UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

FORM 10-K

|(Mark One) |                                                                                                    | 
|---------- | -------------------------------------------------------------------------------------------------- | 
|           | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)                                                      | 
|           | OF THE SECURITIES EXCHANGE ACT OF 1934                                                             | 
|           | For the fiscal year ended September 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 or organization) | (IRS Employer Identification No.)
|                                                                   |                                  
|5457 West 79thStreet                                               | 46268                            
|Indianapolis, Indiana                                              | (Zip Code)                       
|(Address
    of principal executive offices)                       |                                  

Registrants telephone number, including area code: (317)
692-6666 Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:None

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

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

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

Indicate by check
mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).	Yes  	 No

The aggregate value of the common stock held by non-affiliates of the registrant as of November 8, 2005 (based upon the book value per share of the common stock) was $0.

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The number of shares of the registrant’s common stock, par value $.01 per share, outstanding as of November 8, 2005 was 100.

Documents incorporated by reference: None

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TABLE OF CONTENTS

|PART I   |                                                              | 2  | 
|-------- | ------------------------------------------------------------ | -- | 
|Item 1.  | BUSINESS                                                     | 2  | 
|Item 2.  | PROPERTIES                                                   | 12 | 
|Item 3.  | LEGAL PROCEEDINGS                                            | 13 | 
|Item 4.  | SUBMISSION OF MATTERS
         TO A VOTE OF SECURITY HOLDERS | 16 | 
|PART II  |                                                              | 17 | 
|Item 5.  | MARKET
    FOR REGISTRANTS COMMON EQUITY AND                |    | 
|         | RELATED STOCKHOLDER MATTERS                                  | 17 | 
|Item 6.  | SELECTED FINANCIAL DATA                                      | 17 | 
|Item 7.  | MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL        |    | 
|         | CONDITION AND RESULTS OF OPERATIONS                          | 20 | 
|Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT               |    | 
|         | MARKET RISK                                                  | 35 | 
|Item 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                  | 37 | 
|Item 9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS                |    | 
|         | ON ACCOUNTING AND FINANCIAL DISCLOSURE                       | 82 | 
|Item 9A. | CONTROL AND PROCEDURES                                       | 83 | 
|Item 9B. | OTHER INFORMATION                                            | 84 | 
|         |                                                              |    | 
|PART III |                                                              | 85 | 
|Item 10. | EXECUTIVE COMPENSATION                                       | 85 | 
|Item 11. | EXECUTIVE COMPENSATION                                       | 87 | 
|Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS              |    | 
|         | AND MANAGEMENT                                               | 94 | 
|Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               | 96 | 
|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                       | 98 | 
|         |                                                              |    | 
|PART IV  |                                                              | 99 | 
|Item 15  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                      | 99 | 

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PART I

Item 1. Business

The following discussion should be read in conjunction with
  the Consolidated Financial Statements of the Company (as defined below), including
  notes thereto included in Item 8 of this Annual Report. 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 include 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 statement.  Many of these factors are beyond the Companys ability to control or predict. Such factors include, but are not limited to the risks set forth under the caption
Risk Factors in Item 7 of this Annual Report.

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.

Aearo Company I (hereafter referred to collectively with its subsidiaries
as Aearo, we, our, or the Company) is a global leader in the hearing, eye, face, head and respiratory
protection segments of the estimated $15 billion global personal protection equipment, or PPE, market. We manufacture hearing protection devices, communication headsets, prescription and non-prescription safety eyewear, face shields, hard hats,
reusable and disposable respirators, fall protection equipment and other safety products.  Our products are marketed in over 70 countries under the well-recognized brand names AOSafety®, E-A-R®, Peltor® and SafeWaze. We also
manufacture a wide array of energy-absorbing materials that are incorporated into other manufacturers products to control noise, vibration and thermal energy. These products are marketed under our brand name E-A-R® Specialty
Composites. We believe that the strength of our brand names, our reputation for
developing and providing high-quality, innovative products, our intensive coverage
of multiple distribution channels targeting a wide array of end-users, our broad
product offering,
and our commitment to providing a high level of customer service have enabled
us to achieve leading positions in the market segments in which we compete. For
the year ended September 30, 2005, our net sales were $423.4 million.

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Segments

We operate three business
segments:

| | Safety Products
|- | ---------------

|  |                            
|- | ---------------------------
| | Safety Prescription Eyewear
|  |                            
| | Specialty Composites       

Through these three segments we sell a wide range of products to industrial distributors,
    as well as into the consumer, construction and military channels and directly
    to industrial companies. Please see Note 13 to our consolidated financial
    statements included elsewhere in this Annual Report for more detailed financial
    information regarding our business segments, as well as sales by principal
    geographic area.

Safety Products Segment

The Safety Products segment manufactures hearing protection devices,
communication headsets, non-prescription safety eyewear, face shields, hard hats,
reusable and disposable respirators, fall protection equipment and other safety
equipment. These products are sold under our AOSafety®, E-A-R®, Peltor® and SafeWaze brand
names.

The following is a summary of Safety Products major categories
and product lines:

Hearing Protection:Our hearing protection category includes passive hearing protection products as well as communication headsets with hearing protection. Our hearing
protection category generated sales of $207.5 million during our fiscal year ended September 30, 2005.

Passive Hearing Protection. Passive hearing
protection products are used in work environments where high noise levels could
lead to hearing loss. Our passive hearing protection products primarily consist
of disposable and reusable earplugs and passive earmuffs. We have been a leader
in hearing conservation research and development since 1972, when we first introduced
the cylindrical disposable earplug. The majority of
earplugs are made of scientifically formulated polyvinyl chloride, or PVC, and
polyurethane, or PU, foams. The earplug market is segmented into disposable and
reusable. The disposable earplug market is further segmented into roll-down
plugs and push-in plugs. Roll-down earplugs are designed to be rolled down (i.e., compressed) before being inserted into the ear, at which point they slowly recover to
fill the ear canal, thereby providing the desired protection. Push-in earplugs,
which are not compressed before insertion, combine the easy use and fit benefits
of reusable earplugs with the cost and comfort advantages of a disposable earplug.
Reusable earplugs, while initially more
expensive than disposables, offer savings over the long term.

We offer a wide range of products for each of the disposable, reusable and earmuff
    product categories. Our E-A-R® Classic® disposable earplug has slow-recovery characteristics that provide superior fit, protection and comfort. Its yellow color is a registered trademark in the United States, Canada,
Belgium, Netherlands and Luxembourg. Our disposable earplugs are available corded and uncorded and in a variety of packaging options. In the reusable earplug segment, we offer our patented E-A-R® UltraFit® and E-AR®
Express® products. The E-A-R® Express® product
features a polyurethane pod and a short plastic stem to facilitate sanitary and
easy insertion of the plug into the ear. We also offer the Flex line of
semi-aural banded products, featuring articulating arms that allow
for use in multiple positions and for easy storage around the neck.

In the military channel, we sell the E-A-R® Combat Arms® earplug.
Its patented design, specially developed for the armed forces and law enforcement
personnel, allows wearers to hear low-level sounds critical to mission safety
(e.g., conversation, footsteps and rifle bolts) while the plugs filters
are engineered to provide instant protection from high level noises (e.g., weapons
fire and explosions). Combat Arms® has been sold to the U.S., Canadian, French,
British and Australian militaries. We also manufacture, assemble and sell a broad line of passive earmuffs under the E-A-R® and Peltor® brand names. These headsets provide hearing protection in a variety of noise environments and can be worn over-the-head, under-the-chin or attached to a helmet and are made of durable,
lightweight non-conductive plastic.

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Communication Headsets with Hearing Protection. We offer a rapidly growing full line of technology-driven hearing and communication headset solutions.

Communication headsets are technologically advanced, premium priced products
    that are designed to offer a variety of communications and entertainment
    solutions while ensuring reliable hearing protection. In general, these products
    are equipped with noise attenuation features that are integrated into a variety
    of technologies like FM radio, two-way radio, Bluetooth and duplex wireless
    communication to permit the user to engage in a broad array of activities
    while
receiving effective hearing protection. For example, tactical headsets are designed
    for impulse noise environments to protect against harmful loud noises such
    as gunfire or explosions, while at the same time amplifying low decibel ambient
    sounds. These products primarily serve the military, law enforcement, industrial,
    fire safety and recreational (e.g., hunting and motor sports) markets.

The communication headsets market is primarily driven by new technologies
and product developments that expand end-user applications, including the adaptation
of entertainment functions, such as AM/FM radio and built-in CD/MP3 systems,
for use with electronic ear muffs. Employers, particularly in Europe, increasingly
regard these as tools to reduce worker monotony and improve productivity. These
products are also used in the consumer channel in air travel, while
mowing the lawn or undertaking do-it yourself, or DIY, projects. In addition,
developments in active noise reduction, or ANR technology and wireless duplex
technology (simultaneous multi-user communication) in military headsets is believed
to significantly increase the safety and efficiency of military personnel while
enabling them to actively communicate more effectively in battlefield situations.
We entered the communication headset market in 1996 with our acquisition of Peltor
Communications. Peltor has over 50 years of experience in the communications
field. We strengthened our North American communication headsets footprint in
2000 with the acquisition of Norhammer, Peltors North American master distributor.
Our
Peltor® brand products include: the WorkTunes® and FM Radio® family of products, which have become increasingly popular across a range of industrial and consumer applications due to enhanced aesthetics and easy-to-use controls; the Ground
Mechanic® headset, featuring the PowerCom® and LiteCom® product lines, which allow airline ramp crews to maintain constant communication with the cockpit crew; and the Peltor® PTL (Push to Listen)
over-the-head earmuff, which allows normal communication at the touch of a button
while still providing protection from loud noises.

Eye, Face and Head Protection: Our eye, face and head protection category includes non-prescription eye protection as well as face and head protection products. Our eye, face
and head protection products generated sales of $73.4 million during our fiscal year ended September 30, 2005.

Non-Prescription Eye Protection.Non-prescription
eye protection is used in work environments where a number of hazards present
a danger to the eyes, including dust, flying particles, metal fragments, chemicals,
extreme glare and optical radiation. The basic categories of eyewear protection
products are non-prescription, or plano eyewear and goggles.

Plano eyewear accounts for the majority of our sales in this category and encompasses
    a full range of protective needs, including visitor spectacles, over-the-glass,
    single lens and dual lens products. Within these categories are a variety
    of styles, frame colors and lens options that include a number of adjustability
    and comfort features. Many of these AOSafety® and Peltor
products feature our proprietary DX® coating, combining the benefits of chemical and scratch resistance with anti-fog properties. Flywear®,
Maxim, X-Series, Metaliks®, Fuel, X-Factor® and
X.Sport eyewear offer modern sport styling with numerous comfort features. Nuvo eyewear has the classic dual lens look redesigned for todays
worker. Our
Lexa® eyewear blends a wrapping, single lens with a lightweight,
frameless design. Virtua offers stylish eyewear at an economical price.
Visitor spectacles and
over-the-glass products are represented by our Seepro® and Tourguard® models.
We also sell a broad line of goggles, which are typically required in work environments
where a higher degree of impact protection is required, where increased protection
against dust, mist or chemical splash is needed and/or for use in welding operations.
To meet these requirements, we offer a variety of vented
and non-vented goggles with varying fields of view
including Dust GoggleGear for Lexa®,
Splash GoggleGear for
Lexa® and
Centurion®,
all under the AOSafety® brand.

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In order to optimize our cost of product, we will either manufacture or import
    our non-prescription eye protection products from Asia. During fiscal year
    2005, we imported approximately 50% of these products.

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

Faceshields are designed to protect against heat, splash and flying particles
    and are worn in conjunction with other protective equipment, such as plano
    eyewear and respirators. We offer a wide variety of use specific faceshields
    under both AOSafety® and Peltor® brands. The patented AO
TuffMaster® line of faceshields is one of the leading brands in the market.

We also sell a broad line of hard hats, including bump caps,
full-brim hats and traditional hard hats, featuring four or six point suspension,
ratchet adjustment, and a wide selection of colors and custom imprinting. The
XLR8® line of hard hats represents the latest design and functionality under the AOSafety® brand.

Other Safety:Our
    other safety category includes respiratory and fall protection products as
    well as other safety equipment. Our other safety category generated sales
    of $49.5 million during our fiscal year ended September 30, 2005.

Respiratory Protection.We offer a broad line of respiratory protection products in North America primarily focused on the U.S. consumer channel.

Respiratory protection products are used to protect against the harmful effects
    of contamination and pollution caused by dust, gases, fumes, sprays and other
    contaminants. The respiratory market can be segmented into the following
    product categories: disposable masks; air-purifying respirators; self-contained
    breathing apparatuses; and airline respirators.

We offer a broad line of disposable dust and mist masks; cartridge-equipped
quarter, half and full-face respirators; and escape respirators (a
single-use respirator for emergencies) under the
AOSafety®brand. We focus on product innovation by improving ease of use, convenience and comfort. Our product offerings include the QuickLatch® 8000 series half mask respirator and the QuickFit® full face mask respirator, each featuring a patented
on-and-off latching system that can be accomplished with just one hand. The QuickLatch® 8000 line is increasing penetration in the industrial and retail paint channels.

Fall Protection.We entered the fall protection market in 2003 with
  the acquisition of SafeWaze, Inc. We offer a line of fall protection equipment
  under the AOSafety®SafeWaze brand name. Fall protection consists
  of equipment used to protect workers operating at heights, and primarily serves
  the construction, industrial and consumer markets. Types of equipment are traditionally
  broken up into two categories: soft goods and hard goods. Soft goods consist
  of the items a worker wears up to and including an anchor point device such as
  harnesses, lanyards,
  self-retracting lifelines, miscellaneous anchoring devices and hardware. Hard
  goods refer mainly to engineered, permanent anchor points systems traditionally
  built into structures. We focus mainly on the soft goods market. Our products
  are specifically designed to not only protect a worker if a fall occurs, but
  to allow maximum comfort, maneuverability and ergonomic safety while in use.

Safety Prescription Eyewear Segment

The Safety Prescription Eyewear, or SRx, segment manufactures and sells products
    under the AOSafety® brand
name that are designed to protect the eyes of workers who require corrective
lenses from the typical hazards encountered in the industrial and other work
environments. We purchase component parts, lenses and the majority of our frames
from various suppliers. We grind and shape the
lenses to the end-users prescription, and then assemble the
glasses using the
end-users choice of frame. We view our ability to provide individual attention
to each customer through Company-employed, as well as independently contracted
eye-care professionals, as an essential part of our SRx business. These products
serve a wide variety of end-user markets such as utilities, transportation, industrial
manufacturing and federal, state and local governments.

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Specialty Composites Segment

Our Specialty Composites segment manufactures a wide array of energy-absorbing
composites that are incorporated into other manufacturers products to control
noise, vibration and shock. These materials are used in applications such as
noise and vibration damping for precision electronics, integrated acoustical
systems for business and regional jet aircraft, thermal insulation and damping
for heavy duty trucks and vibration and noise control for industrial
products.

Our success in this specialized industry is based on our ability to leverage
    our two main core competencies: (1) our proprietary computer design know-how
    which positions us as a design partner with industrial OEM customers to create
    integrated thermal, acoustic and shock solutions; and (2) our unique ability
    to design specialized high-performance materials such as PU, PVC and thermoplastic
    elastomers for a variety of end uses, including: Tufcote® acoustical products; Confor® for cushioning and shock protection; ISODAMP® for reduction of mechanical vibration; ISOLOSS® for LCD gasketing; and VersaDamp® for
shock protection. Specialty Composites also produces the specially formulated
foams used in the manufacture of Safety Products earplugs.

Specialty Composites marketing efforts are aimed at four key
strategic segments worldwide: aircraft, precision electronic equipment, heavy-duty
trucks and industrial original equipment manufacturing, or OEM.

Precision Electronic Equipment Market. This global market has increasingly focused on compact portable devices that require durability and lower noise levels. Our design
expertise and proprietary energy absorbing materials and technology are critical to enterprise and consumer electronics product development, helping in the design of quieter, more rugged and higher speed devices. Among the key applications for which
we have developed proprietary solutions are noise/vibration reduction and shock protection for hard disk drives in portable and desk top computers, hand held portable devices, data servers and data storage arrays.

Aircraft Market. We provide integrated thermal acoustic systems for aircraft manufacturers and refurbishers worldwide. We have integrated a full suite of computer assisted design
software to create integrated thermal/acoustic solutions primarily for business and regional jets. These highly customized solutions are designed to control the interior levels of noise, vibration and thermal conditions in a weight-efficient manner,
allowing aircraft OEMs to produce aircraft that have desirable passenger comfort and operational efficiency characteristics and that meet FAA regulations.

Heavy-Duty Truck Market. We provide design solutions for truck manufacturers to meet regulatory pass-by noise standards and acoustical and thermal underhood and in-cabin
requirements. We design lightweight integrated systems for the truck market that include: damped or resilient gaskets and seals that absorb the vibration between body parts, specialty foam seating that reduces the level of vibration that the
operator feels, cabin interior liners and floor and door panel damping that reduce the noise level and provide thermal insulation of the cabin and under hood barrier/absorber to reduce noise emission to the surroundings.

Industrial OEM Market. Our energy-control technology base, broad product line and depth of engineering experience enable us to provide highly effective, targeted solutions to
manufacturers in a wide range of industries. Our engineered systems provide cost-effective acoustical and thermal solutions that include noise control treatments for pumps, power generators and compressors; vibration damping for garage door openers
and laboratory centrifuges, shock protection for personal protection apparel and high performance sealing solutions for electrical control boxes and electrical systems.

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Sales and Marketing

We divide our sales and marketing force into our three business segments:

Safety Products Segment

Within Safety Products, sales are managed through four channels: North American
    Distribution; Consumer; Europe and International. Each of these channels
    has its own sales force and its own distinct yet synergistic sales
strategy.

North American Distribution. This is
the largest channel for Safety Products and is comprised of the U.S. and Canada.
Approximately 1,000 North American distributors and dealers are served by 31
territory sales managers, six national account managers, 70 sales agents dedicated
to the construction channel and five dedicated military/law enforcement sales
agents supported by three internal sales agents. Currently,
approximately 225 of our distributors qualify for our Dialog rebate program. Participation in the Dialog program
requires minimum annual purchase levels and offers growth and volume rebates.
The program also offers customers cooperative advertising and marketing incentives
for developing marketing programs that promote our products.

Consumer. We supply personal safety products
to the Consumer/DIY segment under the AOSafety® brand name. Within the Consumer/DIY marketplace, AOSafety® is the primary
personal safety products brand carried by The Home Depot, Ace Hardware, Lowes
Home Improvement Warehouse and other retailers. Our sales in this channel are
managed by a corporate sales force of six agents supported by independent rep
agencies.

Europe. We have a significant presence in Europe with sales offices in the U.K., Sweden, Norway, Germany, France and Italy with a total of 65 people. We sell through over 1,000
industrial distributors and organize our sales effort by country.

International. International sales are managed by 13 sales representatives located in Australia, New Zealand, Shanghai, Singapore, Miami (covering the Caribbean and Central
America), Mexico, Brazil and Dubai (covering the Middle East and South Africa).

Safety Prescription Eyewear Segment (SRx)

Our SRx segment employs its own sales force to sell our products throughout North
    America. Approximately 87% of our safety prescription eyewear is sold directly
    to more than 10,000 end-users, including a majority of the industrial companies
    in the Fortune 500. The remainder of our SRx products are sold through the
    industrial distribution channel and directly to eye-care professionals.

Specialty Composites Segment

We have a Specialty Composites sales and marketing team of 21 professionals,
as well as independent manufacturers representatives and select distributors
to identify global sales opportunities in target markets. Once such applications
have been identified, our marketing, sales and technical staffs work closely
with customer product development teams to provide the customer with cost-effective,
integrated solutions. Specialty Composites marketing efforts are
aimed at four key strategic segments worldwide: precision electronic equipment,
aircraft, heavy-duty trucks and OEM.

Research and Development

We place a strong emphasis on new product development, innovation
and protection of intellectual property. We employ over 60 R&D scientists,
engineers and technologists.

Safety Products Segment

Since its inception in 1972, our ultimate predecessor, the former
E-A-R® (Energy Absorbing Resins) Division of Cabot Corporation, has been
a leader in the development of technology for understanding noise, measuring
noise and hearing loss, and in the development of products and programs to encourage
hearing protection and conservation. To maintain that leadership position, and
in order to test the efficacy  of
our hearing protection products, we own and operate a National Voluntary Laboratory
Accreditation Program laboratory in the United States. We also operate sound
chambers and testing facilities in the United States and Sweden that measure
the performance of our materials and designs. With these and other capabilities,
we believe we continue to be a leader in the development of both passive hearing
products and communication headsets. Similarly, we believe that we have been
a pioneer and leader in the development and testing of safety eyewear, maintaining
and operating extensive facilities for the design and testing of these products.
Many of our research and development personnel are recognized experts in the
safety products industry and are members of various committees of standard-setting
organizations.

We are making a significant
    investment in research and development in the Safety Products segment. This
    includes investing in outside consultants
  to adapt existing technology to communication headsets primarily for military
  applications. In addition, we recently established a research and development
  operation in China to support our consumer headset and eyewear products.

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Safety Prescription Eyewear Segment

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

Specialty Composites Segment

Specialty Composites research and development efforts focus on developing proprietary materials and enhancing existing products in order to meet customer needs identified by our marketing, sales and technical staffs.
Products such as Versa Damp thermoplastic elastomers, Confor® energy-absorbing foams and products to meet no-idle trucking regulations and FAA requirements on burn-through have been developed as a result of these efforts. R&D
has been a key factor driving sales growth in an increasing number of applications
across all markets served by Specialty Composites.

Over the last two years, we have invested in computer modeling capabilities and
    personnel. Our use of statistical energy analysis, finite element analysis
    and sound quality has created a competitive advantage by enabling us to develop
    faster and more accurate design solutions for our customers.

Raw Materials and Suppliers

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

We have a diverse base of material suppliers and are subject to market risks
    with respect to industry pricing in paper and crude oil as it relates to
    various commodity items. Items with potential risk of price volatility include
    paperboard, packaging films, nylons, resins, propylene, ethylene, plasticizer
    and freight. We manage pricing pressure exposure on large volume commodities
    such as polycarbonate, polyols and polyvinyl chloride via price negotiations
    utilizing
alternative supplier competitive pricing. However, where appropriate, we will
    use a single source for supply of certain items. In addition, based on the
    material, availability of supply, level of quality and the technical difficulty
    to produce, we will use a major and minor source to insure continued best
    pricing and a ready back up supply. We do not enter into derivative instruments
    to manage commodity risk.

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

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

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Manufacturing Operations

Our core manufacturing strengths include: foam casting, molding
and fabricating for Specialty Composites products (including the foam used
in the manufacture of earplugs); proprietary high-speed assembly and packaging
of earplugs; optical quality plastic injection molding and coating; automated
eyewear assembly and packaging; precision molding for hearing attenuation; assembly,
grinding, polishing and coating of prescription eyewear; and automated earmuff
and
wire bending assembly.

Approximately 75% of
    our cost of goods sold is associated with internally manufactured products
    that we sell, and the balance is externally
  sourced or contract manufactured. We have implemented a strategy of sourcing
  or utilizing contract manufacturers where we have limited competences and there
  is a clear cost advantage. We are working with a limited number of contract
    manufacturers in the United States, Mexico and Eastern Europe to assemble
    and/or manufacture
  products. We use selected Asian suppliers for some product lines to complement
  our product lines. We expect to continue to use contract manufacturers where
  appropriate to remain competitive and maximize profit margins.

All of our manufacturing
    sites have implemented a number of initiatives including lean manufacturing
    concepts and an extensive Kaizen event schedule. During 2005, we introduced
    Demand Flow Technology, or DFT and developed our first pilot line at our
    Southbridge, Massachusetts location. Our plan is to implement DFT at all
    of our manufacturing locations. Our continuous improvement efforts continue
    to result in significant improvements in the areas of safety, quality,
cost, and customer service.

