared
     to 31.9% for the nine  months  ended June 30,  2004.  Amortization  expense
     increased  approximately  $3.6  million due to the  allocation  of purchase
     price to finite lived intangible assets required by SFAS No. 141 due to the
     Merger  Agreement.  The decrease in other  charges,  net was  attributed to
     foreign  currency  transaction  expenses in the nine months  ended June 30,
     2005 as compared to $1.2  million of expense in the nine months  ended June
     30, 2004, which included  approximately $1.5 million of expense to call the
     Company's  12.5%  senior  subordinated  notes to  effect  the  merger.  The
     restructuring  provision  adjustment  of $1.1 million of income in the nine
     months ended June 30, 2004 was the result of a change in estimate  relating
     to non-cancelable leases.



                                       31
<PAGE>

     Interest  expense,  net,  for the nine  months  ended  June  30,  2005
     decreased  to $16.8  million  from $21.1  million for the nine months ended
     June 30,  2004.  Interest  expense in the nine  months  ended June 30, 2004
     included  approximately $4.0 million of expense related to the write off of
     deferred  financing  fees and  approximately  $1.0  million of  incremental
     interest expense related to the redemption of the 12.5% senior subordinated
     notes as a result of the Merger.

     The provision for income taxes for the nine months ended June 30, 2005
     decreased  to $0.4 million from $3.1 million for the nine months ended June
     30, 2004.  At September 30, 2004,  the Company's net operating  losses were
     partially offset by a valuation  allowance of $7.5 million.  During the six
     month  period  ended March 31, 2005,  management  determined  that based on
     current  domestic  operating  results,  it is more  likely  than  not  that
     domestic net operating  losses will be realized and  consequently  reversed
     the  $7.5  million  valuation  allowance.  The  reversal  of the  valuation
     allowance reduced the expected annual effective tax rate.

     Effects of Changes in Exchange Rates

     In  general,  the  Company's  results of  operations  are  affected by
     changes in exchange rates. Subject to market conditions, the Company prices
     its  products  in Europe  and Canada in local  currency.  While many of the
     Company's  selling and  distribution  costs are also  denominated  in these
     currencies,  a large portion of product costs are U.S. Dollar  denominated.
     As a result,  a decline in the value of the U.S.  Dollar  relative to other
     currencies can have a favorable impact on the profitability of the Company,
     and an  increase  in the value of the U.S.  Dollar  relative to these other
     currencies can have a negative effect on the  profitability of the Company.
     The Company's  Swedish  operations are also affected by changes in exchange
     rates relative to the Swedish Krona. In contrast to the above, 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,  from time to time, will utilize
     forward  foreign  currency  contracts  and  other  hedging  instruments  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 results of the Company's operations.

     Liquidity and Capital Resources

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

     The Company's  debt  structure  includes:  (a) $175.0 million of 8.25%
     Senior Subordinated Notes ("8.25% Notes") due 2012, which are publicly held
     and redeemable at the option of the Company, in whole or in part at various
     redemption  prices,  (b) up to an  aggregate  of $175.0  million  under its
     Credit  Agreement  with various banks  comprised of (i) a secured term loan
     facility  consisting of loans  providing  for up to $125.0  million of term
     loans  (collectively  the "Term  Loans")  with a portion  of the Term Loans
     denominated in Euros, (ii) a secured revolving credit facility  ("Revolving
     Credit Facility")  providing for up to $50.0 million of revolving loans for
     general corporate purposes, and (iii) an uncommitted  incremental term loan
     facility of up to $75.0 million for acquisitions (collectively, the "Senior
     Bank Facilities").  Since the Acquisition Date, the Company's debt has been
     negatively impacted by $ 0.3 million related to the fluctuation of the Euro
     relative to the U.S dollar as of June 30,  2005.  The Company does not plan



                                       32
<PAGE>

     to take any measure to minimize  the  foreign  exchange  impact of its Euro
     denominated   debt.  The  amounts   outstanding  on  the  Term  Loans  were
     approximately  $123.8  million  and  $126.0  million  at June 30,  2005 and
     September 30, 2004,  respectively.  There were no amounts outstanding under
     the  Revolving  Credit  Facility at June 30, 2005 and  September  30, 2004,
     respectively.  The Revolving  Credit Facility  provides for the issuance of
     letters of credit in an aggregate face amount of up to $15.0  million.  The
     Company  had  approximately  $1.4  million  and $1.6  million of letters of
     credit  outstanding at September 30, 2004 and June 30, 2005,  respectively.
     The Term Loans amortize quarterly over a seven-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 April 7, 2010. The Term
     Loans mature on April 7, 2011.  Effective  December  31, 2004,  the Company
     received a 0.25%  reduction in the interest rate paid on its Term Loans for
     meeting certain financial covenants. The Company was in compliance with all
     financial covenants and restrictions as of June 30, 2005.

     On April 28, 2005, the Company  amended its credit  agreement to allow
     the Company to make, prior to September 30, 2005, up to $35 million of cash
     distributions to Aearo Corporation,  its parent corporation for the purpose
     of paying cash dividends to AC Safety Holding Corp., its parent, to be used
     by AC Safety Holding Corp.  primarily to redeem,  pro rata, its outstanding
     preferred shares and to pay accrued  dividends on the preferred  shares. In
     addition,  the  amendment (i) modified the amount of the  incremental  Term
     Loan  commitment  from $60.0 million to $75.0 million (ii)  eliminated  the
     termination date for the incremental Term Loan commitment and (iii) allowed
     for incremental Term Loans in Euros.

     On May 5, 2005, the Company's  Board of Directors  declared a cash dividend
     of  approximately  $35 million to be paid to the  Company's  parent,  Aearo
     Corporation,  the  sole  holder  of  common  stock.  On May 7,  2005  Aearo
     Corporation  paid a cash dividend to AC Safety Holding Corp., the Company's
     ultimate parent,  who used the proceeds to make a partial redemption of its
     preferred stock. The Company used available cash to fund the dividend.

     The Company typically makes capital  expenditures  related primarily to the
     maintenance  and  improvement of  manufacturing  facilities.  The Company's
     principal  source of cash to fund these capital  requirements  is cash from
     operations. The Company spent $5.4 million and $7.8 million,  respectively,
     for capital  expenditures for the nine months ended June 30, 2005 and 2004,
     respectively.  The Company  anticipates  it will spend  approximately  $9.5
     million for capital  expenditures  in its fiscal year ending  September 30,
     2005.

     The Company's net cash provided by operating activities for the nine months
     ended June 30, 2005 totaled  $31.5 million as compared to $22.8 million for
     the nine months  ended June 30,  2004.  The  increase  of $8.7  million was
     primarily due to a $10.9  million  improvement  in net income  adjusted for
     non-cash charges  (depreciation,  amortization,  deferred taxes and other),
     partially offset by a $2.2 million reduction from the net changes in assets
     and liabilities.

     Net cash used for investing activities was $5.3 million for the nine months
     ended June 30, 2005 as compared to $7.8  million for the nine months  ended
     June 30, 2004.  The decrease in net cash used by  investing  activities  is
     primarily attributed to reduced spending for property, plant and equipment.

     Net cash used for financing  activities  for the nine months ended June 30,
     2005 was $36.4 million compared with $8.8 million for the nine months ended
     June 30, 2004. The change is primarily due to the cash dividend paid to our
     Parent as mentioned above.


                                       33
<PAGE>

     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. To
     develop the expected  long-term  rate of return on assets  assumption,  the
     Company considered  historical returns and future  expectations for returns
     for each asset class, as well as the target asset allocation of the pension
     portfolio. Over the 11 year period ended September 30, 2004, the returns on
     the  portfolio,  assuming  it was  invested  at the  current  target  asset
     allocation  in prior  periods,  would have been a compound  annual  average
     return of 9.3%.  Considering  this  information and the potential for lower
     future returns,  the Company  selected an 8.0% rate of return on plan asset
     assumption. Actual asset returns for the Company's pension plan improved in
     the last  two  fiscal  years  after  two  years of  negative  returns.  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 annual pension expense. The
     discount rate was also  unchanged at 6.0% for the year ended  September 30,
     2004.  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 $0.1
     million impact on annual 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 2004.
     The following benefit payments,  which reflect expected future service,  as
     appropriate, are expected to be paid (in thousands of dollars):