Consistent across all
    of our manufacturing operations is an emphasis on using world class manufacturing
    standards to produce high-quality
  products. Currently, the majority of our manufacturing facilities have been
    awarded ISO 9002 or ISO 9001 certification, indicating that we have achieved
    and sustained
  a high degree of quality and consistency with respect to our products. We have
  also attained
  QS 9000 certification for the Specialty Composites operations in Indianapolis
  and Newark, and our operations in Sweden have achieved ISO 14001 certification.
  We believe that ISO certification is an increasingly important selling feature
  both domestically and internationally, as certain customers require ISO certification
  from all their vendors.

Safety Products Segment

We believe our Indianapolis, Indiana plant is one of the largest
earplug manufacturing facilities in the world. It fabricates, molds, assembles
and packages hundreds of millions of pairs of earplugs annually, utilizing automated,
high-speed assembly and packaging equipment. The plants high-speed robotic
facility facilitates low cost, high-volume, and short supply chain production
techniques.

The Southbridge, Massachusetts facility is our largest manufacturing site and
    manufactures a wide variety of personal protection equipment, including respiratory
    devices, reusable earplugs and ear-muffs, head and face products and a broad
    offering of safety eyewear products.

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

Safety Prescription Eyewear Segment

Our SRx manufacturing facilities generally possess lens surfacing, edging, grinding
    and coating machinery capable of handling glass, plastic and polycarbonate
    lenses. Following manufacture, the lenses are then fitted into frames and
    shipped to customers.

SRx production operations are comprised of two facilities located in the U.S.,
    one in Canada and one in England. The U.S. locations are in Indiana and Oklahoma
    and both locations include customer service. In Canada, the Mississauga,
    Ontario plant fabricates prescription eyewear and, together with a small
    customer service operation in Montreal, produces SRx products for the Canadian
    market. In Poynton, England, we have a small plant that performs edging and
    assembly
operations and serves primarily the  U.K.
and French markets. These facilities currently manufacture and distribute approximately
500,000 pairs of safety prescription glasses annually.

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Specialty Composites Segment

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

Distribution Operations

We fill virtually all of our domestic orders and certain segments of our international
    orders through our distribution center located in Indianapolis, IN, which
    has bar-code scanning capabilities to assure rapid turn-around time and high
    service levels for customer orders. A key feature of the distribution center
    is the ability to ship a single customer order with multiple products, thus
    achieving a high fill rate, which minimizes backorders and maximizes customer
    satisfaction. Our products are generally shipped within several days from
    the receipt of a purchase order. As a result, backlog is not material to
our business.

Service from road carriers
    is readily available in Indianapolis, with competitive
  pricing for both inbound and outbound business. In addition, we make direct
    customer shipments from Concord, North Carolina and Newark, Delaware (Specialty
    Composites).
      European orders are filled from distribution facilities near Manchester,
      U.K. and in Varnamo, Sweden. During 2005, we initiated a distribution facility
      agreement with a third party in Australia to better serve our growing customer
      base in the region.

During 2005, we expanded operations to mainland China.  Functions operating within
    China include Sales, Customer Service, Engineering, and Purchasing. The expansion
    to China helps us provide better service to our existing customers in this
    portion of the world and positions us to further expand our global market.

Also during 2005, a partnership agreement was established with a major Chinese
    sourcing company to achieve Asia procurement savings. This company has over
    two decades of experience in sourcing from China; it focuses on select clients
    and providessourcing capability from China/Asia. With over 300 locally based personnel for Purchasing, Quality Control and Logistics Management, we
believethat this partnership will shorten our supply chain and generate substantial material savings.

Competition

The global PPE market is highly fragmented. We estimate that there
are several hundred manufacturers of PPE (other than safety clothing, gloves
and shoes) in the United States, Europe and Southeast Asia. Participants in the
industry range in size from small, independent, single-product companies with
annual sales of less than $15 million, to a small number of multinational corporations
with annual sales in excess of $100 million. We believe that participants in
the PPE
market compete primarily on the basis of product characteristics (such as design,
style and functional performance), product quality, service, brand name recognition
and, to a lesser extent, price. From a competitive standpoint, we believe we
are
currently well situated, primarily because of our brands size and our broad
product offerings, to compete in this fragmented industry. We enjoy certain economies
of scale that are not available to smaller competitors and our advanced distribution
center further facilitates timely and accurate deliveries.

Several manufacturers compete in noise and vibration control, but
few if any of our Specialty Composites segments competitors offer the complete range of technology and energy-control materials as we do. Thus we are
able to differentiate ourselves by leveraging our technology, engineering and wide ranges of proprietary products into energy control solutions or systems that add value to customers products.
In markets where technology is of particular value we are able to command better
margins due to our product  solution
and positioning. There are however market segments in which we compete where
price is still a significant factor. .We believe that participants in this market
generally compete on the basis of design capability, solution package characteristics
(functional performance and installation ease), product quality, service, reputation
and installed cost.

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Employees

As of September 30, 2005, we had 1,659 employees, of whom 1,053 were primarily
    engaged in manufacturing, 403 in sales, marketing, customer service and distribution,
    66 in research and development and 137 in general and administrative. We
    believe our employee relations are good. We have one domestic U.S. facility
    that employs union members. This facility, located in Plymouth, Indiana,
    employs 61 members of the International Union of Electronic, Electrical,
Salaried, Machine and Furniture Workers (out of a total of 74 employees), and
    our relations with these union members are fully satisfactory. The union
    contract expires on June 27, 2007.

Patents and Trademarks

We own and have obtained licenses to various domestic and foreign patents, patent
    applications and trademarks related to our products, processes and business.
    We place significant value on our trademark for the color yellow for earplugs
    in the United States, Canada, Belgium, Netherlands and Luxembourg and on
    our overall patent portfolio. However, no single patent or patent application
    is material to us. Our patents expire at various times in the future not
    exceeding 20
years.

Government Regulation

As a manufacturer of safety products, we are subject to regulation by numerous
    governmental bodies. Principal among the federal regulatory agencies in the
    United States of America are the following: (i) the Occupational Safety and
    Health Administration, or OSHA, which regulates the occupational usage of
    all PPE, (ii) the Environmental Protection Agency, which regulates labeling
    of hearing protection devices; and (iii) the Mine Safety and Health Administration
    and
the National Institute for Occupational Safety and Health, both of which certify
    respirators. These agencies generally mandate that our products meet standards
    established by private groups, such as the American National Standards Institute.
    Our products are also subject to foreign laws and regulations. In particular,
    they must comply with the Canadian Standards Association, European Committee
    for Standardization and Standards Australia in order to be sold in these
    markets. Our products are
also subject to the Export Administration Regulation administered by the Department
    of Commerce, and certain products are subject to the International Traffic
    in Arms Regulations administered by the Department of State. We believe we
    are in compliance in all material respects with the regulations and standards
    of these governmental bodies.

Environmental Matters

We are subject to various evolving federal, state and local environmental laws
    and regulations governing, among other things, emissions to air, discharge
    to waters and the generation, handling, storage, transportation, treatment
    and disposal of hazardous substances and wastes. We believe that we are in
    substantial compliance with all such laws and regulations. We have an active
    program to ensure environmental compliance and achievement of environmental
    goals and
objectives. We will continue to implement Environmental Management Systems at
    our manufacturing facilities. The consequence for violating these laws and
    regulations can be material. We have made and will continue to make capital
    and other expenditures to comply with environmental and health and safety
    requirements. In addition, if a release of hazardous substances occurs on
    or from our properties or any offsite disposal location where our wastes
    have been disposed, or if
contamination from prior activities is discovered at any of our properties or
    third-party owned properties that we or our predecessors formerly owned or
    operated, we may be subject to liability arising out of such conditions and
    the amount of such liability could be material. Liability can include, for
    example, costs of investigation and cleanup of the contamination, natural
    resource damages, damage to properties and personal injuries. Environmental
    laws and regulations are complex, change
frequently and have tended to become more strict over time. If more stringent
    environmental laws or regulations are enacted, these future laws could have
    a material adverse
effect on our results of operations.

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Item 2. Properties

We own and/or lease facilities in the United States, Canada, Europe and China.
    The following table sets forth the location of each, its square footage and
    the principal function as of September 30, 2005.

|                             |  | Approximate |  |                                                  
|---------------------------- |  | ----------- |  | -------------------------------------------------
|Location                     |  | Square Feet |  | Function                                         
|                             |  |             |  |                                                  
|SAFETY PRODUCTS              |  |             |  |                                                  
|Southbridge, Massachusetts   |  | 198,984     |  | Manufacturing/Administration                     
|Indianapolis, Indiana (1)    |  | 226,794     |  | Distribution/Customer Service                    
|Indianapolis, Indiana (2)    |  | 81,540      |  | Manufacturing/Corporate Headquarters             
|Concord, North Carolina      |  | 17,500      |  | Manufacturing/Distribution/Customer Service      
|Poynton, England (3)         |  | 74,331      |  | Sales/Manufacturing/Distribution/Customer Service
|Varnamo, Sweden (2)          |  | 144,130     |  | Sales/Manufacturing/Distribution/Customer Service
|Ettlingen, Germany           |  | 14,661      |  | Sales/Customer Service                           
|Paris, France                |  | 1,894       |  | Sales Office                                     
|Barcelona Spain              |  | (*)         |  | Sales Office                                     
|Milan, Italy                 |  | (*)         |  | Sales Office                                     
|Barrie, Ontario, Canada      |  | 4,768       |  | Manufacturing/Distribution/Customer Service      
|Oslo, Norway                 |  | 6,300       |  | Sales/Distribution/Customer Service              
|Joinville-le-Pont, France    |  | 10,200      |  | Sales/Distribution/Customer Service              
|Shanghai, China              |  | (*)         |  | Sales Office                                     
|                             |  |             |  |                                                  
|SAFETY PRESCRIPTION EYEWEAR  |  |             |  |                                                  
|                             |  |             |  |                                                  
|Chickasha, Oklahoma          |  | 35,000      |  | Manufacturing/Customer Service                   
|Plymouth, Indiana            |  | 9,500       |  | Manufacturing/Customer Service                   
|Mississauga, Ontario, Canada |  | 12,300      |  | Manufacturing/Customer Service                   
|Montreal, Quebec, Canada     |  | 1,800       |  | Customer Service                                 
|Newport News, Virginia       |  | 1,400       |  | Customer Service                                 
|                             |  |             |  |                                                  
|SPECIALTY COMPOSITES         |  |             |  |                                                  
|                             |  |             |  |                                                  
|Indianapolis, Indiana (2)    |  | 155,800     |  | Manufacturing/Distribution/Customer Service      
|Newark, Delaware (2)         |  | 79,650      |  | Manufacturing/Distribution                       
|Newark, Delaware             |  | 61,642      |  | Warehouse/Distribution                           
|Shenzhen, China              |  | 1,850       |  | Sales/Customer Service/Administration            
|                             |  |             |  |                                                  

|(1) This facility also serves as an international distribution center.    
|--------------------------------------------------------------------------
|                                                                          
|(2) We own this facility. (All other facilities are leased.)              
|                                                                          
|(3) This facilitys
    primary function is manufacturing safety products.
|                                                                          
|(*) Less than 1,000 square feet.                                          

We believe that our facilities are suitable for our operations and provide sufficient
    capacity to meet our current requirements. We believe that we will be able
    to renew each of our leases upon their respective expiration dates on commercially
    reasonable terms. In addition, we believe that we will be able to lease suitable
    additional or replacement space on commercially reasonable terms.

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Item 3. Legal Proceedings

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

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 $0.4 million 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. (the Merger Agreement), Aearo Corporation agreed to make the annual payment to Cabot for a minimum of seven years from April 7, 2004 (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 the 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. Claims related to Eastern Safety Equipment have historically been covered
  by that company’s insurers under a reservation of rights.

The following table sets forth information concerning respiratory claims filed
    against the Company in fiscal 2003, 2004 and 2005.

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|                                      |                                                    |  | Silica                                                                                  |  |                                                                                         |  |                                                    |  | Asbestos                                                                                             |  |                                                                                                      |  
|------------------------------------- | -------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | -------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- | -
|                                      |                                                    |  |                                                                                         |  |                                                                                         |  |                                                    |  |                                                                                                      |  |                                                                                                      |  
|                                      | Through      September
              30,      2003 |  | October
              1,      2003 through          September
        30, 
        2004 |  | October
              1,      2004 through          September
        30, 
        2005 |  | Through      September
              30,      2003 |  | October
              1,      2003          through          September        30,
              2004 |  | October
              1,      2004          through          September        30,
              2005 |  
|                                      |                                                    |  |                                                                                         |  |                                                                                         |  |                                                    |  |                                                                                                      |  |                                                                                                      |  
|                                      |                                                    |  |                                                                                         |  |                                                                                         |  |                                                    |  |                                                                                                      |  |                                                                                                      |  
|Number of claims at
        beginning | 135                                                |  | 6,629                                                                                   |  | 11,087                                                                                  |  | 564                                                |  | 4,143                                                                                                |  | 4,282                                                                                                |  
|                                      |                                                    |  |                                                                                         |  |                                                                                         |  |                                                    |  |                                                                                                      |  |                                                                                                      |  
|Increases in number
        of claims | 6,529                                              |  | 4,586                                                                                   |  | 2,409                                                                                   |  | 3,862                                              |  | 152                                                                                                  |  | 1,074                                                                                                | 1
|                                      |                                                    |  |                                                                                         |  |                                                                                         |  |                                                    |  |                                                                                                      |  |                                                                                                      |  
|Number of claims settled              | 13                                                 |  | 0                                                                                       |  | 2                                                                                       |  | 245                                                |  | 1                                                                                                    |  | 0                                                                                                    |  
|

|                                               |        |  |        |  |        |  |        |  |       |  |       | 
|---------------------------------------------- | ------ |  | ------ |  | ------ |  | ------ |  | ----- |  | ----- | 
|Number of claims dismissed
    without payment | 22     |  | 128    |  | 780    |  | 38     |  | 12    |  | 1,232 | 
|                                               |        |  |        |  |        |  |        |  |       |  |       | 
|Ending number of claims                        | 6,629  |  | 11,087 |  | 12,714 |  | 4,143  |  | 4,282 |  | 4,124 | 
|                                               |        |  |        |  |        |  |        |  |       |  |       | 
|Average amount per
    claims settled          | $24.36 |  | N/A    |  | $16.99 |  | $83.24 |  | $0    |  | $0    | 
|                                               |        |  |        |  |        |  |        |  |       |  |       | 
|Average amount per
    claims closed2          | $9.05  |  | 0      |  | $0.04  |  | $72.06 |  | $0    |  | $0    | 

(1) The 1,074 new asbestos claims include 114 claims that allege exposure from
    clothing, which the Company never manufactured.

(2) The difference between average amount for claims settled versus average amount for claims closed is that some claims are dismissed or withdrawn without having to pay a settlement or any amount.
The average amount per claim closed includes claims closed by both settlement and by dismissal without payment while the average amount per claim settled is
for claims settled.

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 the Company has some risk of legal
liability as a successor (Additional Claims). During fiscal 2005,
the Company paid a total of $1.6 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 the Company was named as a defendant and Additional Claims. During fiscal
2005 the
Company paid a total of $0.7 million for administrative and defense costs involving
both claims in which the Company was named as a defendant and Additional Claims.
Also in fiscal 2005, in addition to the cases in the above chart, the Company
paid $0.3 million to settle approximately 4,449 claims, involving a still being
determined ratio of claims in which the Company was named as a defendant and
Additional Claims and therefore the above table does not reflect the settlement
of these claims.
In addition, the Company 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 the Company.

The above information was based on data compiled by a third party
that 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 during fiscal 2005, there may have been claims settled by and fully funded
by the insurers of Eastern Safety Equipment Co., Inc., a subsidiary
of Aearo which is in the process of winding up its affairs. In addition, during
fiscal 2005 the Company paid $0.1 million, net of insurance proceeds, to settle
a safety eyewear product liability claim.



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At September 30, 2005
and September 30, 2004, the Company has recorded liabilities of approximately
$5.1 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 $0.3 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 $1.6 million, as referenced
above, to pay costs attributed to settlement, administrative and defense costs
that had been reached over a
prior two year time period, $0.7 million for administrative and defense costs
involving both claims in which the Company was named as a defendant and Additional
Claims, the payment of $0.3 million, as referenced above, for the settlement
of 4,445 claims during fiscal 2005, and $0.1 million, net of insurance proceeds,
to
settle a safety eyewear product liability claim. 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 2010 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.

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

On October 11, 2005, the Company held a special meeting of stockholders.
The stockholders approved the selection of Deloitte & Touche LLP as the Companys
independent registered public accountants for the year ending September 30, 2006
with a total of 2,534,965 votes in favor and 2,547 abstention votes. The stockholders
voted to elect the following directors for the ensuing year with a total of 2,535,239
votes in favor of each director and 2,273
abstention votes for each director: Michael A. McLain, Douglas R. Korn, John
D. Howard, Peter Cureton and Nick White.









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PART II

Item 5. Market for Registrants Common Equity and Related Stockholder
  Matters and Issuer Purchases of Equity Securities

There is no established trading market for our common stock. As
of November 1, 2005, one hundred percent of our stock was held by our parent,
Aearo Corporation. As of November 1, 2005, there were outstanding 2,537,512 shares
of common stock, par value $0.01 per share, of Aearo Technologies Inc. (Aearo Technologies Common Stock) the parent of Aearo Corporation. Substantially all of the Aearo Technologies Common Stock is held, collectively, by
Affiliates of Bear Stearns Merchant Capital II, L.P., Vestar Capital Partners, L.P. (together with certain related persons, Vestar)
and management. As of November 1, 2005 there were 56 shareholders of record of
Aearo Technologies Common
Stock.

On April 7, 2004, the Company paid a dividend of $14.3 million to Aearo Corporation
    in connection with the Merger Agreement to retire the outstanding debt of
    Aearo Corporation.

On May 5, 2005, the Companys Board of Directors declared a cash dividend of approximately $35.0 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 Aearo Technologies Inc., 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.

Item 6. Selected Financial Data

On April 7, 2004, the Companys parent, Aearo Corporation,
was acquired by Aearo Technologies Inc. and its subsidiary AC Safety Acquisition
Corp. for $409.3 million. AC Safety Acquisition Corp. was merged into Aearo Corporation.
The Company continues to be wholly-owned by Aearo Corporation, however, on the
acquisition date, 100% of the purchase price paid for Aearo Corporation was pushed
down to the Company. Accordingly, the historical consolidated financial
information of the predecessor Aearo Company I is not comparable to the consolidated
information of the successor Aearo Company I for the periods after March 31,
2004.

The selected historical financial data as of and for the periods
ended September 30, 2001, 2002, 2003 and March 31, 2004 are derived from the
consolidated financial statements of predecessor Aearo Company I and subsidiaries.
The selected historical financial data as of and for the six months ended September
30, 2004 and year ended September 30, 2005 are derived from the consolidated
financial statements of successor Aearo Company I and subsidiaries and
should be read in conjunction with the consolidated financial statements and
related notes, Managements Discussion and Analysis of Financial Condition and Results of Operations and
other financial information included herein.

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|                                       | Predecessor                   |         | Successor                  |        
|-------------------------------------- | ----------------------------- | ------- | -------------------------- | -------
|                                       |                               |         |                            |        
|                                       | Years
    Ended September 30, |         | Six
Months
Ended
March 31, |        
|                                       | 2001                          |         | 2002                       |        
|                                       |                               |         |                            |        
|Statement of Operations Data:          |                               |         |                            |        
|Net Sales                             |                               |         |                            |        
|Safety
    Products                    | $                             | 206,358 |                            | $      
|Safety
    Prescription Eyewear        |                               | 39,076  |                            |        
|Specialty
    Composites               |                               | 38,428  |                            |        
|                                       |                               |         |                            |        
|Total
    net sales                    |                               | 283,862 |                            |        
|Cost of Sales                          | 155,213                       | (2)     |                            | 150,397
|                                       |                               |         |                            |        
|Gross
    profit                       |                               | 128,649 |                            |        
|Operating Expenses                    |                               |         |                            |        
|Selling
    and administrative         |                               | 87,286  |                            |        
|Research
    and technical service     |                               | 5,162   |                            |        
|Amortization
    expense               |                               | 6,530   |                            |        
|Other
    charges (income), net        |                               | 680     |                            |        
|Restructuring
    charge               |                               | 9,077   | (2)                        |        
|                                       |                               |         |                            |        
|Operating
    income                   |                               | 19,914  |                            |        
|Interest
    expense, net              |                               | 23,755  |                            |        
|                                       |                               |         |                            |        
|Income
    (loss) before income taxes  |                               | (3,841  | )                          |        
|Provision
    (benefit) for income     |                               |         |                            |        
|taxes                                  |                               | (1,907  | )                          |        
|                                       |                               |         |                            |        
|Net income (loss)                      | $                             | (1,934  | )                          | $      
|                                       |                               |         |                            |        
|                                       |                               |         |                            |        
|Other Data:                            |                               |         |                            |        
|Depreciation and amortization          |                               | 16,653  |                            |        
|Capital expenditures                   |                               | 7,799   |                            |        
|Ratio of earnings to fixed charges (1) |                               |        |                            |        
|                                       |                               |         |                            |        
|Balance Sheet Data (at period-end):    |                               |         |                            |        
|Total assets                           | $                             | 261,302 |                            | $      
|Debt                                   |                               | 202,229 |                            |        
|Stockholders equity                   |                               | 9,743   |                            |        



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Notes to Selected Financial
Data:

|1 | .  | Ratio of earnings to
        fixed charges is defined as pretax income from continuing operations
        plus fixed chargesdivided
        by fixed charges.Fixed
        charges include interest expense (including amortization of debt issuance
        costs)and a
        portion of rent expense assumed to be interest.Earnings
        for the year ended September 30, 2001 wereinadequate
        to cover fixed charges by $3.8 million.Earnings
        for the six month period ended September 30, 2004were
        inadequate to cover fixed charges by $6.1 million.                                                           
|- | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2 | .  | On September 30, 2001,
        the Company recorded a restructuring charge of $11.4 million related
        to a restructuringplan
        announced by the Company to improve its competitive position and long
        term profitability. The planincluded
        the closure of its Ettlingen, Germany plant, significantly reorganizing
        operations at the CompanysVarnamo,
        Sweden plant, rationalizing the manufacturing assets and product mix
        of its Specialty Compositesbusiness
        unit and a reduction of products and product lines (See Note 15 of Notes
        to Consolidated FinancialStatements).
|  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3 | .  | During fiscal 2002,
        the Company reversed $0.6 million of reserves related to the September
        30, 2001restructuring
        provision.The
        adjustment represents a change in estimate of the plan for the disposal
        of certain items of inventory and the closure of its Ettlingen, Germany
        plant. The inventory provision of $0.5 million was classified as cost
        of sales with the remaining $0.1 million classified as operating expenses.                                                                                                                                                          
|  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  | 4. | During fiscal 2003,
        the Company reversed $0.3 million of reserves related to the September
        30, 2001 restructuring provision. The adjustment represents a change
        in estimate of the plan for the disposal of certain items of inventory.
        The inventory provision of $0.3 million was classified as cost of sales.                                                                                                                                                                                                                                                                                                 
|  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  | 5. | During the six month
        period ended March 31, 2004, the Company reversed $1.1 million of reserves
        related to the September 30, 2001 restructuring provision. The adjustment
        represents a change in estimate related to amounts for non-cancelable
        lease obligations due to the renegotiation of the subject lease that
        was completed in the second quarter.                                                                                                                                                                                                                                                
|  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  | 6. | As a result of the
        Merger Agreement on April 7, 2004, the Company recorded a non-recurring
        charge of $17.1 million resulting from the write-up of inventory required
        by Statement of Financial Accounting Standards (“SFAS”) No.
        141 on the merger date and subsequent sale of such inventory                                                                                                                                                                                                                                                                                                                    

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

Overview

Aearo is a global leader in the hearing, eye, face, head and respiratory protection
      segments of approximately $15.0 billion global personal protection equipment,
      or PPE, market. We manufacture hearing protection devices, communication
      headsets, prescription and non-prescription safety eyewear, face shields,
      reusable and disposable respirators, fall protection equipment, hard hats
      and first aid kits that enhance the health and safety of workers. Our products
      are
  manufactured and marketed under the brand names AOSafety®, E-A-R®,
  Peltor® and SafeWaze®, which are well known in
  the PPE market. We also manufacture a wide array of energy-absorbing materials
  that are incorporated into other manufacturers products to control noise,
  vibration and shock. These products are marketed under our brand name E-AR® Specialty Composites.

We are committed to be the PPE market leader with value-added products and
      global, leading brands. We believe that the strength of our brand names,
      our reputation for developing and providing high-quality, innovative products,
      our intensive coverage of multiple distribution channels targeting a wide
      array of end-users, our broad product offering, and our commitment to providing
      a high level of customer service have enabled us to achieve leading positions
      in
  market segments in which we compete.

We sell our products in more than 70 countries and approximately 40% of our
      sales are now made outside of the United States. Accordingly, our businesses
      are affected by levels of industrial activity and economic conditions in
      the U.S. and in other countries where our products are sold and by the
      relationship of the U.S. dollar to other currencies.

The PPE market is driven in part by the introduction and continued adherence
      to increased governmental safety standards for the health and safety of
      workers. Within the United States and Europe, we anticipate that regulators
      will continue to enforce compliance as well as introduce new safety standards.
      The PPE market is also highly competitive and therefore requires dedication
      to the introduction of new products and product line extensions as well
      as
  productivity improvements.

In recent years the Company has focused on initiatives intended
to foster share growth in our core markets through superior product innovation,
differentiated go-to-market strategies and improved emerging market
penetration. In addition, we seek to accelerate the penetration of non-industrial
end markets such as consumer, military and construction.

The Company has used selective acquisitions, in targeted markets or product lines,
    to enhance its strategies. Over the past nine years we have made eleven acquisitions,
    with the most recent being the March 2003 acquisition of SafeWaze, which
    brought the fall protection product line and greater access to the construction
    channel.

On March 10, 2004, Aearo Corporation, the Companys parent, entered into a Merger Agreement with Aearo Technologies Inc. and its subsidiary, AC Safety Acquisition Corp. that closed on April 7, 2004 (the
Merger). Pursuant to the terms of the Merger Agreement, AC Safety Acquisition Corp. merged with and into Aearo Corporation with Aearo Corporation surviving the Merger as a wholly-owned subsidiary of Aearo Technologies Inc. The aggregate
purchase price was $409.3 million, including estimated fees and expenses. The Merger was financed with $303.7 million of new debt consisting of $175.0 million of 8.25% senior subordinated notes and a $125.0 million senior credit facility, $3.7
million of assumed debt, $4.3 million of cash and $101.3 million of equity. Aearo Corporation accounted for the Merger in accordance with SFAS No. 141, Business Combinations, and allocated the purchase price to assets and liabilities
based on their fair values. Aearo Corporations new basis of accounting
was pushed down to the Company, therefore, the historical financial information
of the predecessor Aearo Company I is not comparable to the financial information
of the
successor Aearo Company I for periods after March 31, 2004.

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Critical Accounting Policies

The Companys discussion and analysis of its financial condition and results of operations are based upon the Companys condensed consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
GAAP requires the use of estimates, judgments, assumptions and subjective interpretations
of accounting principles that affect the reported amounts of assets, liabilities,
revenues and expenses.

The Company believes its
    use of estimates and underlying accounting assumptions adhere to GAAP and
    are consistently applied. The Company
  revises its estimates and assumptions as new information becomes
  available. The Company believes the following policies involve a higher degree
of judgment and/or complexity.

Basis of Presentation  The acquisition of our parent,
    Aearo Corporation, was accounted for as a business combination in accordance with SFAS No 141, Business Combinations.
    The purchase price was allocated to assets and liabilities based on their fair
    values as determined by management and resulted in a new basis of accounting
    as of April 1, 2004. The new basis of accounting was pushed down to the Company
    and therefore, historical financial information of the Company is not comparable
    to the financial information of the Company for
    the periods after March 31, 2004.

Income Taxes  The Company is included in the consolidated tax returns filed by Aearo Technologies Inc. All taxes are recorded as if separate, standalone returns are filed.
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between
book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Realization of the deferred tax asset for net operating losses is dependent on generating sufficient future taxable income in the United States prior to the expiration of the net operating losses and credit carryforwards, which expire over various
periods ranging from 2010 to 2021 and are subject to certain limitations on their use after the merger transaction. 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 period ended September 30,
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. Since the valuation
allowance related to Aearo predecessors net operating losses, goodwill
was reduced for this reversal.

Product Liabilities -The Company has
established reserves for potential product liabilities that arise out of the
use of the Companys products. A significant amount of
judgment is required to quantify the Companys
ultimate exposure in these matters and the reserve is estimated based on currently
available information and historical claims experience.
Reasonable estimates of its probable product liabilities substantially related
to asbestos and silica-related claims are determined by the Company based on
data provided by a third party and past cases and settlements. The Company has
determined that the five year period through 2010 is the most
reasonable time period for projective asbestos and silica-related claims and
defense costs. From time to time, the Company may seek the assistance of an independent
consultant to assess the adequacy of the reserve. While the Company believes
that the current level of reserve is adequate, changes in the future could impact
these determinations.

Pension Plan - The valuation of the Companys pension plan requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and
assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and mortality rates. The actuarial assumptions used in the Companys pension reporting are reviewed annually and compared with external
benchmarks and internal operating trends to assure that they accurately account for future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Companys
pension expense and
funding requirements.

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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 that achieve specified volume levels
  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 years ended
  September 30, 2003, 2004 and 2005 were $1.7 million, $1.9
  million and $2.6 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.

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, shipping and handling expenses incurred after the point of manufacture.

Goodwill and Impairment of Long-Lived Assets -
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill no longer be amortized, and instead, be
tested for impairment on a periodic basis. In testing for a potential impairment of goodwill, SFAS No. 142 requires the Company to individually allocate and assign the carrying value of assets and liabilities (including goodwill and intangible
assets) to specific reporting units or business segments, estimate the fair value of the reporting units or business segments, and determine goodwill impairment by comparing the estimated fair value to the assigned carrying value. The process of
evaluating the potential impairment is highly subjective and requires significant judgment at many points during the analysis. The Company evaluates long-lived assets, including other intangible assets, of identifiable reporting units for impairment
when events or changes in circumstances indicate, in managements judgment, that the carrying value of such assets may not be recoverable. Cash flows used in the potential impairment evaluation are based on managements
estimates and assumptions. Changes in business conditions could potentially require
future adjustments to asset valuations.

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Results of Operations

The following discussion provides a comparison of the results of operations for
    the successor company for the fiscal year ended September 30, 2005, and that
    of the predecessor company on a combined basis for the fiscal year ended
    September 30, 2004 with the historical results of operations of the predecessor
    company for the fiscal year ended September 30, 2003. The discussion is provided
    for comparative purposes only, but the value of such comparison may be limited.
    The combined results of operations for the fiscal year ended September 30,
    2004 include the results of operations of the predecessor company for the
    six months ended March 31, 2004, combined with the results of operations
    of the successor company
for the six months ended September 30, 2004. The combined financial information
    for the year ended September 30, 2004 is merely additive and does not give
    proforma effect to the Merger transaction. Our results of operations after
    March 31, 2004 are not comparable to the results of operations of the predecessor
    company for the periods prior to April 1, 2004. The information regarding
    results of operations should be read in conjunction with the consolidated
    financial statements and related notes
thereto.

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

|                                    | Years Ended September 30, |  
|----------------------------------- | ------------------------- | -
|                                    |                           |  
|                                    | 2003                      |  
|                                    |                           |  
|Net sales:                          |                           |  
|Safety
    Products                 | 76.6                      | %
|Safety
    Prescription Eyewear     | 12.6                      |  
|Specialty
    Composites            | 10.8                      |  
|                                    |                           |  
|Total
    net sales                 | 100.0                     |  
|Cost
    of sales                   | 51.8                      |  
|                                    |                           |  
|Gross
    profit                    | 48.2                      |  
|Selling
    and administrative      | 32.0                      |  
|Research
    and technical services | 2.1                       |  
|Amortization
    expense            | 0.0                       |  
|Other
    charges (income), net     | 0.6                       |  
|Restructuring                       | 0.0                       |  
|                                    |                           |  
|Operating
    income                | 13.5                      | %
|                                    |                           |  

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

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Fiscal 2005 Compared to Fiscal 2004

Net sales in the year ended September 30, 2005 increased 16.7%
  to $423.4 million from $362.8 million in the year ended September 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 $7.7 million.
  The Safety Products segment net sales in the year ended September 30, 2005
  increased 16.0% to
  $318.4 million from $274.4 million in the year ended September 30, 2004. The
  increase in net sales resulted from a 13.4% increase in organic growth and
  a 2.6% increase due to foreign currency translation. Organic sales growth for
  the Safety Products segment, defined as net sales less the impact of foreign
  currency translation and acquisitions, has increased for thirteen consecutive
  quarters. The Company attributes this growth to an improved economy and its
  ability to generate market share gains
  enabled by its breath of product offerings complemented by successful introductions
  of new products into the markets it serves. The Safety Prescription Eyewear
  segment net sales in the year ended September 30, 2005 decreased slightly to
  $39.4 million from $39.8 million in the year ended September 30, 2004. Specialty
  Composites net sales in the year ended September 30, 2005 increased 34.7%
  to $65.5 million from $48.6 million in the year ended September 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.

Gross profit for the year ended September 30, 2005 increased 33.1%
  to $206.7 million from $155.3 million for the year ended September 30, 2004.
  Gross profit for 2004 was adversely affected by a non-recurring charge of $17.1
  million resulting from the write-up of inventory required by SFAS No. 141 on
  the merger date and subsequent sale of such inventory. Gross profit as a percentage
  of sales for the year ended September 30, 2005 was 48.8% as compared to 47.5%
  for the
  year ended September 30, 2004 with fiscal year 2004 calculated by excluding
  the effects of the purchase accounting adjustment. The improvement in the gross
  profit percentage, to the highest gross profit percentage in the Companys
  history, is  primarily due to the favorable impacts of higher manufacturing
  volumes in the Companys plants covering its manufacturing costs, favorable
  product mix, productivity improvements and 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 year ended September 30, 2005,
  increased 20.8% to
  $161.1 million from $133.4 million, when excluding the effects of the purchase
  accounting adjustment, in the year ended September 30, 2004. The increase in
  gross profit is primarily due to the favorable impacts of higher manufacturing
  volumes in the Companys plants covering its manufacturing costs due to
  an improved economy and the Companys ability to successfully introduce
  new products into the markets it serves, favorable product mix, productivity
  improvements and the impact of  foreign currency translation. The Safety Prescription
  Eyewear segment gross profit in the year ended September 30, 2005, decreased
  slightly to $17.8 million from $18.5 million in the year ended September 30,
  2004, when excluding the effects of the
  purchase accounting adjustment, primarily as a result of the slight decline
  in sales volume and the mix in sales of our products. The Specialty Composites segment
  gross profit in the year ended September 30, 2005, increased $9.0 million,
  or  47.8%, to $27.8 million from $18.8 million in the year ended September
  30, 2004, when excluding the effects of the purchase accounting adjustment.
  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.
  Productivity and improved manufacturing absorption, due to a higher level of
  production in Specialtys
  plants, also favorably impacted gross profit.

Operating expenses for the year ended September 30, 2005 increased
17.6% to $145.9 million from $124.1 million for the year ended September 30,
2004. The increase in operating expenses was primarily driven by increases in
selling and administrative, research and technical services expenses, amortization
expense, and an absence of income as a result of the prior years partial reversal of a prior periods
restructuring provision. Selling and administrative expenses included higher
levels of variable selling expenses, as well
as increased marketing expenses to support new product launches and our global
    brands. Selling and administrative expenses as a percentage of net sales
    improved to 31.0% in the year ended September 30, 2005 as compared to 31.3%
    for the year ended September 30, 2004. The increase in 2005 compared to 2004
    in selling and administrative expenses included approximately $1.6 million
    due to foreign currency translation, $1.7 million due to variable selling
    expenses, as well
as approximately $2.0 million in increased marketing expenses to support new
    product launches and build brand support. Amortization expense increased
    approximately $2.3 million due to the fair value allocation of purchase price
    to finite lived intangible assets required by SFAS No. 141 due to the Merger.
    The restructuring provision adjustment of $1.1 million of income in the year
    ended September 30, 2004 was the result of a change in estimate relating
    to non-cancelable leases. The
decrease in other charges (income), net of $0.8 million was primarily attributed
    to the bond call premium of $1.5 million paid as a result of the Merger Agreement
    that was expensed in the year ended September 30, 2004.

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Operating income for the year ended September 30, 2005 increased 94.9% to $60.8
    million from $31.2 million for the year ended September 30, 2004. Operating
    income in 2004 included a non-recurring charge of $17.1 million resulting
    from the write-up of inventory and a $1.7 million increase in depreciation
    and amortization for identifiable intangible assets written up to fair value
    as required by SFAS No. 141 on the merger. Operating income in the year ended
    September
30, 2005 includes additional amortization expense of approximately $2.4 million
    due to the fair value allocation of purchase price to finite lived intangible
    assets required by SFAS No. 141 due to the Merger. Excluding the effects
    of the purchase accounting adjustments for both years, operating income increased
    by $14.2 million and as a percentage of net sales for the year ended September
    30, 2005 increased to 15.2% from 13.8% for the year ended September 30, 2004.

Interest expense, net, for the year ended September 30, 2005 decreased
to $22.0 million from $26.7 million for the year ended September 30, 2004. Interest
expense for the year ended September 30, 2004 included the write-off of approximately
$3.9 million for deferred financing fees related to the redemption of the $98.0
million face value, 12.50% senior subordinated notes, which were an obligation
of the predecessor company and the repayment of the Companys old
senior bank facilities. In addition, the Company incurred an incremental 30 days of interest of $1.0 million on the 12.50% senior subordinated notes between the call date for the 12.50% senior subordinated notes and the redemption date. Net of the

write-off of deferred financing fees and the incremental senior subordinated notes interest, the interest expense for the year ended September 30, 2005 increased $0.2 million due to the higher level of borrowings under the Companys
new credit
facility and the 8.25% senior subordinated notes.

The provision for income taxes for the year ended September 30,
2005 was $11.2 million compared to $1.0 million for the year ended September
30, 2004. The effective tax rate for the year ended September 30, 2005 and 2004
was different from the statutory rate due to the mix of income between the Companys
foreign and domestic subsidiaries. Generally, the foreign tax rates of our foreign
subsidiaries are lower than the domestic statutory rate. In addition for the
year ended September 30, 2005, a benefit was recorded to adjust estimated post
merger net operating loss carry forwards.

Fiscal 2004 Compared to Fiscal 2003

Net sales in the year ended September 30, 2004 increased 14.7% to $362.8 million
    from $316.4 million in the year ended September 30, 2003. The increase in
    net sales was primarily driven by organic growth in the Safety Products and
    Specialty Composites segments, the impact of the SafeWaze acquisition on
    March 14, 2003 and foreign currency translation. The weakness of the U.S.
    dollar and the SafeWaze acquisition favorably impacted net sales by $11.6
    million and
$4.5 million, respectively. The Safety Products segment net sales in the year
    ended September 30, 2004 increased 13.2% to $274.4 million from $242.3 million
    in the year ended September 30, 2003. The increase in net sales resulted
    from a 6.7% increase in organic growth, a 4.6% increase due to foreign currency
    translation and a 1.9% increase due to the acquisition of SafeWaze. Organic
    sales growth for the Safety Products segment, defined as net sales less the
    impact of foreign currency
translation and acquisitions, has increased for nine consecutive
quarters. 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 in the year ended September
30, 2004 decreased slightly to $39.8 million from $40.0 million in the year ended
September 30, 2003. Specialty Composites net sales in the year ended September
30, 2004 increased 42.5% to $48.6 million from $34.1 million in the year ended
September 30, 2003. 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 five quarters.

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Gross profit for the year ended September 30, 2004 increased 1.9%
to $155.3 million from $152.4 million for the year ended September 30, 2003.
Gross profit for 2004 was adversely affected by a non-recurring charge of $17.1
million resulting from the write-up of inventory required by SFAS No. 141 on
the merger date and subsequent sale of such inventory. Excluding the effects
of the purchase accounting adjustment, gross profit as a percentage of net sales
for the year
ended September 30, 2004 was 47.5% as compared to 48.2% for the year ended September
30, 2003. The slight decline in the gross profit percentage, exclusive of the
non-recurring charge, is primarily due to unfavorable product mix partially offset
by productivity improvements and the impact of foreign currency translation.
The Safety Products segment gross profit in the year ended September 30, 2004,
excluding the effects of the purchase accounting adjustment, increased 9.8% to
$133.4 million
from $120.0 million in the year ended September 30, 2003. The increase in gross
profit is primarily due to an improvement in sales volume due to an improved
economy, the Companys ability to successfully introduce new products into the markets
it serves, and the favorable impact of foreign currency translation. The Safety Prescription Eyewear segment gross profit in the year ended September 30, 2004, excluding the effects of the purchase accounting adjustment, decreased slightly to $18.5
million from $18.9 million in the year ended September 30, 2003, primarily a result of the slight decline in sales volume and the mix in sales of our products. Specialty Composites gross
profit in the year ended September 30, 2004, excluding the effects of the purchase
accounting adjustment, increased 61.5% to $18.8 million from $11.7 million in
the year ended September 30, 2003. 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.

Operating expenses for the year ended September 30, 2004 increased 13.1% to $124.1
    million from $109.7 million for the year ended September 30, 2003. The increase
    in operating expenses was primarily driven by an increase in selling and
    administrative, research and technical services expenses and amortization
    expense, partially offset by the restructuring provision adjustment and other
    charges, net. Selling and administrative expenses included approximately
    $1.1 million
of expenses due to the acquisition of SafeWaze, $3.2 million due to foreign currency
    translation, $1.7 million due to variable selling expenses, as well as increased
    marketing expenses to support new product launches and build brand support.
    Selling and administrative expenses as a percentage of net sales improved
    to 31.3% in the year ended September 30, 2004 as compared to 32.0% for the
    year ended September 30, 2003.

Depreciation and amortization expense increased approximately $1.7 million due
    to the fair value allocation of purchase price to tangible assets and finite
    lived intangible assets required by SFAS No. 141 due to the Merger Agreement.
    The restructuring provision adjustment of $1.1 million of income was the
    result of a change in estimate relating to non-cancelable leases. The decrease
    in other charges, net was attributed to a reduction in foreign currency transaction
    expenses partially offset by the bond call premium of $1.5 million as a result
    of the Merger Agreement.

Operating income for the year ended September 30, 2004 decreased 26.9% to $31.2
    million from $42.7 million for the year ended September 30, 2003. Operating
    income in 2004 included a non-recurring charge of $17.1 million resulting
    from the write-up of inventory and the $1.7 million increase in depreciation
    and amortization as required by SFAS No. 141 on the merger date due to purchase
    accounting. Excluding the effects of the purchase accounting adjustment,
    operating
income increased by
$7.3 million and as a percentage of net sales for the year ended September 30,
    2004 increased to 13.8% from 13.5% for the year ended September 30, 2003.

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Interest expense, net, for the year ended September 30, 2004 increased
to $26.7 million from $19.6 million for the year ended September 30, 2003. Interest
expense for the year ended September 30, 2004 included the write-off of approximately
$3.9 million for deferred financing fees related to the redemption of the 12.50%
senior subordinated notes and the repayment of the Companys old senior bank facilities. In addition, the Company incurred an incremental 30 days
of interest of $1.0 million on the 12.50% senior subordinated notes between the call date for the 12.50% senior subordinated notes and the redemption date. The balance of the increase is due to the higher level of borrowings under the Companys
new credit facility and the 8.25% senior subordinated notes.

The provision for income taxes for the year ended September 30,
2004 was $1.0 million compared to $2.6 million for the year ended September 30,
2003. The effective tax rates for the year ended September 30, 2004 and 2003
were different from the statutory rates due to the mix of income between the
Companys foreign and domestic subsidiaries. The Companys foreign subsidiaries had taxable income in their foreign jurisdictions while the Companys
domestic subsidiaries have net operating loss carry-forwards for income tax purposes.
Due to the uncertainty of realizing these tax benefits at September 30, 2004,
the tax benefits for net operating losses were partially offset by a valuation
allowance.

Effects of Changes in Exchange Rates

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

Effects of Inflation

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

Merger Agreement

On March 10, 2004, Aearo Corporation, the Companys parent,
entered into a Merger Agreement with Aearo Technologies Inc. and its subsidiary,
AC Safety Acquisition Corp. that closed on April 7, 2004. Pursuant to the terms
of the Merger Agreement, AC Safety Acquisition Corp. merged with and into Aearo
Corporation with Aearo Corporation surviving the Merger as a wholly-owned subsidiary
of Aearo Technologies Inc. The aggregate purchase price was $409.3 million,
including fees and expenses. The Merger was financed with approximately $303.7
million of new debt consisting of $175.0 million of 8.25% senior subordinated
notes and a $125.0 million senior credit facility, $3.7 million of assumed debt
and by $4.3
million of cash and $101.3 million of equity.

Liquidity and Capital Resources

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 term and long term. 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 guarantees that this trend will
    continue in the future.

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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) effective April 28, 2005 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 $0.1 million related to the fluctuation
of the Euro relative to the U.S dollar as of September 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 $123.2 million and $126.0 million
at September 30, 2005 and September 30, 2004, respectively. There were no amounts
outstanding under the Revolving Credit Facility at September 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 $1.6 million and $1.4 million of letters of credit
outstanding at
September 30, 2005 and September 30, 2004, 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 September 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 $35.0 million of cash distributions
    to Aearo Corporation, its parent corporation for the purpose of paying cash
    dividends to Aearo Technologies Inc., its parent, to be used by Aearo Technologies
    Inc. 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 $35.0 million to be paid to the Companys parent, Aearo Corporation, the sole holder of the Companys common stock. On May 7, 2005
Aearo Corporation paid a cash dividend to Aearo Technologies Inc., the Companys
ultimate parent, which was used 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 new product development and the maintenance and improvement of its manufacturing
facilities. The Companys principal source of cash to fund these
capital requirements is cash from operations. The Company spent $7.7 million
for capital expenditures for the year ended September 30, 2005. The Company spent
$9.5 million for capital expenditures for the year ended September 30, 2004 and
spent $9.9 million, plus an additional $0.4 million under capital leases, for
capital expenditures for the year ended September 30, 2003. The Company plans
to spend approximately $13.0 million for capital expenditures in fiscal year
2006, which is expected to
be funded by operating cash flow.

The Companys net
    cash provided by operating activities for the year ended September 30, 2005
    totaled $45.6 million as compared to $41.0 million for the year ended September
    30, 2004. The increase of $4.6 million was due primarily to a $10.0 million
    increase related to the increase in net income adjusted for cash and non-cash
    charges (depreciation, inventory purchase accounting adjustment, amortization,
    deferred taxes and other), offset by a $5.4 million decrease related to the
    net changes in assets and liabilities. The Company’s net changes in assets
    and liabilities was primarily driven by a decrease in cash from receivables
    and inventory, partially offset by an increase in cash from accounts payable
and accrued liabilities and other, net.

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Net cash used for investing activities was $6.2 million for the year ended September
    30, 2005 as compared to $9.5 million for the year ended September 30, 2004.
    The decrease in net cash used by investing activities is primarily attributed
    to the completion of various automation projects in 2004. Net cash used for
    financing activities for the year ended September 30, 2005 was $36.8 million
    compared with net cash used by financing activities for the year ended
September 30, 2004 of $10.5 million. The change is primarily due to the dividend
    made to the parent company.