     Fiscal year 2005                             $   1,121
     Fiscal year 2006                                   466
     Fiscal year 2007                                   618
     Fiscal year 2008                                   830
     Fiscal year 2009                                 1,214
     Fiscal year 2010 - 2014                          6,784


     The  Company's  business  is  affected by  macroeconomic  activity,  mainly
     manufacturing output in developed nations. In addition, significant changes
     in product mix and volume can impact the  Company's  liquidity  and capital
     resources in both the short and long term. As such, the Company's liquidity
     and capital  resources  are more  likely to be  impacted  by  macroeconomic
     factors.  The  Company  believes  that  its  disciplined  approach  to cost
     control,  its  diversification  into  consumer  and other  channels and the
     available capacity on its revolving credit facility will enable the Company
     to  maintain  adequate  liquidity  and  capital  resources  in an  economic
     downturn.  The  introduction  of new  products  is  likely to  continue  to
     favorably  impact  liquidity  and capital  resources in periods of economic
     growth  although there are no assurances that these trends will continue 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,  capital
     expenditures  and debt service  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.



                                       34
<PAGE>

     Product Liability Claims

     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.
     Many of these claims are covered by the Asset  Transfer  Agreement  entered
     into on June 13,  1995 by the  Company  and Aearo  Corporation,  on the one
     hand,  and  Cabot   Corporation  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 Aearo Corporation makes an annual
     payment of $400,000 to Cabot,  the Sellers agreed to retain,  and Cabot and
     the  Sellers  agreed to defend  and  indemnify  Aearo  Corporation  and its
     subsidiaries  against, any liability or obligation relating to or otherwise
     arising under any proceeding or other claim against Aearo  Corporation  and
     its subsidiaries 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,  Aearo
     Corporation has elected to pay the annual fee and intends to continue to do
     so. In  addition,  under the terms of the Merger  Agreement  with AC Safety
     Acquisition  Corp.,  Aearo Corporation agreed to make the annual payment to
     Cabot  for a  minimum  of seven  years  from the  Acquisition  Date.  Aearo
     Corporation  and its  subsidiaries  could  potentially be liable for claims
     currently  retained by Sellers if Aearo Corporation  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 a stock purchase  agreement that it and Aearo  Corporation
     entered  into on June 27,  2003  (providing  for the sale by Cabot to Aearo
     Corporation of all of the common and preferred  stock of Aearo  Corporation
     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.

     In fiscal 2003 and 2004,  the  Company  settled 259 claims in which it
     was named as a  defendant  for an  average  settlement  amount of $24.36 in
     silica claims and $83.24 in asbestos claims, while an additional 200 claims
     were dismissed  without any payment  (43.6% of cases  closed),  because the
     Company was not a proper defendant or did not make the product in question.
     As of September  30, 2004,  the number of open claims where the Company was
     named as a defendant in silica and asbestos  related matters was 11,087 and
     4,282, respectively. For the nine months ended June 30, 2005, the increases
     in number of claims  where the Company  was named as a defendant  in silica
     and asbestos  related matters was 2,122 and 1,010  respectively.  The 1,010
     new asbestos  claims include 114 claims that allege exposure from clothing,
     which the  Company  never  manufactured.  One claim was  settled for $17.85
     where the Company was named as a defendant in silica related matters during
     the nine  months  ended June 30,  2005.  No claims were  settled  where the
     Company was named as a defendant  in asbestos  related  matters  during the
     nine months  ended June 30, 2005.  As of June 30, 2005,  the number of open
     claims  where the Company was named as a defendant  in silica and  asbestos
     related matters was 12,739 and 4,095, respectively.