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. Based on Actuarial Standard
of Practice No. 27 and interpretation of this standard, the SFAS No. 87 long
term rate of return on asset assumption must fall within a best estimate range
 that is, a range of returns within which the actual return is more likely than not to fall. This best estimate range equates to a 20-year compound average return derived using the outside actuarial firms proprietary
Portfolio Return calculator (PRC), reflecting the asset allocation of the trust
with appropriate adjustments for investment, trading, management and administrative
expenses that are paid from the trust. For purposes of determining the
25th to 75th percentile range, the PRC uses the outside
actuarial firms capital market
assumptions with respect to each class to develop the probability distribution
of returns. The independently developed rate of 8.00% falls within the 25th and
75th percentiles of 4.96% and 8.61%, respectively. The discount rate was lowered to 5.5% for the fiscal year ended September 30, 2005 from 6.0% for the fiscal 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 2005, although the Company
elected to make an additional contribution of $0.3 million. The following benefit
payments, which reflect expected future service, as appropriate, are
expected to be paid (in thousands of dollars):

|Fiscal year 2006        | $ | 1,047 | 
|----------------------- | - | ----- | 
|Fiscal year 2007        |   | 561   | 
|Fiscal year 2008        |   | 753   | 
|Fiscal year 2009        |   | 1,070 | 
|Fiscal year 2010        |   | 1,001 | 
|Fiscal year 2011  2015 |   | 7,108 | 

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.

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Contractual Obligations

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

|                            |      |        |           |   |           |  | 2011 and |        |       |  
|--------------------------- | ---- | ------ | --------- | - | --------- |  | -------- | ------ | ----- | -
|                            |      |        |           |   |           |  |          |        |       |  
|                            | 2006 |        | 2007-2008 |   | 2009-2010 |  | after    |        | Total |  
|                            |      |        |           |   |           |  |          |        |       |  
|                            |      |        |           |   |           |  |          |        |       |  
|Capital lease obligations   | $    | 353    |           | $ | 631       |  | $        | 122    |       | $
|Operating lease obligations |      | 5,757  |           |   | 6,499     |  |          | 4,584  |       |  
|Mortgage obligations        |      | 2,048  |           |   |          |  |          |       |       |  
|Purchase obligations        |      | 5,994  |           |   | 10,972    |  |          | 6,138  |       |  
|Respiratory commitment      |      | 400    |           |   | 800       |  |          | 800    |       |  
|Deferred Compensation       |      |       |           |   |          |  |          |       |       |  
|Long term debt and interest |      | 21,702 |           |   | 43,403    |  |          | 43,173 |       |  
|                            |      |        |           |   |           |  |          |        |       |  
|Total                       | $    | 36,254 |           | $ | 62,305    |  | $        | 54,817 |       | $
|                            |      |        |           |   |           |  |          |        |       |  
|                           

The amounts for long term debt above include both interest and principal payments.
    The Company paid approximately $4.2 million for taxes worldwide in fiscal
    2005 and does not anticipate significant changes to its tax obligations in
    2006. The Company has approximately $1.6 million of letters of credit outstanding
    as of September 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 by considering 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 the plan features. The goal of the funding strategy is to
    achieve full funding while minimizing the year to year volatility of contribution
    payments. The deferred
compensation plan is fully funded by investments made in a rabbi trust.

Off-Balance Sheet Arrangements

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

Risk Factors

If we fail to successfully introduce new products, we may lose market position and our financial performance may be negatively impacted.

In many of the markets in which we compete, there are frequent introductions
    of new products and product line extensions. If we are unable to identify
    emerging consumer and technological trends, maintain and improve the competitiveness
    of our products and introduce these products on a global basis, we may lose
    market position, which could have a material adverse effect on our business,
    financial condition and results of operations. Continued product development
    and
marketing efforts have all the risks inherent in the development of new products
    and line extensions, including development delays, the failure of new products
    and line extensions to achieve anticipated levels of market acceptance and
    the cost of
failed product introductions.

The markets in which we compete are highly competitive.

The PPE and energy absorbing composites markets are highly competitive. Our competitors
    range in size from small companies focusing on single products to large multinational
    corporations that manufacture and supply many types of products. Our main
    competitors vary by region and product. We believe that participants in this
    industry compete primarily on the basis of product characteristics (such
    as design,
style and functional performance), product quality, service, brand-name
recognition and, to a lesser extent, price. Some of our competitors have greater
financial and other resources than we do and may be able to grow more quickly
through strategic acquisitions and may be able to better respond to changing
business and economic conditions. Our net income could be adversely affected
by competitors product innovations and increased pricing pressure. Individual
competitors have advantages and strengths in different sectors of our markets,
in different products and in different areas, including manufacturing and distribution
systems, geographic market presence, customer service and support, breadth of
product, delivery time and price. Some of our competitors also have greater access
to capital and technological resources and we may not be able to compete successfully
with them.

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The energy absorbing composites market is also very competitive with competitors
    ranging from smaller companies competing in single vertical segments to significantly
    larger companies that participate in this market but have numerous other
    product lines as well. Competitors vary by region and product lines. Our
    profitability could be affected by competitor product innovations, pricing
    pressures and mergers within this market.

Downturns in the North American and European economies could significantly reduce the demand for our products.

The level of demand for our products depends on the general economic conditions
    of the markets in which we compete. A general economic decline in North America
    or Europe could adversely affect our business. Our customers tend to reduce
    their purchases of our products during economic downturns.

If we are unable to retain senior executives and other qualified professionals, our growth may be hindered, which could negatively impact our results of operations.

Our success depends in part on our ability to attract, hire, train and retain
    qualified managerial, sales and marketing personnel. Competition for these
    types of personnel is intense. We may be unsuccessful in attracting and retaining
    the personnel we require to conduct and expand our operations successfully.
    Our results of operations could be materially and adversely affected if we
    are unable to attract, hire, train and retain qualified personnel. Our success
    also
depends to a significant extent on the continued service of our management team.
    The loss of any member of the management team could have a material adverse
    effect on our business, results of operations and financial condition.

We are subject to market risks with respect to industry pricing of the raw materials we need to manufacture our products.

We buy and consume a wide variety of raw materials in order to manufacture our
    products. We are subject to market risks with respect to industry pricing
    of such raw materials and we do not enter into derivative instruments to
    manage such risk. If the costs of these raw materials increase dramatically,
    it could have a material adverse effect on our business, results of operations
    and financial condition.

Our continued success depends on our ability to protect our intellectual property. If we are unable to protect our intellectual property, our sales could be materially and adversely affected.

Our success depends, in part, on our ability to obtain and enforce patents, maintain
    trade-secret protection and operate without infringing on the proprietary
    rights of third parties. We may find it necessary to initiate litigation
    to protect our intellectual property. Litigation can be costly and time consuming.
    Litigation expenses could be significant. In addition, we may decide to settle
    legal claims, including certain pending claims, despite our beliefs on the
    probability of success on the merits, to avoid litigation expenses as well
    as the diversion of management resources. While we have been issued patents
    and have registered trademarks with respect to many of our products and technologies,
    there can be no assurance that our competitors will not infringe our parents
    or trandmarks,
independently develop similar or superior products or technologies, duplicate
    any of our designs, trademarks, processes or other intellectual property
    or design around any processes or designs on which we have or may obtain
    patents or trademark protection. In addition, it is possible that third parties
    may have or acquire  other technology or designs that we may
    use or desire to use, so that we may need to acquire licenses to, or to contest
    the validity of, such third-party patents or trademarks. Such licenses may
    not be made available to us on acceptable terms, if at all, and we may
    not prevail in contesting the validity of such third-party rights.

In addition to patent
    and trademark protection, we also protect trade secrets, know-how and other
    confidential information against unauthorized use by others or disclosure
    by persons who have access to them, such as our employees, through contractual
    arrangements. These agreements may not provide meaningful protection for
    our trade secrets, know-how or other proprietary information in the event
    of any unauthorized use, misappropriation or disclosure of such trade secrets,
    know-how or other proprietary information. If we are unable to maintain the
    proprietary nature of our technologies, our sales could be materially adversely
    affected.

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We have, and may need
    to acquire in the future, licenses permitting us to use certain third-party
     technologies and designs in connection with our business. We cannot
    be certain that such licenses will be continue to be available to us on favorable
    terms, if at all. If we cannot acquire or maintain any necessary license,
    or if any necessary license is too costly, we may be prohibited from using
    certain technologies or designs in our business, which could have an adverse
    affect on our operating results.

Litigation brought by third parties claiming infringement of their intellectual
property rights or trying
to
invalidate
intellectual
property
rights owned or used by us may be costly and time consuming.

We face lawsuits from time to time alleging that our products infringe on third-party
    intellectual property, and/or seeking to invalidate or limit our ability
    to use our intellectual property. If we become involved in litigation, we
    may incur substantial expense defending these claims and the proceedings
    may divert the attention of management, even if we prevail. An adverse determination
    in proceedings of this type could subject us to significant liabilities,
allow our competitors to market competitive products without a license from us,
    prohibit us from marketing our products or require us to seek licenses from
    third parties that may not be available on commercially reasonable terms,
    if at all.

Product liability claims could have a material adverse effect on our operating results.

We face an inherent business risk of exposure to product liability claims arising
    from the alleged failure of our products to prevent the types of personal
    injury or death against which they are designed to protect. Any material
    uninsured losses due to product liability claims that we experience could
    subject us to material losses.

In particular, we are 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 $0.4 million 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. Nevertheless,
we could potentially be liable for these losses or claims if Cabot Corporation
fails to meet its obligations pursuant to our agreement with them. We could also
be liable if the alleged exposure involved the use of products manufactured by
us after our July 1995 acquisition of the business. Consistent with the experience
of
other companies involved in silica- and asbestos-related litigation, there has
been an increase in the number of asserted claims that could potentially involve
us. We cannot determine our potential liability, if any, for such claims, in
part because the defendants in these lawsuits are often numerous and the claims
generally do not specify the amount of damages sought. Additionally, bankruptcy
filings of companies with asbestos- and silica-related litigation could increase
our cost over time.
If we are found liable in these cases and Cabot Corporation fails to meet its
obligations pursuant to our agreement with them, it would have a material adverse
effect on our business. 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.

We could be required
    to recall or redesign our products if they prove to be defective. We maintain
    insurance against product liability claims (with the exception of asbestosis
    and silicosis cases, for which coverage is not commercially available), but
    it is possible that our insurance coverage will not continue to be available
    on terms acceptable to us or that such coverage will not be adequate for
    liabilities actually incurred. A successful claim brought against us in excess
    of available insurance coverage, or any claim or product recall that results
    in significant expense or adverse publicity against us, could have a material
    adverse effect on our business, operating results and financial condition.

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Environmental, health and safety requirements could expose us to material obligations and liabilities.

We are subject to federal, state, local and foreign laws, regulations and ordinances
    relating to the protection of the environment, including those governing
    discharges to air and water, handling and disposal practices for solid and
    hazardous wastes, and occupational health and safety. The consequence for
    violating such requirements can be material. We have made and will continue
    to make capital and other expenditures to comply with environmental and health
    and safety
requirements. In addition, if a release of hazardous substances occurs on or
    from our properties or any offsite disposal location where our wastes have
    been disposed, or if contamination from prior activities is discovered at
    any of our properties or third-party owned properties that we or our predecessors
    formerly owned or operated, we may be subject to liability arising out of
    such conditions and the amount of such liability could be material. Liability
    can include, for example, costs of
investigation and cleanup of the contamination, natural resource damages, damage
    to properties and personal injuries. Environmental laws and regulations are
    complex, change frequently and have tended to become more strict over time.
    If more stringent environmental laws or regulations are enacted, these future
    laws could have a material adverse effect on our results of operations.

Our international operations are subject to various uncertainties, and a significant reduction in international sales of our products could have a material adverse effect on our results of operations.

Our international operations are subject to various political, economic
and other uncertainties which could adversely affect our business. A significant
reduction of our international business would adversely affect our revenues.
We operate manufacturing, distribution and sales facilities in eight foreign
countries and sell our products in more than 70 countries. Approximately 40%
of our fiscal 2005 net sales were made in foreign countries. These risks include
unexpected changes in regulatory requirements; currency exchange rate fluctuations;
changes in trade policy or tariff regulations; customs matters; longer payment
cycles; higher tax rates and potentially adverse tax consequences, including
restrictions on repatriating earnings and the threat of double taxation;
additional tax withholding requirements; intellectual property protection difficulties;
difficulty in collecting accounts receivable; complications in complying with
a variety of foreign laws and regulations, many of which conflict with United
States laws; costs and difficulties in integrating, staffing and managing international
operations; and strains on financial and other systems to properly administer
VAT and other taxes.

In addition, foreign operations involve uncertainties arising from local business
    practices, cultural considerations and international political and trade
    tensions. If we are unable to successfully manage the risks associated with
    expanding our global business or to adequately manage operational fluctuations
    internationally, it could have a material adverse effect on our business,
    results of operations or financial condition.

We expect that international sales will continue to represent a significant percentage of our net sales, which exposes us to currency exchange rate fluctuations.

Because a significant
    percentage of our net sales are made in foreign countries, our results of
    operations are subject to risks associated with fluctuations in currency
    exchange rates. While many of our 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, an increase in the value of the U.S.
    dollar relative to other currencies can have a negative impact on our profitability.
    Also, our Swedish operations are affected by changes in exchange rates relative
    to the Swedish Krona, and an increase in the value of the Krona relative
    to other currencies can have a negative impact on our profitability. We cannot
    predict whether the foreign currency exchange risks inherent in doing business
    in foreign countries will have a material adverse effect on our operations
and financial results in the future.

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We may be unable to successfully execute or effectively integrate acquisitions, which may adversely affect our results of operations.

One of our key operating strategies is to selectively pursue acquisitions.
Acquisitions involve a number of risks including failure of the acquired businesses
to achieve the results we expect, diversion of our
managements attention from operational matters, our inability to retain
key personnel of the acquired businesses, risks associated with unanticipated
events or liabilities, the potential disruption of our existing business, and
customer
dissatisfaction or performance problems with the acquired businesses.

If we are unable to integrate or successfully manage a business that we may acquire
    in the future, we may not realize anticipated cost savings, improved manufacturing
    efficiencies and revenue growth. This may result in reduced profitability
    or operating losses. In addition, we expect to face competition for acquisition
    candidates, which may limit the number of our acquisition opportunities and
    may lead to higher acquisition prices. Moreover, acquisitions of
businesses may require additional debt financing, resulting in additional leverage.
    The covenants in our senior credit facility and the indenture governing our
    8 1/4% Senior Subordinated Notes due 2012, or the 8 1/4% Notes, may further
    limit our ability to complete acquisitions. In addition, we may in the future
    pursue acquisitions of a significantly larger scale than in the past, in
    which case these risks would be intensified. The realization of all or any
    of the risks described above
could materially and adversely affect our business, results of operations and
    financial condition.

We do not have long term contracts with many of our customers.

We do not have contracts with many of our customers, and a significant portion
    of the customer contracts that we do have, are not long term contracts. A
    significant number of our customers may terminate their relationships with
    us at any time, which could have a material adverse effect on our business,
    results of operations and financial condition.

Our results of operations and net sales are dependent on existing regulations and standards. If these regulations or standards are changed, our results and sales could be materially and adversely affected.

Our products are and will continue to be subject to regulation by various federal,
    state, local and foreign regulatory authorities. Our net sales may be materially
    and adversely affected by changes in safety regulations and standards covering
    industrial workers in the United States, Canada and Europe, including those
    of OSHA, the National Institute for Occupational Safety and Health, or the
    European Committee for Standardization. Our net sales could also be adversely
    affected by a reduction in the level of enforcement of such regulations.
    Changes in regulations could reduce the demand for our products or require
    us to reengineer our products, thereby creating opportunities for our competitors.
    If demand for our
products is reduced, our results of operations and net sales could be materially
    and adversely affected.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risks related to changes in foreign
currencies, interest rates and commodity pricing. The Company uses derivatives
to mitigate the impact of changes in foreign currencies and interest rates. All
derivatives are for purposes other than trading. The Company adopted the provisions
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities on
October 1, 2000, 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. For
    the year ended September 30, 2003 the impact on earnings for trade activities
    was a net gain of $0.3 million. For the year ended September 30, 2004, the
    impact on earnings for trade activities was a net loss of $0.5 million.
For the year ended September 30, 2005 the impact on earnings for trade activities
    was minimal.

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 loss of approximately
$0.6 million, a loss of approximately $0.2 million and a gain of approximately
$1.0 million for the years ended September 30, 2005, 2004 and 2003, respectively.
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
year ended September 30, 2005, the Company entered into 36 new monthly forward
foreign currency contract derivatives that are designed to protect the Company
against exchange rate movement during fiscal 2006. As a result of the new forward
currency contracts, the Company has recorded a derivative payable of $0.6 million
at September 30, 2005. For the years ended September 30, 2004 and 2003, the Company
reclassified into earnings losses of $0.8 million and $2.0 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.
The Company estimates that a hypothetical 1% adverse change in foreign currency
exchange rates relative to the US Dollar would impact net income by $0.4 million
for the consolidated operating results of the Company.

Interest Rates

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

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The Company had approximately $30.5 million of variable rate debt protected under
    an interest rate cap arrangement at a strike price of 1.13% LIBOR, which
    expired December 31, 2004. The approximate fair value of the cap at September
    30, 2004 was $0.1 million. 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.
    During
the six months ended September 30, 2004 and the twelve months ended September
    30, 2005, there was a minimal impact and a $0.1 million gain on earnings,
    respectively.

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. The Company
    estimates that a hypothetical 1% increase in interest rates would increase
    interest expense by $1.2 million.

Commodity Risk

The Company is subject to market risks with respect to industry pricing in paper,
    crude oil and natural gas 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.

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Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 38
|------------------------------------------------------- | --
|CONSOLIDATED BALANCE SHEETS                             | 39
|CONSOLIDATED STATEMENTS OF OPERATIONS                   | 40
|CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY     | 41
|CONSOLIDATED STATEMENTS OF CASH FLOWS                   | 42
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS              | 43





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Aearo Company I:

We have audited the accompanying consolidated balance sheets of
Aearo Company I and subsidiaries (Aearo  Successor) as of September 30, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year ended September 30, 2005 and the six months ended September 30, 2004. We have also audited the statements of operations, stockholders equity and cash flows of Aearo Company I and
subsidiaries (Aearo  Predecessor) for the six months ended March 31, 2004 and for the year ended September 30, 2003.  Aearo  - Successor and Aearo  Predecessor are collectively referred to as the Company.
These financial statements are the responsibility of management of the Company.
Our responsibility is to express opinions on these financial statements based
on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting
    Oversight Board (United States). Those standards require that we plan and
    perform the audit to obtain reasonable assurance about whether the financial
    statements are free of material misstatement. The Company is not required
    to have, nor were we engaged to perform, an audit of its internal control
    over financial reporting. Our audits included consideration of internal control
    over
financial reporting as a basis for designing audit procedures that are appropriate
    in the circumstances, but not for the purpose of expressing an opinion on
    the effectiveness of the Company’s internal control over financial reporting.
    Accordingly, we express no such opinion. An audit also includes examining,
    on a test basis, evidence supporting the amounts and disclosures in the financial
    statements, assessing the accounting principles used and significant estimates
    made by management, as
well as evaluating the overall financial statement presentation. We believe that
    our audits provide a reasonable basis for our opinions.

In our opinion, such consolidated financial statements referred
to above of Aearo  Successor present fairly, in all material respects, the financial position of Aearo  Successor at September 30, 2005 and 2004,
and the results of their operations and their cash flows for the year ended September 30, 2005 and the six months ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America, and in our
opinion, the consolidated financial statements referred to above for Aearo  Predecessor
present fairly, in all material respects, the results of their operations and
their cash flows for the six months ended March 31, 2004 and the year ended September
30, 2003 in conformity with accounting principles generally accepted in the United
States of America.

/s/ DELOITTE & TOUCHE LLP 
Indianapolis, Indiana 
November 21,
2005

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

|                                             |                                                                                                         | September 30, |         | September 30, |  
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------- | ------- | ------------- | -
|                                             |                                                                                                         | 2004          |         | 2005          |  
|                                             |                                                                                                         |               |         |               |  
|                                             | ASSETS                                                                                                  |               |         |               |  
|CURRENTASSETS:                               |                                                                                                         |               |         |              
|                                             | Cash and cash equivalents                                                                               | $             | 27,724  |               | $
|                                             | Accounts receivable (net of allowance
    for doubtful accounts of $1,334 and $1,206,
    respectively) |               | 54,159  |               |  
|                                             | Inventories                                                                                             |               | 40,849  |               |  
|                                             | Deferred and prepaid expenses                                                                           |               | 4,146   |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total current assets                                                                                    |               | 126,878 |               |  
|                                             |                                                                                                         |               |         |               |  
|LONGTERMASSETS:                              |                                                                                                         |               |         |               |  
|                                             | Property, plant and equipment, net                                                                      |               | 54,750  |               |  
|                                             | Goodwill                                                                                                |               | 133,745 |               |  
|                                             | Other intangible assets, net                                                                            |               | 185,855 |               |  
|                                             | Other assets                                                                                            |               | 15,144  |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total assets                                                                                            | $             | 516,372 |               | $
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | LIABILITIES                                                                                             |               |         |               |  
|CURRENTLIABILITIES:                          |                                                                                                         |               |         |               |  
|                                             | Current portion of long term debt                                                                       | $             | 1,639   |               | $
|                                             | Accounts payable and accrued liabilities                                                                |               | 46,730  |               |  
|                                             | Accrued interest                                                                                        |               | 6,996   |               |  
|                                             | U.S. and foreign income taxes                                                                           |               | 1,648   |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total current liabilities                                                                               |               | 57,013  |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|LONGTERMLIABILITIES:                         |                                                                                                         |               |         |               |  
|                                             | Long term debt                                                                                          |               | 302,842 |               |  
|                                             | Deferred income taxes                                                                                   |               | 59,699  |               |  
|                                             | Due to Parent                                                                                           |               |        |               |  
|                                             | Other liabilities                                                                                       |               | 14,726  |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total liabilities                                                                                       |               | 434,280 |               |  
|                                             |                                                                                                         |               |         |               |  
|COMMITMENTS
        ANDCONTINGENTLIABILITIES |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | STOCKHOLDERS
    EQUITY                                                                                |               |         |               |  
|                                             | Common stock, $.01 par value                                                                           |               |         |               |  
|                                             | Authorized100 shares                                                                                   |               |         |               |  
|                                             | Issued and outstanding100 shares                                                                       |               |        |               |  
|                                             | Paid in capital                                                                                         |               | 101,610 |               |  
|                                             | Accumulated deficit                                                                                     |               | (19,415 | )             |  
|                                             | Accumulated other comprehensive loss                                                                    |               | (103    | )             |  
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total stockholders equity                                                                              |               | 82,092  |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             |                                                                                                         |               |         |               |  
|                                             | Total liabilities and stockholders
        equity                                                      | $             | 516,372 |               | $
|                                             |                                                                                                         |               |         |               |  

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

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

|                                    | Predecessor   |         |              | Successor |         |               |  |              
|----------------------------------- | ------------- | ------- | ------------ | --------- | ------- | ------------- |  | -------------
|                                    |               |         |              |           |         |               |  |              
|                                    |               |         | Six          |           |         | Six           |  |              
|                                    | Year Ended    |         | Months Ended |           |         | Months Ended  |  | Year Ended   
|                                    | September 30, |         | March 31,    |           |         | September 30, |  | September 30,
|                                    | 2003          |         | 2004         |           |         | 2004          |  | 2005         
|                                    |               |         |              |           |         |               |  |              
|Net sales                           | $             | 316,428 |              | $         | 169,579 |               |  | $            
|Cost of sales                       |               | 164,289 |              |           | 89,056  |               |  |              
|Restructuring                       |               | (270    | )            |           |        |               |  |              
|                                    |               |         |              |           |         |               |  |              
|Gross profit                        |               | 152,409 |              |           | 80,523  |               |  |              
|                                    |               |         |              |           |         |               |  |              
|Selling and administrative          |               | 101,257 |              |           | 56,835  |               |  |              
|Research
    and technical services |               | 6,402   |              |           | 3,623   |               |  |              
|Amortization expense                |               | 267     |              |           | 242     |               |  |              
|Other charges (income), net         |               | 1,737   |              |           | (506    | )             |  |              
|Restructuring                       |               |        |              |           | (1,091  | )             |  |              
|                                    |               |         |              |           |         |               |  |              
|Operating
        income            |               | 42,746  |              |           | 21,420  |               |  |              
|Interest income                     |               | (107    | )            |           | (53     | )             |  |              
|Interest expense                    |               | 19,563  |              |           | 10,889  |               |  |              
|                                    |               |         |              |           |         |               |  |              
|Income
        (loss) before        |               |         |              |           |         |               |  |              
|income
        taxes                |               | 23,290  |              |           | 10,584  |               |  |              
|Provision (benefit) for income      |               |         |              |           |         |               |  |              
|taxes                               |               | 2,603   |              |           | 2,020   |               |  |              
|                                    |               |         |              |           |         |               |  |              
|Net income
        (loss)           | $             | 20,687  |              | $         | 8,564   |               |  | $            
|                                    |               |         |              |           |         |               |  |              

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

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AEARO COMPANY I AND SUBSIDIARIES CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS
EQUITY (Dollars in Thousands)

|                                                |        |        |  |    |         |  |          | Retained    |   |               | Accumulated |   |   |         |   |        |               |  
|----------------------------------------------- | ------ | ------ |  | -- | ------- |  | -------- | ----------- | - | ------------- | ----------- | - | - | ------- | - | ------ | ------------- | -
|                                                |        |        |  |    | Paid    |  |          | Accumulated |   |               | Other       |   |   |         |   |        | Comprehensive |  
|                                                | Common |        |  | In |         |  | Earnings |             |   | Comprehensive |             |   |   |         |   | Income |              
|                                                | Shares | Amount |  |    | Capital |  |          | (Deficit)   |   |               | Loss        |   |   | Total   |   |        | (Loss)        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Balance, October 1, 2002                        | 100    |        |  | $  | 32,531  |  | $        | 6,532       |   | $             | (17,536     | ) | $ | 21,527  |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Foreign currency translation adjustment         |       |       |  |    |        |  |          |            |   |               | 9,080       |   |   | 9,080   |   | $      | 9,080         |  
|Unrealized loss on derivative instruments       |       |       |  |    |        |  |          |            |   |               | (390        | ) |   | (390    | ) |        | (390          | )
|Net minimum pension liability adjustment        |        |        |  |    |         |  |          |             |   |               | 2,060       |   |   | 2,060   |   |        | 2,060         |  
|Dividend to Parent                              |        |        |  |    |         |  |          | (19,506     | ) |               |             |   |   | (19,506 | ) |        |               |  
|Net income                                      |       |       |  |    |        |  |          | 20,687      |   |               |            |   |   | 20,687  |   |        | 20,687        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Comprehensive income                            |       |       |  |    |        |  |          |            |   |               |            |   |   |         |   | $      | 31,437        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Balance, September 30, 2003                     | 100    |        |  |    | 32,531  |  |          | 7,713       |   |               | (6,786      | ) |   | 33,458  |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Net income                                      |       |       |  |    |        |  |          | 8,564       |   |               |            |   |   | 8,564   |   |        | 8,564         |  
|Foreign currencytranslationadjustment           |        |        |  |    |         |  |          |             |   |               | 1,688       |   |   | 1,688   |   |        | 1,688         |  
|Net
    minimum pensionliability adjustment     |        |        |  |    |         |  |          |             |   |               | 4           |   |   | 4       |   |        | 4             |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Comprehensive income                            |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   | $      | 10,256        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Balance, March 31, 2004                         | 100    |       |  | $  | 32,531  |  | $        | 16,277      |   | $             | (5,094      | ) | $ | 43,714  |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Capital contribution                            | 100    |       |  | $  | 101,610 |  | $        |            |   | $             |             |   | $ | 101,610 |   |        |               |  
|Foreign currencytranslation
    adjustment      |       |       |  |    |        |  |          |            |   |               | (103        | ) |   | (103    | ) | $      | (103          | )
|Dividend to Parent forrepayment
        of debt |        |        |  |    |         |  |          | (14,305     | ) |               |             |   |   | (14,305 | ) |        |               |  
|Net loss                                        |       |       |  |    |        |  |          | (5,110      | ) |               |            |   |   | (5,110  | ) |        | (5,110        | )
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Comprehensive loss                              |       |       |  |    |        |  |          |            |   |               |            |   |   |        |   | $      | (5,213        | )
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Balance, September 30, 2004                     | 100    | $     |  | $  | 101,610 |  | $        | (19,415     | ) | $             | (103        | ) | $ | 82,092  |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Vesting of restricted stock                     |        |        |  |    | 40      |  |          |             |   |               |             |   |   | 40      |   |        |               |  
|Tax benefit of stockoptions exercised           |        |        |  |    | 100     |  |          |             |   |               |             |   |   | 100     |   |        |               |  
|Foreign currencytranslation adjustment          |       |       |  |    |        |  |          |            |   |               | (871        | ) |   | (871    | ) | $      | (871          | )
|Unrealized gain on derivative                   |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|instruments, net of taxof
        $215          |       |       |  |    |        |  |          |            |   |               | (351        | ) |   | (351    | ) |        | (351          | )
|Dividend to Parent                              |        |        |  |    |         |  |          | (34,994     | ) |               |             |   |   | (34,994 | ) |        |               |  
|Net income                                      |       |       |  |    |        |  |          | 27,589      |   |               |            |   |   | 27,589  |   |        | 27,589        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Comprehensive income                            |       |       |  |    |        |  |          |            |   |               |            |   |   |         |   | $      | 26,367        |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  
|Balance, September 30, 2005                     | 100    | $     |  | $  | 101,750 |  | $        | (26,820     | ) | $             | (1,325      | ) | $ | 73,605  |   |        |               |  
|                                                |        |        |  |    |         |  |          |             |   |               |             |   |   |         |   |        |               |  

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

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AEARO
      COMPANY I AND SUBSIDIARIES 
  CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)

|                                                                                     | Predecessor   |         |            | Successor |       
|------------------------------------------------------------------------------------ | ------------- | ------- | ---------- | --------- | ------
|                                                                                     | Year          |         | Six Months |           |       
|                                                                                     | Ended         |         | Ended      |           |       
|                                                                                     | September 30, |         | March 31,  |           |       
|                                                                                     | 2003          |         | 2004       |           |       
|                                                                                     |               |         |            |           |       
|CASH FLOWS
        FROM OPERATING ACTIVITIES:                                        |               |         |            |           |       
|Net income (loss)                                                                    | $             | 20,687  |            | $         | 8,564 
|                                                                                     |               |         |            |           |       
|Adjustments to reconcile net income (loss)
        to cash provided by operating     |               |         |            |           |       
|activities                                                                          |               |         |            |           |       
|Depreciation                                                                         |               | 11,102  |            |           | 5,931 
|Amortization of intangible
        assets and deferred financing costs               |               | 1,775   |            |           | 2,283 
|Inventory purchase accounting
        adjustment                                     |               |        |            |           |      
|Restructuring adjustment                                                             |               | (270    | )          |           | (1,091
|Deferred income taxes                                                                |               | (986    | )          |           | (15   
|Other, net                                                                           |               | 395     |            |           | 682   
|Changes in assets
          and liabilities(net
        of effects of acquisitions) |               |         |            |           |       
|Accounts
        receivable                                                          |               | 1,067   |            |           | (1,113
|Inventories                                                                          |               | (443    | )          |           | (3,464
|Income
        taxes payable                                                         |               | 635     |            |           | (1,168
|Accounts
        payable and accrued liabilities                                     |               | 4,672   |            |           | (3,221
|Prepaid
        and deferred assets                                                  |               | (3,707  | )          |           | 1,065 
|Other
        assets                                                                 |               | (2,983  | )          |           | (432  
|Other
        liabilities                                                            |               | 4,756   |            |           | 1,014 
|                                                                                     |               |         |            |           |       
|Net
        cash provided by operating activities                                    |               | 36,700  |            |           | 9,035 
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|CASH FLOWS
        FROM INVESTING ACTIVITIES:                                        |               |         |            |           |       
|Additions to property, plant
        and equipment                                   |               | (9,886  | )          |           | (5,006
|Acquisitions, net of cash                                                            |               | (12,600 | )          |           |      
|Other                                                                                |               | 28      |            |           | 12    
|                                                                                     |               |         |            |           |       
|Net
        cash used by investing activities                                        |               | (22,458 | )          |           | (4,994
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|CASH FLOWS
        FROM FINANCING ACTIVITIES:                                        |               |         |            |           |       
|Distribution to stockholders
        of parent to effect the merger                  |               |        |            |           |      
|(Repayment of) proceeds from
        revolving credit facility                       |               | 11,650  |            |           | 3,950 
|Repayment of old credit facility                                                     |               | (12,826 | )          |           | (8,949
|Proceeds from new credit
        facility                                            |               |        |            |           |      
|Repayment of new credit facility                                                     |               |        |            |           |      
|Repayment of 12.50% senior
        subordinated notes                                |               |        |            |           |      
|Proceeds from 8.25% senior
        subordinated notes                                |               |        |            |           |      
|Debt issue costs                                                                     |               | (3,990  | )          |           |      
|Dividend to Parent                                                                   |               | (19,506 | )          |           |      
|Repayment of capital lease
        obligations                                       |               | (224    | )          |           | (122  
|Repayment of long term debt                                                          |               | (107    | )          |           | (119  
|                                                                                     |               |         |            |           |       
|Net
        cash used by financing activities                                        |               | (25,003 | )          |           | (5,240
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|EFFECT OF EXCHANGE RATE
        ON CASH                                              |               | 3,582   |            |           | (789  
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |               | (7,179  | )          |           | (1,988
|                                                                                     |               |         |            |           |       
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       |               | 14,480  |            |           | 7,301 
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                             | $             | 7,301   |            | $         | 5,313 
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|NON-CASH INVESTING
        AND FINANCING ACTIVITIES:                                 |               |         |            |           |       
|Property,
        Plant and equipment purchases                                      | $             |        |            | $         |      
|Capital Lease Obligations                                                            |               | 430     |            |           |      
|                                                                                     |               |         |            |           |       
|                                                                                     |               |         |            |           |       
|CASH PAID FOR:                                                                       |               |         |            |           |       
|Interest                                                                             | $             | 18,096  |            | $         | 8,862 
|                                                                                     |               |         |            |           |       
|Income Taxes                                                                         | $             | 1,444   |            | $         | 3,254 
|                                                                                     |               |         |            |           |       

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

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AEARO COMPANY
      I AND SUBSIDIARIES 
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis
      of Presentation

Aearo Company I, a Delaware corporation (Aearo),
    and its wholly owned subsidiaries, (hereafter referred to as we, our,
    or the Company) manufactures and sells products under the brand
    names: AOSafety®, E-A-R®, Peltor® and SafeWaze. 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, non-prescription safety
    eyewear, face shields, reusable and disposable respirators, hard hats and
    first aid kits under the brand names: AOSafety®, E-A-R®,
    and Peltor®.
    The Safety Prescription Eyewear segment manufactures and sells prescription
    eyewear products that are designed to protect the eyes from the typical hazards
    encountered in the industrial work environment. The Company’s Safety Prescription
    Eyewear segment purchases component parts (lenses and the majority of its
    frames) from various suppliers, grinds and shapes the lenses to the customer’s
    prescription, and then assembles the glasses using the customer’s choice
    of frame. The Specialty Composites segment manufactures and sells a wide
    array of energy-absorbing materials that are incorporated into other manufacturers products
    to control noise, vibration and shock.

On March 10, 2004, Aearo Corporation (Parent),
    the Companys parent, entered into a merger agreement (Merger
    Agreement) with Aearo Technologies Inc. (formerly 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 Aearo Technologies Inc. The aggregate
    purchase price was approximately $409.3 million, including fees and expenses.
    The Merger was financed with approximately $303.7 million of new debt as
    discussed in Note 6, $3.7 million of assumed debt, $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 Aearo
    Technologies Inc.

Approximately $86.9 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.

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The purchase price is allocated to the Companys
    net 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 bases of those assets
    as a result of finalizing the book bases of certain assets. The allocation
    included a $17.1 million fair value adjustment to inventory as of March 31,
    2004 which was charged to cost of goods sold during the three month period
    ended June 30, 2004. The inventory adjustment above was based on the guidance
    for assigning amounts to inventory in accordance with paragraph 37(c) of
    SFAS No. 141 which requires inventory to be valued at estimated selling prices
    less a reasonable profit allowance for the selling effort. The purchase price
    was allocated as follows (dollars in thousands):

|Working capital                    | $ | 74,680  |  
|---------------------------------- | - | ------- | -
|Fixed assets                       |   | 55,139  |  
|Other assets and liabilities       |   | 16,073  |  
|Deferred tax liabilities           |   | (41,384 | )
|Finite lived intangible asset      |   | 74,104  |  
|Indefinite lived intangible assets |   | 114,300 |  
|Goodwill                           |   | 116,432 |  
|                                   |   |         |  
|Purchase price                     | $ | 409,344 |  
|                                   |   |         |  

The following unaudited pro forma financial information
    is presented as if the Company had been acquired as of the beginning of each
    period presented. The pro forma amounts include certain adjustments, including
    increases in depreciation, amortization and interest expense based on the
    allocation of purchase price to tangible and intangible assets and the issuance
    of additional debt (dollars in thousands):

|                           | Predecessor   |        
|-------------------------- | ------------- | -------
|                           |               |        
|                           | Year          |        
|                           | Ended         |        
|                           | September 30, |        
|                           | 2003          |        
|                           |               |        
|Sales                      | $             | 316,428
|Income before income taxes |               | 20,930 
|Net income                 |               | 18,296 

2. Significant
      Accounting Policies

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

Use of Estimates

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

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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 that achieve specified volume levels 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 years ended September 30, 2003, 2004 and 2005 were $1.7
    million, $1.9 million and $2.6 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.

Advertising

The Company expenses the costs of advertising as
    incurred. These expenses, including cooperative advertising, were approximately
    $7.3 million, $4.3 million, $4.9 million and $10.9 million for the years
    ended September 30, 2003, the six months ended March 31, 2004 and September
    30, 2004 and the year ended September 30, 2005, respectively.

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.

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Cash Equivalents

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

Marketable Securities

The Company has acquired ceratin investment securities
    for the purpose of funding its obligations under deferred compensation plans.
    The Companys investments in marketable securities are classified as
    trading securities and are carried at fair value under SFAS No. 115,Accounting for Certain Investments in Debt
      and Equity Securities.The investments
    are included in other assets in the consolidated balance sheet.

Foreign Currency Translation and Transactions
      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, permanently invested, 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 (loss). For the year ended September 30, 2003 the accompanying consolidated
    statements of operations include approximately $0.3 million of transaction
    gains included in other charges (income), net. For each of the six month
    periods ended March 31, 2004 and September 30, 2004 the accompanying consolidated
    statements of operations include approximately $0.3 million, and $0.2 million,
    respectively, of transaction losses included in other charges (income), net.
    For the year ended September 30, 2005 the accompanying consolidated statements
    of operations included a minimal amount of transaction gains in other charges
    (income), net.

To mitigate the effects of changes in foreign currency
    rates on operating results related to trade accounts receivable and trade
    accounts payable denominated in foreign currencies, the Company enters into
    forward foreign currency contracts. Gains and losses related to contracts
    designated as hedges of trade accounts receivable and trade accounts payable
    denominated in foreign currencies are accrued as exchange rates change and
    are recognized in the accompanying consolidated statements of operations
    as transaction (gains) and losses and included in other charges (income),
    net. As of September 30, 2004 and 2005, relative to these exposures, the Company had forward foreign currency contracts
      open in the following amounts:

|                | September 30, 2004 |        | September 30, 2005
|--------------- | ------------------ | ------ | ------------------
|                |                    |        |                   
|                | Amount             |        | Contract          
|Currency        | (000s)             |        | Position          
|                |                    |        |                   
|British Pound   | $                  | 1,036  |                   
|Canadian Dollar |                    | 260    |                   
|Norwegian Krona |                    | 2,648  |                   
|Swedish Krona   |                    | 73,125 |                   
|Swiss Franc     |                    | 54     |                   
|Euro            |                    | 7,750  |                   
|Danish Krona    |                    | 3,599  |                   
|               

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As of September 30, 2004 and 2005, the Company
    had less than $0.1 million and $0.3 million of unrealized losses in other
    charges (income) associated with the above forward foreign currency contract
    commitments, respectively.

In addition, the Company enters into forward foreign
    currency contracts to hedge a portion of anticipated sales denominated in
    Euro and Canadian Dollar to mitigate the impact of the effects of changes
    in foreign currency rates on operating results related to cash flows from
    foreign operations. Gains and losses on these derivative hedge contracts
    are deferred in other comprehensive income and recognized as an adjustment
    to the other charges (income) when anticipated sales occur. For the year
    ended September 30, 2003 the accompanying consolidated statements of operations
    include approximately $0.6 million of transaction losses included in other
    charges (income), net. For each of the six month periods ended March 31,
    2004 and September 30, 2004 the accompanying consolidated statements of operations
    include approximately $0.3 million, and $0.2 million, respectively, of transaction
    losses included in other charges (income), net. For the year ended September
    30, 2005 the accompanying consolidated statements of operations included
    no transaction gains or losses in other charges (income), net.

There were thirty six open forward foreign currency
    contracts to hedge anticipated revenues and costs as of September 30, 2005.
    The Company does not enter into forward foreign contracts for trading purposes.

Inventories

Inventories are stated at the lower of cost or
    market, cost being determined using the first-in, first-out (FIFO) method.
    Our excess and obsolete reserves are determined by historical sales data
    and, in the case of new products, by future demand forecasts.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost.
    Depreciation of property, plant and equipment is calculated using the straight-line
    method based on estimated economic useful lives. Expenditures for maintenance
    and repairs and minor renewals are charged to expense. Expenses for maintenance
    and repairs totaled approximately $2.4 million for the year ended September
    30, 2003, $1.2 million and $1.3 million for each of the six month periods
    ended March 31, 2004 and September 30, 2004, respectively, and $2.8 million
    for the year ended September 30, 2005.

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

|Asset Classification    |  | Estimated Useful
          Life | 
|----------------------- |  | ------------------------------- | 
|                        |  |                                 | 
|Buildings               |  | 25-40 years                     | 
|Leasehold improvements  |  | 2-15 years                      | 
|Machinery and equipment |  | 3-10 years                      | 
|Furniture and fixtures  |  | 3-10 years                      | 

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

Income Taxes

Deferred tax assets and liabilities are determined
    based on the differences between the financial statement and tax bases of
    assets and liabilities using currently enacted tax rates. The Company is
    included in the consolidated tax return filed by Aearo Technologies Inc.
    All taxes are recorded as if separate, stand alone returns were filed.

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Research and Technical Services

The Company engages in research and development
      through the normal course of its business and expenses all costs as incurred
      to its statement of operations.

Goodwill and Intangible Assets

Under the provisions of SFAS No. 142 Goodwill
    and Other Intangible Assets, goodwill and intangible assets that have
    indefinite useful lives are not amortized but are tested at least annually
    for impairment. Intangible assets that have finite useful lives are amortized
    over their useful lives and reviewed for impairment at each reporting date.
    The following presents a summary of goodwill and intangible assets at September
    30, 2004 and 2005 (dollars in thousands):

|                           | Gross  |         | Accumulated  |              |           |           | Carrying |    
|-------------------------- | ------ | ------- | ------------ | ------------ | --------- | --------- | -------- | ---
|September 30, 2004         | Amount |         | Amortization |              | Additions |           | Amount   |    
|                           |        |         |              |              |           |           |          |    
|                           |        |         |              |              |           |           |          |    
|Trademarks                 | $      | 114,300 |              | $            |           |           | $        |   
|Customer Relationship List |        | 73,000  |              |              | (2,433    | )         |          |   
|Patents                    |        | 719     |              |              | (122      | )         |          | 82 
|Other                      |        | 385     |              |              | (76       | )         |          |   
|                           |        |         |              |              |           |           |          |    
|Total Intangibles          | $      | 188,404 |              | $            | (2,631    | )         | $        | 82 
|                           |        |         |              |              |           |           |          |    
|                           |        |         |              |              |           |           |          |    
|                           |        |         |              |              |           |           |          |    
|                           |        | Gross   |              | Accumulated  |           |           |          |    
|September 30, 2005         |        | Amount  |              | Amortization |           | Additions |          |    
|                           |        |         |              |              |           |           |          |    
|                           |        |         |              |              |           |           |          |    
|Trademarks                 | $      | 114,300 |              | $            |          |           | $        |   
|Customer Relationship List |        | 73,000  |              |              | (7,299    | )         |          |   
|Patents                    |        | 801     |              |              | (377      | )         |          | 162
|Other                      |        | 385     |              |              | (185      | )         |          |   
|                           |        |         |              |              |           |           |          |    
|Total Intangibles          | $      | 188,486 |              | $            | (7,861    | )         | $        | 162
|                           |        |         |              |              |           |           |          |    
|                          

The weighted average life of patents is 4 years,
    non-compete agreements and other is 5 years and customer relationships is
    15 years. Trademarks have indefinite lives.

Estimate of Aggregate Amortization Expense

|Year ending September 30, 2006 | $ | 5,121 | 
|------------------------------ | - | ----- | 
|Year ending September 30, 2007 |   | 5,010 | 
|Year ending September 30, 2008 |   | 4,900 | 
|Year ending September 30, 2009 |   | 4,910 | 
|Year ending September 30, 2010 |   | 4,902 | 

The following presents the changes in the carrying
    amount of goodwill for the six month period ended September 30, 2004 and
    the year ended September 30, 2005 (dollars in thousands):

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|                                  |  | Six
    Month
    Ended
    September 30,
    2004 |         | YearEnded
     September
    30,
    2005 |  
|--------------------------------- |  | -------------------------------------------------- | ------- | ----------------------------------------- | -
|                                  |  |                                                    |         |                                           |  
|Beginning balance                 |  | $                                                  |        |                                           | $
|Pushed down in merger transaction |  |                                                    | 133,140 |                                           |  
|Reversal of deferred income tax   |  |                                                    |         |                                           |  
|valuation allowance               |  |                                                    |        |                                           |  
|Translation adjustment            |  |                                                    | 605     |                                           |  
|                                  |  |                                                    |         |                                           |  
|Ending balance                    |  | $                                                  | 133,745 |                                           | $
|                                  |  |                                                    |         |                                           |  

Of the goodwill resulting from the merger, $6.8 million is deductible for tax purposes as a result of carryover tax basis and the remaining amount is not deductible for tax purposes.

Impairment

The Company accounts for long-lived and certain intangible assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and SFAS No. 142. The Company continually reviews
its long-lived tangible and intangible assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the
amortization of such assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting
the Companys average cost of funds. During the year ended September 30, 2003, as a result of normal product/equipment obsolescence and productivity or capacity enhancement projects, the Company wrote off approximately $0.3 million of
manufacturing assets. During each of the six month periods ended March 31, 2004 and September 30, 2004, the Company wrote off $0.1 million of manufacturing assets, respectively. During the year ended September 30, 2005, the Company wrote off $0.5
million of manufacturing assets.

Deferred Financing Costs

Deferred financing costs are stated at cost as a component of other assets and amortized over the life of the related debt. Amortization of deferred financing costs is included in interest expense and aggregated $1.4
million for the year ended September 30, 2003. Deferred financing amortization was approximately $1.9 million and $0.7 million for each of the six month periods ended March 31, 2004 and September 30, 2004, respectively. In addition, the six month
periods ended September 30, 2004 included approximately $3.9 million of interest expense for the write-off of deferred financing costs related to the Senior Bank Facility and the 12.50% Notes. Deferred financing amortization was approximately $1.1
million for the year ended September 30, 2005.