     In addition to the above claims,  the Company may agree to pay a share
     of the  settlement  and defense costs in  particular  cases even though the
     Company is not named as a defendant because of agreements with prior owners
     of the brand  and/or  because  of  allegations  that Aearo has some risk of
     legal  liability  as a  successor  ("Additional  Claims").  During the nine
     months  ended  June 30,  2005,  Aearo  paid a total of  $1.67  million  for
     settlement, administrative and defense costs resulting in the settlement of
     4,325 silica and asbestos  claims that were settled between October 1, 2002
     and September 30, 2004  involving both claims in which Aearo was named as a
     defendant and Additional Claims.  During the period October 1, 2004 to June
     30,  2005 Aearo paid a total of $164.72  for three  additional  claims that
     were  settled  during that time period and paid a total of $0.4 million for
     administrative  and defense costs  involving both claims in which Aearo was
     named as a defendant and Additional Claims. In addition,  Aearo may receive
     the benefit of releases in some additional  cases settled by the AO Defense
     Group regardless of whether or not any claim was made against Aearo.


                                       35
<PAGE>


     The above  information  was based on data  provided by Simon  Peragine
     Smith, an outside law firm which tracks numbers of cases and settlements on
     behalf  of the  "AO  Defense  Group",  and  is  believed  to be  materially
     accurate.  This information may be subject to future adjustment in light of
     new  information  becoming  available.  The AO Defense Group is a voluntary
     association of current and former manufacturers of the "AO Safety" brand of
     respirators and certain of their insurers in which Aearo  participates  and
     through  which all of its  settlements  have been  handled in the  relevant
     years. Also, between October 1, 2004 and June 30, 2005, there may have been
     claims  settled  by and fully  funded by the  insurers  of  Eastern  Safety
     Equipment Co., Inc., a dissolved former subsidiary of Aearo.

     At June 30, 2005 and  September  30,  2004,  the Company has  recorded
     liabilities of approximately  $4.6 million and $5.4 million,  respectively,
     which  represents  reasonable  estimates  of its probable  liabilities  for
     product  liabilities  substantially  related to asbestos and silica-related
     claims as determined  by the Company in  consultation  with an  independent
     consultant.  The $0.8 million reduction in the reserve, net of new accruals
     which  added  to  the  reserve,  since  September  30,  2004  is  primarily
     attributed to the payment of $1.67  million,  as referenced  above,  to pay
     costs attributed to settlement,  administrative  and defense costs that had
     been  reached  over the  prior  two  year  time  period.  This  reserve  is
     re-evaluated  periodically and additional  charges or credits to results of
     operations may result as additional information becomes available.  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  2009 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.

     Contractual Obligations

     The Company has the following  minimum  commitments  under contractual
     obligations  including  purchase  obligations by fiscal year, as defined by
     the U.S. Securities and Exchange Commission as of June 30, 2005:



<TABLE>
<CAPTION>
                                            (1)                            2010 and
                                           2005     2006-2007   2008-2009    after       Total


<S>                                      <C>        <C>         <C>        <C>         <C>
     Capital lease obligations           $       88 $      705  $      368 $       32  $    1,193
     Operating lease obligations                905      5,711       4,972      5,434      17,022
     Mortgage obligations                        90      2,048          --         --       2,138
     Purchase obligations                     1,021      6,680       6,402         --      14,103
     Respiratory commitment                     100        800         800        800       2,500
     Long term debt                           5,626     43,403      43,173    320,028     412,230
                                             ------    -------      ------    -------     -------
     Total                               $    7,830 $   59,347  $   55,715 $  326,294  $  449,186
                                             ======     ======      ======    =======     =======
</TABLE>

     1) Amounts  presented in the current fiscal year represent  remaining
     payments for the fiscal year.

     The amounts for long term debt above  include both  interest and  principal
     payments.  The Company paid  approximately $4.7 million for taxes worldwide
     in  fiscal  2004 and does not  anticipate  significant  changes  to its tax
     obligations in the future.  The Company has  approximately  $1.6 million of
     letters of credit  outstanding  as of June 30, 2005 and does not anticipate
     significant changes to its outstanding letters of credit in the future.

     The  Company  plans to fund  approximately  $1.5-$2.2  million per year for
     pension obligations over the next 5 years. The above contribution level was
     determined after consideration of many factors such as the funded status of
     the plan,  the long term rate of return on plan assets of 8%, the  duration
     of  plan  liabilities,   workforce  characteristics  and  changes  to  plan
     features. The goal of the funding strategy is to achieve full funding while
     minimizing the year to year volatility of contribution payments.


                                       36
<PAGE>

     Off-Balance Sheet Arrangements

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


     Item 3. 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 accounts for derivatives  pursuant to SFAS No. 133, "Accounting for
     Derivative Instruments and Hedging Activities", as amended. 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.  The Company's  Swedish  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 results of
     operations and cash flows, the Company executes two hedging  programs,  one
     for transaction exposures, and the other for cash flow exposures in foreign
     operations.  In order to implement the  transaction  hedging  program,  the
     Company utilizes 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  results  of
     operations. The impact on results of operations was a gain of approximately
     $ 0.3 million and $ 0.1 million for the three and nine month  periods ended
     June 30,  2005,  respectively,  compared to net loss of $ 0.3 million and $
     0.6 million,  respectively  for the three and nine month periods ended June
     30, 2004. In regard to its cash flow hedging program,  the Company complies
     with SFAS No. 133 which requires that derivative instruments be recorded in
     the  balance  sheet as either an asset or  liability  measured  at its fair
     value.  During the three  month  period  ended June 30,  2005,  the Company
     entered into three new forward foreign currency  contract  derivatives that
     protect the Company  against  exchange rate movement during fiscal 2006. As
     result of the new forward  currency  contracts,  the Company has recorded a
     derivative payable of $0.4 million at June 30, 2005. For the three and nine
     month periods ended June 30, 2004, the Company  reclassified  into earnings
     net losses of $0 million and $0.5 million, respectively, resulting from the
     exercise  of  forward  foreign  currency  contracts.  All  forward  foreign
     currency  contracts  were  determined  to be highly  effective  whereby  no
     ineffectiveness was recorded in earnings.  In addition,  the Company limits
     the foreign  exchange impact on the balance sheet with debt  denominated in
     Euros.


                                       37
<PAGE>


     Interest Rates

     The Company is exposed to market risk from changes in interest  rates.  The
     Company,  from time to time,  will utilize  interest  rate  instruments  to
     reduce the impact of either increases or decreases in interest rates on its
     floating rate debt.

     The Company had approximately $30.5 million of variable rate debt protected
     under an interest rate cap  arrangement,  which expired  December 31, 2004.
     The Company had not elected  hedge  accounting  treatment  for the interest
     rate cap as  defined  under  SFAS No,  133 and,  as a  result,  fair  value
     adjustments were charged directly to other charges (income), net. There was
     a $0.1 million impact on earnings for the nine-month period ending June 30,
     2004.

     The Company is of the opinion that it is well positioned to manage interest
     rate 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.

     Item 4.      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 as of June 30, 2005, and have  determined that such
     disclosure controls and procedures are effective.

     There has been no change in the Company's  internal  control over financial
     reporting  during the  quarter  ended June 30,  2005,  that has  materially
     affected,  or is  reasonably  likely to  materially  affect,  the Company's
     internal control over financial reporting.



                                       38
<PAGE>

                           PART II - OTHER INFORMATION

     Item 6.      Exhibits

(a)      Exhibits
         See Index of Exhibits on page 41 hereof.




                                       39
<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.


     Date:  August 15, 2005    AEARO COMPANY I


                               /s/ Michael A. McLain

                               _______________________________________
                               Michael A. McLain
                               Chairman and Chief Executive Officer
                               (Principal Executive Officer)

                               /s/ Jeffrey S. Kulka

                               _______________________________________
                               Jeffrey S. Kulka
                               Senior Vice President, Chief Financial Officer
                               and Secretary
                               (Principal Financial and Accounting Officer)




                                       40
<PAGE>

                                  EXHIBIT INDEX


EXHIBITS                          DESCRIPTION


31.1  Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the
      Securities  Exchange  Act of 1934,  as adopted  pursuant  to Section  302
      of the Sarbanes-Oxley Act of 2002.



31.2  Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the
      Securities  Exchange  Act of 1934,  as adopted  pursuant  to Section  302
      of the Sarbanes-Oxley Act of 2002.



32.1  Certification  of Chief Executive  Officer  pursuant to 18 U.S.C.  Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.



32.2  Certification of Chief Financial  Officer  pursuant to 18 U.S.C.  Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




                                       41
<PAGE>