Fair Value of Financial Instruments

In accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company has determined the estimated fair value of its financial instruments using appropriate
market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The
Companys financial instruments consist of a combination of cash and cash
equivalents, accounts receivable, accounts payable, Senior Subordinated Notes,
bank debt (including Term Loans, the Revolving Credit Facility and other debt) and interest rate instruments.
The carrying value of these assets and liabilities is a reasonable estimate of
their fair value at September 30, 2004 and 2005.

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The Company had approximately $30.5 million of variable rate debt protected under an interest rate cap arrangement at a strike price of 1.13% LIBOR, which expired December 31, 2004. The approximate fair value of the cap at
September 30, 2004 was $0.1 million. 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. No
amounts were recorded to income or expense related to the interest rate cap for the six months ended March 31, 2004, approximately $0.1 million was recorded as income during the six months ended September 30, 2004 and no amounts were recorded to
income or expense for the year ended September 30, 2005.

The Company also uses financial instruments in the form of forward foreign currency contracts. Current market prices were used to estimate the fair value of the forward foreign currency contracts. The fair value of these
financial instruments was $0.4 million loss net of a tax benefit of $0.2 million.

At September 30, 2005, the Company had investments in a Rabbi trust with a fair value of $3.4 million.

The future value of the forward foreign currency contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. The counter-parties to these
contracts are substantial and creditworthy financial institutions. Neither the risks of counter-party non-performance nor the economic consequences of counter-party non-performance associated with these contracts are considered by the Company to be
material.

Accounting for Stock-based Compensation

Certain employees are awarded stock options and restricted stock under the stock incentive plan of Aearo Technologies Inc. Pursuant to FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25, the compensation expense associated with these awards is accounted for in the Companys consolidation financial statements.

The Company accounts for stock-based compensation under the recognition and measurement principles of Accounting Principals Board (APB) Opinion 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. The Company does recognize compensation expense related to restricted
stock awards and amortizes the expense over the vesting period based on the estimated value of the stock at the date of grant.

The following table illustrates the effect on net income (loss) 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):



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|                                                                                                                                                                       |  |                              | Predecessor |                                           |           |          | Successor                           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | ----------------------------------------- | --------- | -------- | ----------------------------------- | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|                                                                                                                                                                       |  | Year EndedSeptember 30,
2003 |             | Six
          Months
Ended
March 31,
2004 |           |          | Six Months
Ended
September 30,
2004 | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|Net income (loss) as reported                                                                                                                                          |  | $                            | 20,687      |                                           | $         | 8,564    |                                     | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|Stock-based compensation expense                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|recorded under APB No. 25, net of tax                                                                                                                                  |  |                              |            |                                           |           |         |                                     | 
|Stock-based compensation expense                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|determined under fair value based                                                                                                                                      |  |                              |             |                                           |           |          |                                     | 
|method, net of tax                                                                                                                                                     |  |                              | (147        | )                                         |           | (67      | )                                   | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|Proforma net income (loss)                                                                                                                                             |  | $                            | 20,540      |                                           | $         | 8,497    |                                     | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|The fair value of each option grant was estimated
      on the grant date using the Black-Scholes pricing model with the following
      weighted
average assumptions: | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|                                                                                                                                                                       |  | Predecessor                  |             |                                           | Successor |         
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|                                                                                                                                                                       |  | Year EndedSeptember 30,
2003 |             | Six Months
Ended
March 31,
2004           |           |          | Six Months
Ended
September 30,
2004 | 
|                                                                                                                                                                       |  |                              |             |                                           |           |          |                                     | 
|Risk-free interest rate                                                                                                                                                |  |                              | 4.71        | %                                         |           | 4.35     | %                                   | 
|Expected life of options granted                                                                                                                                       |  |                              | 10 years    |                                           |           | 10 years |                                     | 
|Expected volatility of underlying stock                                                                                                                                |  |                              | 0           | %                                         |           | 0        | %                                   | 
|Dividend yield                                                                                                                                                         |  |                              | 0           | %                                         |           | 0        | %                                   | 

Shipping and Handling Costs

Shipping and handling costs include payments to third parties for the delivery of products to customers, as well as internal salaries and overhead costs incurred to store, move and prepare finished products for shipment.
Shipping and handling costs are included with selling and administrative expenses in the accompanying consolidated statement of operations and totaled $18.3 million for the year ended September 30, 2003 and $9.6 million for the six month periods
ended March 31, 2004 and September 30, 2004, respectively and $22.0 million for the year ended September 30, 2005. The Company recovers a portion of its shipping and handling costs from its customers and records this recovery in net sales.

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.

Accounting for Derivative Instruments and Hedging Activities

The Company accounts for derivatives in accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. SFAS No. 133 requires that every
derivative instrument be recorded in the consolidated 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 forward foreign currency contracts
to mitigate the effects of changes in foreign currency rates on profitability
and enters into interest rate derivative agreements to hedge its variable
interest rate risk. These derivatives are cash flow hedges as defined by SFAS
No. 133. For all qualifying and highly effective cash flow hedges, the changes
in the fair value of the derivatives are recorded in other comprehensive income
(loss). Amounts accumulated in other comprehensive income (loss) will be reclassified
as earnings when the related product sales affect earnings for forward foreign
currency contracts or when related interest payments affect earnings for interest
rate derivatives. At
September 30, 2003 the Company had Canadian Dollar forward foreign currency contracts
and no interest rate derivatives as defined under SFAS No. 133. For the year
ended September 30, 2003, the Company reclassified into earnings net losses of
$2.0 million, resulting from the exercise of forward foreign currency contracts
for cash flow hedges. For the six month periods ended March 31, 2004 and September
30, 2004, the Company reclassified into earnings net losses of $0.5 million and
$0.3
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. For the year ended
September 30, 2005, the Company did not enter into any forward foreign currency
contracts for cash flow hedges.

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

The Company had approximately $30.5 million of variable rate debt protected under an interest rate cap arrangement at a strike price of 1.13 % LIBOR, which expired December 31, 2004. The approximate fair value of the cap at
September 30, 2004 was $0.1 million. 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. No
amounts were recorded to income or expense related to the interest rate cap for the six months ended March 31, 2004, approximately $0.1 million was recorded as income during the six months ended September 30, 2004 and no amounts were recorded to
income or expense for the year ended September 30, 2005.

The Company also executes forward foreign currency contracts for up to 30 day terms to protect against the adverse effects that exchange rate fluctuations may have on the foreign-currency-denominated trade activities
(receivables, payables and cash) of foreign subsidiaries. These contracts have not been designated as hedges under SFAS No. 133, and accordingly, the gains and losses on both the derivative and foreign-currency-denominated trade activities are
recorded as transaction adjustments in current earnings. For the year ended September 30, 2003 the impact on earnings for trade activities was a net gain of $0.3 million. For the six months ended March 31, 2004 and September 30, 2004, the impacts on
earnings for trade activities were a net loss of $0.4 million and $0.1 million, respectively. For the year ended September 30, 2005 there was no impact on earnings for trade activities.

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 adopted DIG B39 on 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.

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New Accounting Pronouncements

In December 2004, the FASB enacted SFAS No. 123R, Share-Based Payment which replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our results
of operations. The accounting provisions of SFAS No. 123R will be adopted by the Company beginning on October 1, 2005. The Company anticipates that this will impact net income by approximately $0.1 million.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is
impracticable to do so. SFAS 154 also provides that a correction of errors in previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and correction of errors beginning October 1, 2005. The Company does not expect that the adoption of SFAS 154 will have a material impact on our consolidated financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). This statement is effective October 1, 2005. The Company has determined that the effect of SFAS No. 151 on its financial position, results of operations and cash flows will be minimal.

3. 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 year ended September 30, 2003, the six month periods
ended March 31, 2004 and September 30, 2004, and the year ended September 30, 2005.

|                                            | Predecessor |                                       |        | Successor                                    |  
|------------------------------------------- | ----------- | ------------------------------------- | ------ | -------------------------------------------- | -
|                                            |             |                                       |        |                                              |  
|                                            |             | Year Ended
    September 30,
    2003 |        | Six Months
    Ended
     March 31,
    2004 |  
|                                            |             |                                       |        |                                              |  
|Unrealized holding losses on derivatives    |             |                                       |        |                                              |  
|during the period                           |             | $                                     | (2,395 | )                                            | $
|Less: reclassification adjustment for gains |             |                                       |        |                                              |  
|(losses) included in the statement of       |             |                                       |        |                                              |  
|operations                                  |             |                                       | (2,005 | )                                            |  
|                                            |             |                                       |        |                                              |  
|Total                                       |             | $                                     | (390   | )                                            | $
|                                            |             |                                       |        |                                              |  

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4. Inventories

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

|                                                                                                 |  | 2004 |         | 2005 |     
|------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | ----
|                                                                                                 |  |      |         |      |     
|Raw materials                                                                                    |  | $    | 9,302   |      | $   
|Work in process                                                                                  |  |      | 12,087  |      |     
|Finished goods                                                                                   |  |      | 19,460  |      |     
|                                                                                                 |  |      |         |      |     
|Total                                                                                            |  | $    | 40,849  |      | $   
|                                                                                                 |  |      |         |      |     
|5. Property, Plant and Equipment                                                                 |  |      |         |      |     
|                                                                                                
|Property, plant and equipment consisted of the following at September 30 (dollars in thousands):
|                                                                                                 |  |      |         |      |     
|                                                                                                 |  | 2004 |         |      | 2005
|                                                                                                 |  |      |         |      |     
|Land                                                                                             |  | $    | 2,483   |      | $   
|Building and improvements                                                                        |  |      | 15,803  |      |     
|Machinery and equipment                                                                          |  |      | 28,686  |      |     
|Furniture and fixtures                                                                           |  |      | 5,714   |      |     
|Construction in progress                                                                         |  |      | 7,084   |      |     
|                                                                                                 |  |      |         |      |     
|Gross property, plant and equipment                                                              |  |      | 59,770  |      |     
|Less  accumulated depreciation                                                                  |  |      | 5,020   |      |     
|                                                                                                 |  |      |         |      |     
|Net property, plant and equipment                                                                |  | $    | 54,750  |      | $   
|                                                                                                 |  |      |         |      |     
|                                                                                                 |  |      |         |      |     
|                                                                                                 |  |      |         |      |     
|6. Accounts Payable and Accrued Liabilities                                                      |  |      |         |     
|                                                                                                
|Accounts payable and accrued liabilities consisted of the following at September 30 (dollars in 
|thousands):                                                                                      |  |      |         |      |     
|                                                                                                 |  |      |         |      |     
|                                                                                                 |  |      | 2004    |      | 2005
|                                                                                                 |  |      |         |      |     
|Accounts payable-trade                                                                           |  | $    | 20,971  |      | $   
|Accrued liabilities:                                                                             |  |      |         |      |     
|Employee compensation and benefits                                                               |  |      | 13,239  |      |     
|Rebate and commissions                                                                           |  |      | 5,412   |      |     
|Other                                                                                            |  |      | 7,108   |      |     
|                                                                                                 |  |      |         |      |     
|Accounts payable and accrued liabilities                                                         |  | $    | 46,730  |      | $   
|                                                                                                 |  |      |         |      |     
|7. Debt                                                                                          |  |      |         |      |     
|                                                                                                
|The long term debt consisted of the following at September 30 (dollars in thousands):           
|                                                                                                 |  |      |         |      |     
|                                                                                                 |  |      | 2004    |      |     
|                                                                                                 |  |      |         |      |     
|Term loans, due 2011                                                                             |  |      | 126,045 |      |     
|8.25% Notes, due 2012                                                                            |  |      | 175,000 |      |     
|Mortgage note, due 2006                                                                          |  |      | 2,000   |      |     
|Other                                                                                            |  |      | 1,436   |      |     
|                                                                                                 |  |      |         |      |     
|Sub-total long term debt                                                                         |  |      | 304,481 |      |     
|Less  current portion                                                                           |  |      | 1,639   |      |     
|                                                                                                 |  |      |         |      |     
|Total long term debt                                                                             |  | $    | 302,842 |      |     
|                                                                                                 |  |      |         |      |     

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Debt
Credit Facility

The Companys new debt structure includes 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) effective April 28, 2005 an uncommitted incremental term loan facility of up to $75.0 million for acquisitions (collectively, the Senior Bank Facilities). The amounts outstanding on the
Term Loans and Revolving Credit Facility at September 30, 2005, were approximately $123.2 and $0 million, 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 September 30, 2005, respectively. The Term Loans amortize and interest is paid 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.

On April 28, 2005, the Company amended
  its Credit Agreement, dated as of April 7, 2004, among Aearo Technologies Inc.
    and Aearo Corporation as guarantors, the other guarantors named therein,
    the Company, various lenders, Bear Stearns Corporate Lending Inc., as Syndication
    Agent, National City Bank of Indiana and Wells Fargo Bank, N.A. as Co-Documentation
    Agents and Deutsche Bank AG, New York Branch, as Administrative Agent. The
    amendment, among other things, allowed the Company to make, prior to September
    30, 2005, up to $35.0
  million of cash distributions to Aearo Corp, its parent corporation, for the
    purpose of paying cash dividends to Aearo Technologies Inc., the Companys ultimate parent, and to be used by Aearo Technologies Inc. to redeem, pro rata, its
  outstanding preferred shares and to pay accrued dividends on the preferred shares. In addition, the amendment permits Parent to issue and sell up to $100.0 million of notes over time for the purpose of paying cash dividends to Aearo Technologies
  Inc. On May 6, 2005, the Company made a $35.0 million cash distribution to our Parent for the purpose of paying cash dividends to Aearo Technologies Inc., and to be used by Aearo Technologies Inc. to redeem, pro rata, its outstanding preferred
  shares and to pay accrued dividends on the preferred shares.

Proceeds of loans made under the uncommitted term loan facilities may be drawn from time to time and used to finance permitted acquisitions (or to refinance outstanding revolving loans used to finance permitted
acquisitions). Amounts drawn under the incremental term loan facilities will comprise new tranches under the term loan and/or one or more increases to the existing tranche under the term loan, in minimum incremental amounts of $10.0 million and up
to a maximum of $75.0 million. The final maturity date of any incremental term loan will be no earlier than the term loan maturity date. The weighted average life to maturity for any incremental term loan will be no shorter than the weighted average
life to maturity for the term loan. The covenants in respect of, and the prepayment provisions applicable to, each incremental term loan facility will be the same as those in respect of and applicable to the term loan.

At the Companys option, the interest rates per annum applicable to the Senior Bank Facilities are either (a) an adjusted rate based on LIBOR plus a margin of 2.75% in the case of New Term Loans and revolving loans or
(b) the Base Rate, as defined, plus a margin of 1.75% in the case of New Term Loans and revolving loans. The Base Rate is the higher of (i) the rate which is 1⁄2 of
1% in excess of the overnight Federal Funds Rate and (ii) the Prime Lending Rate.
The Company must pay certain fees in connection with the Senior Bank Facilities,
including a commitment fee ranging from 0.375% to 0.50% on the undrawn portion
of the commitments in respect of the Revolving Credit Facility based upon the
Companys leverage ratio, and a 0.25% facing fee relating to the issuance
of letters of credit. 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.

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Under the terms of the Senior Bank Facilities, the Company is required to comply with a number of affirmative and negative covenants. Among other restrictions, Aearo Company I must satisfy certain financial covenants and
ratios, including interest coverage ratios, leverage ratios, and limits on the amount of permitted capital acquisitions. The Senior Bank Facilities also impose limitations on certain business activities of the Company. The Senior Bank Facilities
restrict, among other things, the incurrence of additional indebtedness, creation of certain liens, the payment of dividends on the Companys common stock, sales of certain assets and limitations on transactions with affiliates. As of September
30, 2005, Aearo Company I was in compliance with the covenants of the Senior Bank Facilities. The Senior Bank Facilities are unconditionally guaranteed by Aearo Technologies Inc. and secured by first priority security interests in substantially all
the capital stock and tangible and intangible assets of the Company.

At September 30, 2005, the total balance outstanding
    of the Term Loans was $123.2 million and interest rates were 6.6% for the
    U.S. Dollar Term Loan ($73.9 million US dollars outstanding at September
    30, 2005) and 4.6% for the Euro Term Loan (41.0 million Euro outstanding
    at September 30, 2005). For the year ended September 30, 2005, the weighted
    average interest rate paid on Term Loans was 5.4% for US dollar denominated
    debt and 4.7% for Euro denominated debt.

No amounts were outstanding on the Revolving Credit Facility at September 30, 2005 at any time during the year ended September 30, 2005. At September 30, 2005, approximately $48.4 million was available for additional
borrowing.

At September 30, 2004, outstanding Term Loans were $126.0 million and interest rates were 4.7% for the U.S. Dollar Term Loan ($74.6 million US dollars outstanding at September 30, 2004) and 4.9% for the Euro Term Loan (41.4
million Euro outstanding at September 30, 2004). For the six months ended September 30, 2004, the weighted average interest rate paid on Term Loans was 4.3% for US dollar denominated debt and 4.9% for Euro denominated debt.

No amounts were
  outstanding on the Revolving Credit Facility at September 30, 2004. For the
    year six months ended September 30, 2004, the maximum amount outstanding
    was $9.3 million outstanding on the Revolving Credit Facility. The weighted
    average interest rate on the Revolver Credit Facility was 5.7%. At September
    30, 2004, approximately $48.6 million was available for additional borrowing.

Senior Subordinated Notes

On April 7, 2004, in connection with the Merger, the Company issued $175.0 million aggregate principal amount of senior subordinated notes due 2012 (the 8.25% Notes).
The Notes bear interest at 8.25% per annum with interest is paid semiannually
each April 15 and October 15.

The terms of the 8.25% Notes contain three separate
  redemptions. The first redemption, referred to as the Redemption at Specified Prices, provides for redemption at the
  Companys option, at any time on or after April 15, 2008, in whole or in part, at various redemption prices declining from 104.125% of the principal amount to par on and after April 15, 2010. The second redemption, referred to as the Make
  Whole Premium, provides for redemption, at the Companys option, at any time prior to April 15, 2008, at a redemption price equal to the principal amount plus accrued interest plus the Make Whole Amount.
  The Make Whole Amount is defined as an amount equal to the present value of
  (1) the redemption price at April 15, 2008, plus (2) the remaining interest
  payments to April 15, 2008, computed using a discount rate equal to the Treasury
  Rate plus 50 basis points. The Treasury Rate is defined as the yield
  to maturity of U. S. Treasury Securities with a constant maturity most nearly
  equal to the period from the date of redemption to April 15, 2008. The third
  redemption,
referred to as theRedemption upon Equity
Offering, provides for redemption, at the Companys option, on or
prior to April 15, 2007, from the net cash proceeds of one or more equity offerings
to redeem up to 35% of the principal amount outstanding on the 8.25% Notes, at
a redemption price equal to 108.25%.



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The 8.25% Notes indenture contains affirmative and negative covenants and restrictions. As of September 30, 2005, the Company was in compliance with the covenants of the indenture. The 8.25% Notes are unconditionally
guaranteed on an unsecured senior subordinated basis by the Companys domestic subsidiaries.

Maturities

As of September 30, 2005, the scheduled maturity of indebtedness for each of the next five years and thereafter is as follows (dollars in thousands):

|           |  | Amount |        
|---------- |  | ------ | -------
|           |  |        |        
|2006       |  | $      | 3,432  
|2007       |  |        | 1,578  
|2008       |  |        | 1,510  
|2009       |  |        | 1,354  
|2010       |  |        | 1,250  
|Thereafter |  |        | 291,933
|           |  |        |        
|           |  | $      | 301,057
|           |  |        |        

Dividends

The Company is permitted under its Credit Agreement
to pay dividends to its parent, Aearo Corporation, for the purposes of paying
cash interest, when due on its indebtedness if certain conditions are met, and
to pay up to $1.0 million per fiscal year for expenses in the ordinary course
of business. In 2006, there is no cash
interest due on Aearo Corporation’s
indebtedness; accordingly the Company will be prohibited from paying  dividends,
other than for ordinary course expenses, unless a consent or waiver of the Credit
Agreement is obtained.

8. Employee Benefit Plans

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

The following represents information summarizing the Companys defined benefit cash balance pension plan based on valuation dates of September 30, 2003, March 31, 2004, September 30, 2004, and September 30, 2005
(dollars in thousands):

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|                                                 |  |                             | Predecessor |                                               |   |      | Successor                                         | 
|------------------------------------------------ |  | --------------------------- | ----------- | --------------------------------------------- | - | ---- | ------------------------------------------------- | 
|                                                 |  |                             |             |                                               |   |      |                                                   | 
|                                                 |  | Year EndedSeptember 30,2003 |             | Six
          Months
      EndedMarch 31,2004 |   |      | Six
          Months
      EndedSeptember 30,2004 | 
|                                                 |  |                             |             |                                               |   |      |                                                   | 
|Component of net periodic
          benefit cost |  |                             |             |                                               |   |      |                                                   | 
|Service cost                                     |  | $                           | 1,510       |                                               | $ | 670  |                                                   | 
|Interest cost                                    |  |                             | 833         |                                               |   | 371  |                                                   | 
|Expected return on plan assets                   |  |                             | (672        | )                                             |   | (332 | )                                                 | 
|Unrecognized prior service cost                  |  |                             | 9           |                                               |   |     |                                                   | 
|Recognized actuarial gain                        |  |                             | 63          |                                               |   | 4    |                                                   | 
|                                                 |  |                             |             |                                               |   |      |                                                   | 
|Net
        periodic benefit cost                |  | $                           | 1,743       |                                               | $ | 713  |                                                   | 
|                                                 |  |                             |             |                                               |   |      |                                                   | 

|                                                                |  |                             |        |   |                                 |           |                           
|--------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------------- | --------- | --------------------------
|                                                                |  | Predecessor                 |        |   |                                 | Successor |                           
|                                                                |  |                             |        |   |                                 |           |                           
|                                                                |  | SixMonthsEndedMarch 31,2004 |        |   | SixMonthsEndedSeptember 30,2004 |           | YearEndedSeptember 30,2005
|                                                                |  |                             |        |   |                                 |           |                           
|Change in benefit obligation                                    |  |                             |        |   |                                 |           |                           
|Benefit obligation at beginning
        of period               |  | $                           | 13,031 |   |                                 | $         | 13,684                    
|Service
        cost                                            |  |                             | 670    |   |                                 |           | 670                       
|Interest
        cost                                           |  |                             | 371    |   |                                 |           | 402                       
|Benefits
        paid                                           |  |                             | (337   | ) |                                 |           | (581                      
|Actuarial
        (gain) loss                                   |  |                             | (51    | ) |                                 |           | 57                        
|                                                                |  |                             |        |   |                                 |           |                           
|Benefit obligation at end of
        period                     |  | $                           | 13,684 |   |                                 | $         | 14,232                    
|                                                                |  |                             |        |   |                                 |           |                           
|                                                                |  |                             |        |   |                                 |           |                           
|Change in plan assets                                           |  |                             |        |   |                                 |           |                           
|Fair value of plan assets at
        beginning of period        |  | $                           | 8,931  |   |                                 | $         | 9,299                     
|Actual
        return on plan assets                            |  |                             | 705    |   |                                 |           | (95                       
|Employer
        contributions                                  |  |                             |       |   |                                 |           | 1,028                     
|Benefits
        paid                                           |  |                             | (337   | ) |                                 |           | (581                      
|                                                                |  |                             |        |   |                                 |           |                           
|Fair value of plan assets at
        end of period              |  | $                           | 9,299  |   |                                 | $         | 9,651                     
|                                                                |  |                             |        |   |                                 |           |                           
|                                                                |  |                             |        |   |                                 |           |                           
|Reconciliation of funded
          status                       |  |                             |        |   |                                 |           |                           
|Funded status                                                   |  | $                           | (4,385 | ) |                                 | $         | (4,581                    
|Unrecognized prior service cost                                 |  |                             |       |   |                                 |           |                          
|Unrecognized actuarial loss                                     |  |                             |       |   |                                 |           | 514                       
|                                                                |  |                             |        |   |                                 |           |                           
|Net
        amount recognized                                   |  | $                           | (4,385 | ) |                                 | $         | (4,067                    
|                                                                |  |                             |        |   |                                 |           |                           
|                                                                |  |                             |        |   |                                 |           |                           
|Amounts recognized in statement
          of financial position |  |                             |        |   |                                 |           |                           
|Accrued benefit liability                                       |  | $                           | (4,385 | ) |                                 | $         | (4,067                    
|                                                                |  |                             |        |   |                                 |           |                           
|                                                                |  |                             |        |   |                                 |           |                           

|                                                                                                                           |  | SixMonthsEndedSeptember 30,2004 |        | YearEndedSeptember 30,2005 |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | -------------------------- | -
|                                                                                                                           |  |                                 |        |                            |  
|Additional information for
          pension plans with accumulated benefit obligations in excess of plan
          assets |  |                                 |        |                            |  
|Projected benefit obligation                                                                                               |  | $                               | 14,232 |                            | $
|Accumulated benefit obligation                                                                                             |  |                                 | 13,464 |                            |  
|Fair value of plan assets                                                                                                  |  |                                 | 9,651  |                            |  
|                                                                                                                           |  |                                 |        |                            |  

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

|                                                 | 2004 |   | 2005 |  
|------------------------------------------------ | ---- | - | ---- | -
|                                                 |      |   |      |  
|Discount rate                                    | 6.00 | % | 5.50 | %
|Expected long term rate of return of plan assets | 8.00 | % | 8.00 | %
|Rate of compensation increase                    | 4.00 | % | 4.00 | %
|                                                
|

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. Based on Actuarial Standard of Practice No. 27 and interpretation of this standard, the FAS 87 long term rate of return on asset assumption must fall within a best estimate range  that is, a range of returns
within which the actual return is more likely than not to fall. This best estimate range equates to a 20-year compound average return derived using the outside actuarial firms proprietary Portfolio Return calculator (PRC),
reflecting the asset allocation of the trust with appropriate adjustments for investment, trading, management and administrative expenses that are paid from the trust. For purposes of determining the 25thto 75thpercentile range, the PRC uses the outside actuarial firms capital market assumptions with respect to
each class to develop the probability distribution of returns. The independently developed rate of 8.00% falls within the 25thand 75thpercentiles of 4.96% and 8.61%, respectively. Over the 12 year period ended September 30, 2005, 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 9.1%. Considering this information and the potential for lower future returns due to the generally lower interest rate environment, the Company selected an 8.00% long term rate of
return asset assumption.

The weighted average asset allocations at September 30, 2004, and 2005, by asset category, were as follows:

|                             | 2004 |   | 2005 |  
|---------------------------- | ---- | - | ---- | -
|                             |      |   |      |  
|U.S. equity securities       | 62   | % | 62   | %
|U.S. fixed income securities | 37   | % | 38   | %
|Cash and cash equivalents    | 1    | % | 0    | %
|                             |      |   |      |  
|                             | 100  | % | 100  | %
|                             |      |   |      |  

The Company has a benefits committee that is responsible for managing the operations and administration of all benefit plans and related trusts (the Benefits Committee). The Benefits Committee has an investment
policy for the pension plan assets that establishes target asset allocations for the above asset classes as follows: U.S. equity securities 60%, U.S. fixed income securities 40%. The target asset allocation percentages were developed to manage the
net impact of asset and liability changes over time consistent with the Companys funding, accounting and benefit policies. The Benefits Committees goal with respect to the asset allocation percentage is to identify a mix of assets
offering the highest expected return for a given correlation to the pension plan liabilities. The Benefits Committee periodically reviews mismatches between the duration of the fixed income portfolio and the related liabilities. The Benefits
Committee is committed to diversification to reduce the risk of large losses. From time to time, the Benefits Committee will engage a specialist to evaluate if the target asset allocation percentages should be rebalanced.

The Company expects to contribute $1.5 million into its cash balance plan in fiscal 2006.

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The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (dollars in thousands):

|Fiscal year 2006        | $ | 1,047 | 
|----------------------- | - | ----- | 
|Fiscal year 2007        |   | 561   | 
|Fiscal year 2008        |   | 753   | 
|Fiscal year 2009        |   | 1,070 | 
|Fiscal year 2010        |   | 1,001 | 
|Fiscal year 2011  2015 |   | 7,108 | 

In addition, the Company has an unfunded, noncontributory defined benefit pension plan, the Aearo Company Supplemental Executive Retirement Plan (the SERP Plan), which is also a cash balance plan. The SERP Plan, effective
January 1, 1994, covers certain employees in the United States. The costs to the Company for the SERP Plan were $0.1 million for the year ended September 30, 2003, a minimal amount and $0.1 million for the six month periods ended March 31, 2004 and
September 30, 2004, respectively, and $0.1 million for the year ended September 30, 2005. The aggregate liability for the SERP Plan was $1.0 million and $1.1 million for the years ended September 30, 2004 and September 30, 2005 respectively.

A 401(k) plan, the Aearo Company Employees 401(k) Savings Plan, was established as of May 1, 1990. Employees normally scheduled to work a minimum of 1,000 hours per year can join the plan immediately and may
contribute up to 60% of their compensation. The Company contributes amounts equal to 50% of the employees contribution to a maximum of 3% of the employees pay. The costs to the Company for this Plan was $0.9 million for the year ended
September 30, 2003, $0.4 million and $0.5 million for the six month periods ended March 31, 2004 and September 30, 2004, respectively, and $1.0 million for the year end September 30, 2005.

The Company has a deferred compensation plan that allows certain employees to defer a portion of their cash compensation by having it contributed to a non-qualified compensation plan. The Company fully funds the deferred
compensation liabilities by making cash contributions to a trust at the time the salary or bonus being deferred would otherwise be payable to the employee. Gains or losses on amounts held in the trust are fully allocable to participants, who control
the types of investments in the trust. Realized and unrealized holding gains and losses related to these investments increase or decrease the corresponding liability to participants, an thus there is no earnings impact for the Company. The trust
investments are considered trading securities and as such are reported at fair value in other assets in the consolidated balance sheet, with the liabilities included in other long term liabilities.

The Company has a defined contribution savings plan for U.K. employees, under which eligible employees are allowed to contribute up to 15% of their compensation. The Company contributes 5% of pay for all eligible employees
and additional amounts equal to 40% of the employees contribution to a maximum of 2% of the employees pay. The Company contributed approximately $0.2 million for the year ended September 30, 2003, $0.1 million, and $0.2 million for the
six month periods ended March 31, 2004 and September 30, 2004, respectively, and $0.3 million for the year ended September 30, 2005.

Certain employees receive stock options from the Companys ultimate parent, Aearo Technologies Inc., see Note 11.

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9. Related
      Party Transactions

On April 7, 2004, Aearo Technologies Inc., Aearo
    Corporation and Aearo Company I entered into a professional services agreement
    with Bear Stearns Merchant Manager II, LLC, or BSMM (the Successor Agreement).
Under the terms of the Successor Agreement, Aearo  Technologies
Inc., Aearo Corporation and Aearo Company I retained BSMM to provide certain
management consulting and financial advisory services, for which the Company
will pay BSMM an annual advisory fee equal to the greater of (i) $0.7 million
and (ii) 1.25% of the Adjusted Consolidated EBITDA (as defined in our credit
facility as in effect on April 7, 2004, plus, to the extent deducted in arriving
at Consolidated EBITDA, the aggregate advisory fee paid under
the Successor Agreement and any fees paid to Vestar Capital Partners or any of
its affiliates) by the Company and its subsidiaries. If Aearo Technologies Inc.,
Aearo Corporation or Aearo Company I engages BSMM with respect to any merger,
acquisition, disposition, recapitalization, issuance of securities, financing
or similar transaction, the Company will pay BSMM a transaction fee to be negotiated
between the parties. If the parties do not agree on a fee, the transaction fee
will be
1.0% of the aggregate enterprise value paid or provided to Aearo Technologies
Inc., Aearo Corporation or Aearo Company I. BSMM will also be entitled to a fee
(a Company Sale Fee) of 0.65% of the aggregate enterprise value paid to Aearo
Technologies Inc. or Aearo Corporation in a sale of Aearo Technologies Inc. or Aearo Corporation. The Successor Agreement will terminate on the earlier of (i) April 7, 2014, (ii) the consummation of a sale of Aearo Technologies Inc., Aearo
Corporation or Aearo Company I, (iii) termination upon thirty days written
notice by BSMM and (iv) the consummation of a qualified public offering of Aearo
Technologies Inc. common stock. If not terminated by the foregoing, upon the
tenth anniversary of the date of the Successor Agreement and the end of each
year thereafter, the term is automatically extended for an additional year unless
terminated by either party at least 30 days prior to such year end. Under the
Successor
Agreement, Aearo Technologies Inc., Aearo Corporation and Aearo Company I have
agreed to indemnify BSMM for any and all claims and losses arising out of, or
relating, to the professional services agreement.

Pursuant to an agreement with Vestar Capital Partners and Cabot Corporation, dated as of July 11, 1995, an annual management fee was payable by the Company equal to the greater of (i) $0.4 million or (ii) 1.25% of the
consolidated net income of the Company and its subsidiaries before interest, taxes, depreciation and amortization for such fiscal year (the Predecessor Agreement). Payments under the Predecessor Agreement totaled approximately $0.6
million for the year ended September 30, 2003 and $0.4 million for the six months ended March 31, 2004. Payments under the Successor Agreement totaled approximately $0.3 million for the six months ended September 30, 2004 and $0.9 million for the
year ended September 30, 2005.

10. Income Taxes

The Company is included in the consolidated tax return filed by Aearo Technologies Inc. All taxes are recorded as if separate, stand alone returns were filed. Income (loss) before income taxes was as follows (dollars in
thousands):

|                                          |  |                             | Predecessor |                                               |   |        | Successor                                         | 
|----------------------------------------- |  | --------------------------- | ----------- | --------------------------------------------- | - | ------ | ------------------------------------------------- | 
|                                          |  |                             |             |                                               |   |        |                                                   | 
|                                          |  | Year EndedSeptember 30,2003 |             | Six
          Months
      EndedMarch 31,2004 |   |        | Six
          Months
      EndedSeptember 30,2004 | 
|                                          |  |                             |             |                                               |   |        |                                                   | 
|Domestic                                  |  | $                           | 12,259      |                                               | $ | 3,387  |                                                   | 
|Foreign                                   |  |                             | 11,031      |                                               |   | 7,197  |                                                   | 
|                                          |  |                             |             |                                               |   |        |                                                   | 
|Income
        (loss) before income taxes |  | $                           | 23,290      |                                               | $ | 10,584 |                                                   | 
|                                          |  |                             |             |                                               |   |        |                                                   | 
|                                          |  |                             |             |                                               |   |        |                                                   | 

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

|                       |  |                             | Predecessor |                                               |   |       | Successor                                         | 
|---------------------- |  | --------------------------- | ----------- | --------------------------------------------- | - | ----- | ------------------------------------------------- | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|                       |  | Year EndedSeptember 30,2003 |             | Six
          Months
      EndedMarch 31,2004 |   |       | Six
          Months
      EndedSeptember 30,2004 | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|U.S. Federal and State |  |                             |             |                                               |   |       |                                                   | 
|Current                |  | $                           | 671         |                                               | $ | 380   |                                                   | 
|Deferred               |  |                             |            |                                               |   |      |                                                   | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|                       |  |                             | 671         |                                               |   | 380   |                                                   | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|Foreign                |  |                             |             |                                               |   |       |                                                   | 
|Current                |  |                             | 1,148       |                                               |   | 1,624 |                                                   | 
|Deferred               |  |                             | 783         |                                               |   | 16    |                                                   | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|                       |  |                             | 1,932       |                                               |   | 1,640 |                                                   | 
|                       |  |                             |             |                                               |   |       |                                                   | 
|Total                  |  | $                           | 2,603       |                                               | $ | 2,020 |                                                   | 
|                       |  |                             |             |                                               |   |       |                                                   | 

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

|                                                                      |  |                             | Predecessor |                                                    |   |        | Successor                                         | 
|--------------------------------------------------------------------- |  | --------------------------- | ----------- | -------------------------------------------------- | - | ------ | ------------------------------------------------- | 
|                                                                      |  |                             |             |                                                    |   |        |                                                   | 
|                                                                      |  | Year EndedSeptember 30,2003 |             | Six
          Months 
          EndedMarch 31,2004 |   |        | Six
          Months
      EndedSeptember 30,2004 | 
|                                                                      |  |                             |             |                                                    |   |        |                                                   | 
|Computed tax expense (benefit)
        at the expected statutory rate |  | $                           | 7,927       |                                                    | $ | 3,599  |                                                   | 
|State taxes, net of federal
        effects                           |  |                             | 85          |                                                    |   | 36     |                                                   | 
|Foreign income taxed at different
        rates                       |  |                             | (1,174      | )                                                  |   | 551    |                                                   | 
|Permanent items                                                       |  |                             | 125         |                                                    |   | (452   | )                                                 | 
|Decrease in valuation allowance                                       |  |                             | (4,710      | )                                                  |   | (1,714 | )                                                 | 
|Post-merger net operating loss
        carryforward adjustment        |  |                             |            |                                                    |   |       |                                                   | 
|Other, net                                                            |  |                             | (350        | )                                                  |   |       |                                                   | 
|                                                                      |  |                             |             |                                                    |   |        |                                                   | 
|Provision (benefit) for income
        taxes                          |  | $                           | 2,603       |                                                    | $ | 2,020  |                                                   | 
|                                                                      |  |                             |             |                                                    |   |        |                                                   | 

During the year ended September 30, 2004, the Company recorded $1.9 million of adjustments to its preliminary estimate of deferred tax assets for post merger net operating losses based on tax returns filed in fiscal year
2005.

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

|Deferred tax assets (liabilities)           | 2004 |   | 2005    |  
|------------------------------------------- | ---- | - | ------- | -
|                                            |      |   |         |  
|Pension and other benefits                  |      | $ | 1,947   |  
|Property, plant and equipment               |      |   | (3,429  | )
|Intangible assets                           |      |   | (72,100 | )
|Derivatives                                 |      |   |        |  
|Inventory                                   |      |   | 1,242   |  
|Unrealized foreign currency exchange        |      |   | (32     | )
|Net operating loss and credit carryforwards |      |   | 17,761  |  
|Accrued expenses and other                  |      |   | 2,461   |  
|                                            |      |   |         |  
|Subtotal                                    |      |   | (52,150 | )
|Valuation allowance                         |      |   | (7,549  | )
|                                            |      |   |         |  
|Total deferred
tax liability                |      | $ | (59,699 | )
|                                            |      |   |         |  
|                                            |      |   |         |  

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|                                   |  | 2004 |         | 2005 |  
|---------------------------------- |  | ---- | ------- | ---- | -
|                                   |  |      |         |      |  
|Current deferred tax assets        |  | $    |        |      | $
|                                   |  |      |         |      |  
|Long term deferred tax liabilities |  |      | (59,699 | )    |  
|                                   |  |      |         |      |  

The valuation allowance at September 30, 2004 related to the uncertainty of realizing the tax benefits of reversing pre-merger temporary differences and net operating loss carryforwards. During the year ended September 30,
2005, management determined that based on current domestic operating results, it is more likely than not that domestic pre-merger net operating losses would be realized and consequently reversed the $7.5 million valuation allowance, which decreased
goodwill resulting from the Merger. The gross amount of domestic net operating loss carryforwards, before the tax effect, is approximately $35.1 million as of September 30, 2005. Realization of the deferred tax asset for net operating losses is
dependent on generating sufficient future taxable income in the United States prior to the expiration of the net operating losses and credit carryforwards, which expire on various dates ranging from 2010 to 2021 and are subject to certain
limitations on their use after the merger transaction.

The Company has excluded undistributed earnings of $59.8 million of nine foreign affiliates from its calculation of deferred tax liabilities because they will be permanently invested for the foreseeable future. Should
management decide in the future to repatriate all or a portion of these undistributed earnings, the Company would then be required to provide taxes on such amounts.

11. Stockholders Equity

Stock Ownership and Stockholders Agreement

On April 7, 2004, all holders of the capital stock of Aearo Technologies Inc. entered into and became subject to a stockholders agreement that governs certain aspects of its relationship among its security holders.
The stockholders agreement, among other things; allows security holders
to join, and allows BSMM and its affiliates to require security holders to join,
in any sale or transfer of shares of common stock or preferred stock by BSMM
to any third party prior to a qualified public offering of common stock or preferred
stock, following which (when aggregated with all prior such sales or transfers)
BSMM and its affiliates shall have disposed of in excess of a certain specified
percentage of the
number of shares of common stock or preferred stock, as applicable, that BSMM
and its affiliates owned as of the closing of the Merger; restricts the ability
of certain security holders to transfer, assign, sell, gift, pledge, hypothecate
or encumber, or otherwise dispose of, common stock or preferred stock or all
or part of the voting power associated with common stock or preferred stock,
subject to certain specified exceptions; grants to BSMM the right to designate
members of the
board of directors of Aearo Technologies Inc.; grants to security holders the
right to buy their proportionate percentage of securities offered for sale to
BSMM by Aearo Technologies Inc.; allows Aearo Technologies Inc. and BSMM to repurchase
all or any portion of the common stock and preferred stock held by directors,
employees and consultants of Aearo Corporation at varying prices upon the termination
of their employment with Aearo Corporation for any reason (including death or
disability);
grants demand and piggyback registration rights to BSMM and allow security holders
to include securities in a registration statement filed by Aearo Technologies
Inc. with respect to an offering of common stock or preferred stock (i) in connection
with the exercise of any demand rights by BSMM and its affiliates or any other
security holders possessing such rights or (ii) in connection with which BSMM
and its affiliates exercise piggyback registration rights; provides
for the payment by Aearo Technologies Inc. of the fees and expenses associated
with the exercise of registration rights under the stockholders agreement;
restricts the ability of Aearo Technologies Inc. and its subsidiaries to enter
into certain transactions with BSMM and its affiliates; and provides for non-operating
board members of our management to vote their shares at the direction of Aearo
Technologies Inc. and to grant Aearo Technologies Inc. a proxy in respect of
their shares; restricts our ability to amend the certificate of designations
governing our series A preferred stock without the approval of certain of our
security holders; and grant to the security holders of Aearo Technologies Inc.
information rights with
respect of Aearo Technologies Inc. and its subsidiaries.

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The stockholders agreement will terminate upon the earliest to occur of (i) the dissolution of Aearo Technologies Inc., (ii) the occurrence of any event that reduces the number of security holders to one, (iii) the
consummation of a qualified initial public offering of Aearo Technologies Inc.s common stock and (iv) the transfer to a person or group other than BSMM and its affiliates of a number of shares of common stock having the power to elect a
majority of the Aearo Technologies Inc. Board of Directors.

The Company is permitted to pay cash dividends to Aearo Corporation and in turn, Aearo Corporation may pay cash dividends to Aearo Technologies Inc. for taxes and expenses in the ordinary course of business. The maximum
amount of cash dividends paid to Aearo Corporation for ordinary business expenses may not exceed $1,000,000 in any fiscal year. As long as no event of default would result, the Company is permitted to pay dividends, as defined in the New Senior Bank Facilities,
to Aearo Corporation.

Stock Option and Incentive Plans

In connection with the Merger, our ultimate parent, Aearo Technologies Inc., adopted a stock incentive plan (2004 Option Plan) for the benefit of certain of its employees and terminated the 1996 Executive Stock
Option Plan and the 1997 Stock Option Plan of the predecessor company. Options to acquire 18.5% of the total outstanding shares of our ultimate parents common stock on a fully diluted basis were granted under the plan. With respect to the
options, the plan only permits the issuance of non-qualified options. In addition, common stock representing a total of 1.5% of the outstanding shares of our ultimate parents common stock on a fully diluted basis was designated as restricted
stock and made available for grant under the plan to new hires. The number of shares of restricted stock and the number of options to be issued to each new hire or employee will be determined by the compensation committee of the Board of Directors
of our ultimate parent based on the recommendation of the Chief Executive Officer. The option terms are 10 and 7 years except that in certain instances of termination of employment the options shall expire, or upon the sale of the Company, the
options shall immediately vest.

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

Stock Option Activity

Stock option data for the Executive Plan, the 1997 Option Plan and the 2004 Option Plan are as follows:

|                                |  | Number
    of
    Shares |         | Weighted
      Average
      Exercise
    Price |  
|------------------------------- |  | ------------------------ | ------- | ----------------------------------------------- | -
|                                |  |                          |         |                                                 |  
|                                |  |                          |         |                                                 |  
|Outstanding, September 30, 2002 |  |                          | 15,920  |                                                 | $
|Forfeited                       |  |                          | (3,997  | )                                               |  
|                                |  |                          |         |                                                 |  
|                                |  |                          |         |                                                 |  
|Outstanding, September 30, 2003 |  |                          | 11,923  |                                                 | $
|                                |  |                          |         |                                                 |  
|                                |  |                          |         |                                                 |  
|                                |  |                          |         |                                                 |  
|Outstanding, April 1, 2004      |  |                          |         |                                                 |  
|Granted                         |  |                          | 369,185 |                                                 | $
|Granted                         |  |                          | 156,400 |                                                 |  
|                                |  |                          |         |                                                 |  
|Outstanding, September 30, 2004 |  |                          | 525,585 |                                                 | $
|                                |  |                          |         |                                                 |  
|                                |  |                          |         |                                                 |  
|Granted                         |  |                          | 33,800  |                                                 | $
|Granted                         |  |                          | 24,700  |                                                 |  
|Exercised                       |  |                          | (5,252  | )                                               |  
|Exercised                       |  |                          | (4,550  | )                                               |  
|Forfeited                       |  |                          | (3,710  | )                                               |  
|                                |  |                          |         |                                                 |  
|Outstanding, September 30, 2005 |  |                          | 570,573 |                                                 | $
|                                |  |                          |         |                                                 |  

The following table sets forth information regarding options outstanding at September 30, 2005:

|Number of
   Shares
   Covered by
   Options |  |  | Exercise Price |       | Number
    Currently
   Exercisable |        | Weighted
    Average
   Exercise
   Price |   | Weighted
    Average
    Remaining
    Contractual
    Life |  | Weighted
    Average
   Exercise
   Price for
   Currently
   Exercisable |  | Weighted
    Average Fair
   Value |      
|-------------------------------------------- |  |  | -------------- | ----- | ----------------------------------- | ------ | ----------------------------------------- | - | ----------------------------------------------------------- |  | ------------------------------------------------------------------------- |  | ---------------------------------- | -----
|                                             |  |  |                |       |                                     |        |                                           |   |                                                             |  |                                                                           |  |                                    |      
|394,023                                      |  |  | $              | 10.00 |                                     | 86,087 |                                           | $ | 10.00                                                       |  | 8.27                                                                      |  | $                                  | 10.00
|151,850                                      |  |  |                | 17.50 |                                     | 34,550 |                                           |   | 17.50                                                       |  | 8.80                                                                      |  |                                    | 17.50
|24,700                                       |  |  |                | 39.00 |                                     |       |                                           |   | 39.00                                                       |  | 9.96                                                                      |  |                                    | 39.00

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Commitments and Contingencies
12. Lease Commitments

The Company leases certain transportation vehicles, warehouse facilities, office space, and machinery and equipment under cancelable and non-cancelable operating leases. Rent expense under such arrangements totaled $6.0
million for the year ended September 30, 2003, $3.1 million for each of the six month periods ended March 31, 2004 and September 30, 2004, respectively, and $6.9 million for the year ended September 30, 2005. Future minimum rental commitments under
non-cancelable leases in effect at September 30, 2005 are as follows (dollars in thousands):

|2006       |  | $ | 5,757  | 
|---------- |  | - | ------ | 
|2007       |  |   | 3,250  | 
|2008       |  |   | 3,249  | 
|2009       |  |   | 2,301  | 
|2010       |  |   | 2,283  | 
|Thereafter |  |   | 3,955  | 
|           |  |   |        | 
|Total      |  | $ | 20,795 | 
|           |  |   |        | 

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
$0.4 million 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. (the Merger
Agreement), Aearo Corporation agreed to make the annual payment to Cabot for a minimum of seven years from April 7, 2004 (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 the 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. Claims related to Eastern Safety Equipment have historically
been covered by that company’s insurers under a reservation of rights.

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The following table sets forth information concerning respiratory claims filed against the Company in fiscal 2003, 2004 and 2005.

|                                                   |  |   | Silica                          |  |   | Asbestos                                             | 
|-------------------------------------------------- |  | - | ------------------------------- |  | - | ---------------------------------------------------- | 
|                                                   |  |   |                                 |  |   |                                                      | 
|                                                   |  |   | Through 
    September 30, 2003 |  |   | October 1,
      2003 through September
    30, 2004 | 
|                                                   |  |   |                                 |  |   |                                                      | 
|Number of claims at beginning                      |  |   | 135                             |  |   | 6,629                                                | 
|Increases in number of claims                      |  |   | 6,529                           |  |   | 4,586                                                | 
|Number of claims settled                           |  |   | 13                              |  |   | 0                                                    | 
|Number of claims dismissed without
        payment |  |   | 22                              |  |   | 128                                                  | 
|Ending number of claims                            |  |   | 6,629                           |  |   | 11,087                                               | 
|Average amount per claims settled                  |  | $ | 24.36                           |  |   | N/A                                                  | 
|Average amount per claims closed2                  |  | $ | 9.05                            |  | $ | 0                                                    | 

(1) The 1,074 new asbestos claims include 114 claims that allege exposure from clothing, which the Company never manufactured.

(2) The difference between average amount for claims settled versus average amount for claims closed is that some claims are dismissed or withdrawn without having to pay a settlement or any amount.
The average amount per claim closed includes claims closed by both settlement and by dismissal without payment while the average amount per claim settled is for claims settled.

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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
the Company has some risk of legal liability as a successor (Additional
Claims). During fiscal 2005, the Company paid a total of
$1.6 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 the Company was
named as a  defendant and Additional Claims. During fiscal 2005 the Company paid
a total of $0.7 million for administrative and defense costs involving both claims
in which the Company was named as a defendant and Additional Claims. Also in
fiscal 2005, in
addition to the cases in the above chart, the Company paid $0.3 million to settle
approximately 4,449 claims, involving a still being determined ratio of claims
in which the Company was named as a defendant and Additional Claims and therefore
the  above table does not reflect the settlement of these claims. In addition,
the Company 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
the Company.

The above information was based on data compiled
    by a third party that 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 during fiscal 2005, there may have been claims settled by
  and fully funded by the insurers of Eastern Safety Equipment Co., Inc., a subsidiary
  of
  Aearo which is in the process of winding up its affairs. In addition, during
  fiscal 2005 the Company paid $0.1 million, net of insurance proceeds, to settle
  a safety eyewear product liability claim.

At September 30, 2005 and September 30, 2004, the Company
has recorded liabilities of approximately $5.1 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 $0.3 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 $1.6 million, as
referenced above, to pay costs attributed to settlement, administrative and defense
costs that had been reached over a prior two year time period, $0.7 million for
 administrative and defense costs involving both claims in which the Company
was named as a defendant and Additional Claims, the payment of $0.3 million,
as referenced above, for the settlement of 4,445 claims during fiscal 2005, and
$0.1 million,
net of insurance proceeds, to settle a safety eyewear product liability claim.
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 2010 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.

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13. Segment Data

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

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

|                            |                                 | Predecessor |                                        |   |         | Successor                                  | 
|--------------------------- | ------------------------------- | ----------- | -------------------------------------- | - | ------- | ------------------------------------------ | 
|                            |                                 |             |                                        |   |         |                                            | 
|                            | Year
    EndedSeptember 30,2003 |             | Six
         Months EndedMarch 31,2004 |   |         | Six
         Months EndedSeptember 30,2004 | 
|                            |                                 |             |                                        |   |         |                                            | 
|Safety Products             | $                               | 242,263     |                                        | $ | 127,964 |                                            | 
|Safety Prescription Eyewear |                                 | 40,028      |                                        |   | 20,337  |                                            | 
|Specialty Composites        |                                 | 34,137      |                                        |   | 21,278  |                                            | 
|                            |                                 |             |                                        |   |         |                                            | 
|Total                       | $                               | 316,428     |                                        | $ | 169,579 |                                            | 
|                            |                                 |             |                                        |   |         |                                            | 

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

|                                                 |   | Predecessor                             |   |   |                                           | Successor | 
|------------------------------------------------ | - | --------------------------------------- | - | - | ----------------------------------------- | --------- | 
|                                                 |   |                                         |   |   |                                           |           | 
|                                                 |   | Year Ended      September 30,      2003 |   |   | Six Months Ended      March 31,      2004 |           | 
|                                                 |   |                                         |   |   |                                           |           | 
|Safety Products                                  | $ | 50,670                                  |   | $ | 23,704                                    |           | 
|Safety Prescription Eyewear                      |   | 462                                     |   |   | (57                                       | )         | 
|Specialty Composites                             |   | 2,713                                   |   |   | 2,855                                     |           | 
|                                                 |   |                                         |   |   |                                           |           | 
|Segment profit                                   |   | 53,845                                  |   |   | 26,502                                    |           | 
|                                                 |   |                                         |   |   |                                           |           | 
|                                                 |   |                                         |   |   |                                           |           | 
|Depreciation                                     |   | 11,102                                  |   |   | 5,931                                     |           | 
|Amortization of intangibles                      |   | 267                                     |   |   | 242                                       |           | 
|Inventory purchase accounting
        adjustment |   |                                        |   |   |                                          |           | 
|Bond call premium                                |   |                                        |   |   |                                          |           | 
|Restructuring charges                            |   | (270                                    | ) |   | (1,091                                    | )         | 
|Interest, net                                    |   | 19,456                                  |   |   | 10,836                                    |           | 
|                                                 |   |                                         |   |   |                                           |           | 
|Income (loss) before income
        taxes        | $ | 23,290                                  |   | $ | 10,584                                    |           | 
|                                                 |   |                                         |   |   |                                           |           | 

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

Inter-segment sales of the Specialty Composites segment to the Safety Products segment totaled $3.2 million for the year ended September 30, 2003. Inter-segment sales of the Specialty Composites segment to the Safety
  Products segment totaled $1.5 million and $1.3 million for the six months ended March 31, 2004 and September 30, 2004, respectively and $3.9 million for the year ended September 30, 2005. The inter-segment sales value is generally determined at
  fully absorbed inventory cost at standard rates plus 25%.

Depreciation by business segment (dollars in thousands):

|                            | Predecessor    |        |                  | Successor |      
|--------------------------- | -------------- | ------ | ---------------- | --------- | -----
|                            |                |        |                  |           |      
|                            | Year
    Ended |        | Six Months Ended |           |      
|                            | September 30,  |        | March 31,        |           |      
|                            | 2003           |        | 2004             |           |      
|                            |                |        |                  |           |      
|Safety Products             | $              | 8,978  |                  | $         | 4,854
|Safety Prescription Eyewear |                | 707    |                  |           | 351  
|Specialty Composites        |                | 1,417  |                  |           | 726  
|                            |                |        |                  |           |      
|Total                       | $              | 11,102 |                  | $         | 5,931
|                            |                |        |                  |           |      

Identifiable assets by business segment (dollars in thousands):

|                            | September 30, |        
|--------------------------- | ------------- | -------
|                            | 2004          |        
|                            |               |        
|Safety Products             | $             | 389,344
|Safety Prescription Eyewear |               | 24,269 
|Specialty Composites        |               | 55,768 
|Corporate                   |               | 46,991 
|                            |               |        
|Total                       | $             | 516,372
|                            |               |        

Corporate includes cash and other assets not allocated to segments. Goodwill by business segment (dollars in thousands):

|                            | Year Ended    |        
|--------------------------- | ------------- | -------
|                            |               |        
|                            | September 30, |        
|                            | 2005          |        
|                            |               |        
|Safety Products             | $             | 87,787 
|Safety Prescription Eyewear |               | 3,700  
|Specialty Composites        |               | 16,400 
|                            |               |        
|Total                       | $             | 107,887
|                            |               |        

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

|                            | Predecessor   |        |                  | Successor |      
|--------------------------- | ------------- | ------ | ---------------- | --------- | -----
|                            |               |        |                  |           |      
|                            | Year Ended    |        | Six Months Ended |           |      
|                            | September 30, |        | March 31,        |           |      
|                            | 2003          |        | 2004             |           |      
|                            |               |        |                  |           |      
|Safety Products             | $             | 8,888  |                  | $         | 3,674
|Safety Prescription Eyewear |               | 379    |                  |           | 196  
|Specialty Composites        |               | 619    |                  |           | 267  
|Reconciling items           |               | 430    |                  |           | 869  
|                            |               |        |                  |           |      
|Total                       | $             | 10,316 |                  | $         | 5,006
|                            |               |        |                  |           |      



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

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

|                      | Predecessor   |         |                  | Successor |        
|--------------------- | ------------- | ------- | ---------------- | --------- | -------
|                      |               |         |                  |           |        
|                      | Year Ended    |         | Six Months Ended |           |        
|                      | September 30, |         | March 31,        |           |        
|                      | 2003          |         | 2004             |           |        
|                      |               |         |                  |           |        
|United States America | $             | 187,106 |                  | $         | 100,629
|Canada                |               | 22,965  |                  |           | 12,444 
|United Kingdom        |               | 15,562  |                  |           | 8,810  
|Germany               |               | 11,859  |                  |           | 6,806  
|Sweden                |               | 15,392  |                  |           | 7,703  
|France                |               | 9,967   |                  |           | 8,242  
|Italy                 |               | 7,044   |                  |           | 2,438  
|All Others            |               | 46,533  |                  |           | 22,507 
|Total                 | $             | 316,428 |                  | $         | 169,579

The sales as shown above represent the value of shipments
into the customers country of residence. For the year ended September 30, 2003
and the six months ended March 31, 2004 and September 30, 2004, and the year
ended
September 30, 2005, no single customer accounted for more than 5% of sales.

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

|                         | September 30, |        
|------------------------ | ------------- | -------
|                         |               |        
|                         | 2004          |        
|                         |               |        
|United States of America | $             | 407,261
|Canada                   |               | 11,630 
|United Kingdom           |               | 35,473 
|Germany                  |               | 222    
|Sweden                   |               | 60,017 
|France                   |               | 1,294  
|All others               |               | 475    
|                         |               |        
|Total                    | $             | 516,372
|                         |               |        

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14. Quarterly Financial Data (Unaudited)

The following table contains selected unaudited quarterly financial data for fiscal years 2004 and 2005 (dollars in thousands).

|                                          |  |   | QUARTERLY
          FINANCIAL DATA(In Thousands) | 
|----------------------------------------- |  | - | ------------------------------------------------ | 
|                                          |  |   |                                                  | 
|                                          |  |   | Fiscal Year
      2004                           | 
|                                          |  |   |                                                  | 
|                                          |  |   | Predecessor                                      | 
|                                          |  |   | First                                            | 
|                                          |  |   |                                                  | 
|Net sales                                 |  | $ | 79,201                                           | 
|Cost of sales                             |  |   | 41,776                                           | 
|                                          |  |   |                                                  | 
|                                          |  |   |                                                  | 
|Gross profit                              |  |   | 37,425                                           | 
|Restructuring charge                      |  |   |                                                 | 
|                                          |  |   |                                                  | 
|Income (loss) before income
        taxes |  |   | 3,681                                            | 
|                                          |  |   |                                                  | 
|Net income (loss)                         |  |   | 2,890                                            | 

In the third quarter of fiscal 2004, the Company recorded a non-recurring charge of $17.1 million resulting from the write-up of inventory required by SFAS No. 141 on the Acquisition Date and subsequent sale of such
inventory.

15. Restructuring

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

During 2003, the Company reversed $0.3 million of reserves related to the fiscal 2001 restructuring provision. The adjustment represented a change in estimate of the plan for the disposal of certain items of inventory and
was classified as a reduction in cost of sales. During the second quarter of 2004, the Company reversed $1.1 million of reserves related to the fiscal 2001 restructuring provision. The adjustment represented a change in estimate related to amounts
for non-cancelable lease obligations due to the renegotiation of the subject lease that was completed in the second quarter.

The following table displays the activity and balances of the restructuring reserve of the predecessor company as of and for the year ended September 30, 2003 and six months ended March 31, 2004 (dollars in thousands):

|                           | September 30, |       |           |   |         |  | September 30, |       
|-------------------------- | ------------- | ----- | --------- | - | ------- |  | ------------- | ------
|                           | 2002          |       | Reversals |   | Charges |  | 2003          |       
|                           |               |       |           |   |         |  |               |       
|Employee termination costs | $             | 730   |           | $ |         |  | $             | (506  
|Lease agreements           |               | 2,352 |           |   |        |  |               | (896  
|Loss on disposal of assets |               | 700   |           |   |        |  |               | (9    
|Other                      |               | 47    |           |   |        |  |               | (30   
|                           |               |       |           |   |         |  |               |       
|Total                      | $             | 3,829 |           | $ |        |  | $             | (1,441
|                           |               |       |           |   |         |  |               |       

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|                           | September
            30, |       |           |   |         |   |      |        | March
            31, |  
|-------------------------- | ------------------------- | ----- | --------- | - | ------- | - | ---- | ------ | --------------------- | -
|                           | 2003                      |       | Reversals |   | Charges |   | 2004 |       
|                           |                           |       |           |   |         |   |      |        |                       |  
|Employee termination costs | $                         | 224   |           | $ |        |   | $    | (224   | )                     | $
|Lease agreements           |                           | 1,456 |           |   | (1,091  | ) |      | (365   | )                     |  
|Loss on disposal of assets |                           | 691   |           |   |        |   |      | (691   | )                     |  
|Other                      |                           | 17    |           |   |        |   |      | (17    | )                     |  
|                           |                           |       |           |   |         |   |      |        |                       |  
|Total                      | $                         | 2,388 |           | $ | (1,091  | ) | $    | (1,297 | )                     | $
|                           |                           |       |           |   |         |   |      |        |                       |  

16. Summarized Financial Information

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

The following condensed financial information illustrates the composition of the combined Subsidiary Guarantors and non 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):

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Condensed Consolidating Statement of Operations Information 
Year Ended September 30, 2005

|                                 | Successor      |        
|-------------------------------- | -------------- | -------
|                                 |                |        
|                                 | AearoCompany I |        
|                                 |                |        
|                                 |                |        
|Net sales                        | $              | 315,723
|Cost of sales                    |                | 176,535
|                                 |                |        
|Gross profit                     |                | 139,188
|                                 |                |        
|Selling and administrative       |                | 96,057 
|Research and technical services  |                | 5,719  
|Amortization                     |                | 3,695  
|Other charges (income), net      |                | 18,610 
|                                 |                |        
|Operating income (loss)          |                | 15,107 
|                                 |                |        
|Interest expense (income), net   |                | 21,488 
|                                 |                |        
|Income (loss) before taxes       |                | (6,381 
|                                 |                |        
|Income tax provision (benefit)   |                | (5,112 
|                                 |                |        
|Equity in subsidiaries earnings |                | 29,050 
|                                 |                |        
|Net Income                       | $              | 27,781 
|                                 |                |        

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Condensed Consolidating Statement of Operations Information 
Six Months Ended September 30, 2004

|                                 |                |         |                       |   | Successor                 |   |              |        |              |  
|-------------------------------- | -------------- | ------- | --------------------- | - | ------------------------- | - | ------------ | ------ | ------------ | -
|                                 |                |        
|                                 | AearoCompany I |         | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |   | Eliminations |        | Consolidated |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Net sales                        | $              | 146,074 |                       | $ |                          |   | $            | 68,346 |              | $
|Cost of sales                    |                | 93,959  |                       |   |                          |   |              | 45,750 |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Gross profit                     |                | 52,115  |                       |   |                          |   |              | 22,596 |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Selling and administrative       |                | 41,766  |                       |   | 1,183                     |   |              | 13,803 |              |  
|Research and technical services  |                | 2,657   |                       |   |                          |   |              | 1,371  |              |  
|Amortization                     |                | 1,868   |                       |   | 123                       |   |              | 640    |              |  
|Other charges (income), net      |                | 9,456   |                       |   | (13,699                   | ) |              | 5,788  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Operating income (loss)          |                | (3,632  | )                     |   | 12,393                    |   |              | 994    |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Interest expense (income), net   |                | 15,649  |                       |   | (762                      | ) |              | 1,021  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Income (loss) before taxes       |                | (19,281 | )                     |   | 13,155                    |   |              | (27    | )            |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Income tax provision (benefit)   |                | (8,394  | )                     |   | 5,147                     |   |              | 2,263  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Equity in subsidiaries earnings |                | 5,718   |                       |   | (2,290                    | ) |              |        |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Net income (loss)                | $              | (5,169  | )                     | $ | 5,718                     |   | $            | (2,290 | )            | $
|                                 |                |         |                       |   |                           |   |              |        |              |  

Condensed Consolidating Statement of Operations Information 
Six Months Ended March 31, 2004

|                                 |                |         |                       |   | Predecessor               |   |              |        |              |  
|-------------------------------- | -------------- | ------- | --------------------- | - | ------------------------- | - | ------------ | ------ | ------------ | -
|                                 |                |        
|                                 | AearoCompany I |         | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |   | Eliminations |        | Consolidated |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Net sales                        | $              | 122,913 |                       | $ |                          |   | $            | 65,030 |              | $
|Cost of sales                    |                | 71,142  |                       |   |                          |   |              | 36,348 |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Gross profit                     |                | 51,771  |                       |   |                          |   |              | 28,682 |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Selling and administrative       |                | 42,612  |                       |   | 674                       |   |              | 13,549 |              |  
|Research and technical services  |                | 2,351   |                       |   |                          |   |              | 1,272  |              |  
|Amortization                     |                | 168     |                       |   | 74                        |   |              |       |              |  
|Other charges (income), net      |                | 6,815   |                       |   | (12,283                   | ) |              | 4,962  |              |  
|Restructuring charges (income)   |                | (1,091  | )                     |   |                          |   |              |       |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Operating income                 |                | 916     |                       |   | 11,535                    |   |              | 8,899  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Interest expense (income), net   |                | 10,117  |                       |   | (983                      | ) |              | 1,702  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Income (loss) before taxes       |                | (9,201  | )                     |   | 12,518                    |   |              | 7,197  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Income tax provision (benefit)   |                | (4,642  | )                     |   | 5,022                     |   |              | 1,640  |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Equity in subsidiaries earnings |                | 13,053  |                       |   | 5,557                     |   |              |        |              |  
|                                 |                |         |                       |   |                           |   |              |        |              |  
|Net income                       | $              | 8,494   |                       | $ | 13,053                    |   | $            | 5,557  |              | $
|                                 |                |         |                       |   |                           |   |              |        |              |  

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Condensed Consolidating Statement of Operations Information 
  Year Ended September 30, 2003

|                                 |           |         |              |   | Predecessor  |   |              |         |              |  
|-------------------------------- | --------- | ------- | ------------ | - | ------------ | - | ------------ | ------- | ------------ | -
|                                 |           |         |              |   |              |   |              |         |              |  
|                                 |           |         |              |   | Non-         |   |              |         |              |  
|                                 | Aearo     |         | Guarantor    |   | Guarantor    |   |              |         |              |  
|                                 | Company I |         | Subsidiaries |   | Subsidiaries |   | Eliminations |         | Consolidated |  
|                                 |           |         |              |   |              |   |              |         |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Net sales                        | $         | 235,767 |              | $ |             |   | $            | 120,157 |              | $
|Cost of sales                    |           | 133,645 |              |   |             |   |              | 70,257  |              |  
|Restructuring charges (income)   |           | (270    | )            |   |             |   |              |        |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Gross
    profit                 |           | 102,392 |              |   |             |   |              | 49,900  |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Selling and administrative       |           | 76,935  |              |   | 1,359        |   |              | 22,963  |              |  
|Research and technical services  |           | 4,509   |              |   |             |   |              | 1,893   |              |  
|Amortization                     |           | 150     |              |   | 117          |   |              |        |              |  
|Other charges (income), net      |           | 13,347  |              |   | (21,140      | ) |              | 9,530   |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Operating
    income             |           | 7,451   |              |   | 19,664       |   |              | 15,514  |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Interest expense (income), net   |           | 17,983  |              |   | (3,096       | ) |              | 4,569   |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Income (loss) before taxes       |           | (10,532 | )            |   | 22,760       |   |              | 10,945  |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Income tax provision (benefit)   |           | (8,422  | )            |   | 9,094        |   |              | 1,931   |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Equity in subsidiaries earnings |           | 22,680  |              |   | 9,014        |   |              |         |              |  
|                                 |           |         |              |   |              |   |              |         |              |  
|Net
    income                   | $         | 20,570  |              | $ | 22,680       |   | $            | 9,014   |              | $
|                                 |           |         |              |   |              |   |              |         |              |  

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Condensed Consolidating Balance Sheet Information 
  Year Ended September 30, 2005

|                                                      |           |        
|----------------------------------------------------- | --------- | -------
|                                                      |           |        
|                                                      | Aearo     |        
|                                                      | Company I |        
|                                                      |           |        
|Current Assets:                                       |           |        
|                                                      |           |        
|Cash
    and cash equivalents                         | $         | 19,690 
|Receivables,
    net                                  |           | 41,140 
|Inventories                                           |           | 36,969 
|Deferred
    and prepaid expenses                     |           | 7,348  
|                                                      |           |        
|Total current assets                                  |           | 105,147
|                                                      |           |        
|                                                      |           |        
|Long term assets:                                     |           |        
|Property
    plan and equipment                       |           | 36,425 
|Goodwill
    and other intangibles, net               |           | 80,540 
|Investment
    in subsidiaries                        |           | 237,986
|Other
    assets                                      |           | 13,171 
|                                                      |           |        
|Total Assets                                          | $         | 473,269
|                                                      |           |        
|                                                      |           |        
|                                                      |           |        
|Current Liabilities:                                  |           |        
|Current
    portion of long term debt                 | $         | 3,432  
|Accounts
    payable and accrued liabilities          |           | 41,505 
|Accrued
    interest                                  |           | 6,678  
|Income
    tax payables (receivables)                 |           | 2,892  
|                                                      |           |        
|Total current liabilities                             |           | 54,507 
|                                                      |           |        
|                                                      |           |        
|                                                      |           |        
|Long Term Liabilities:                                |           |        
|Long
    term debt                                    |           | 297,625
|Deferred
    income taxes                             |           | 7,799  
|Inter-company
    receivables (payables)              |           | 59,473 
|Other
    liabilities                                 |           | 12,814 
|                                                      |           |        
|Total Liabilities                                     |           | 432,218
|                                                      |           |        
|                                                      |           |        
|                                                      |           |        
|Stockholders Equity:                                 |           |        
|Common
    Stock                                      |           |       
|Paid
    in capital                                   |           | 101,750
|Retained
    earnings                                 |           | (61,220
|Accumulated
    other comprehensive income (loss)     |           | 521    
|                                                      |           |        
|Total Stockholders
    Equity                        |           | 41,051 
|                                                      |           |        
|Total Liabilities
       and Stockholders
    Equity | $         | 473,269
|                                                      |           |        

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Condensed Consolidating Balance Sheet Information 
  Year Ended September 30, 2004

|                                                  |           |         |              |   | Successor    |   |              |         |              |  
|------------------------------------------------- | --------- | ------- | ------------ | - | ------------ | - | ------------ | ------- | ------------ | -
|                                                  |           |        
|                                                  |           |         |              |   | Non-         |   |              |         |              |  
|                                                  | Aearo     |         | Guarantor    |   | Guarantor    |   |              |         |              |  
|                                                  | Company I |         | Subsidiaries |   | Subsidiaries |   | Eliminations |         | Consolidated |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Current Assets:                                   |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Cash
    and cash equivalents                     | $         | 18,309  |              | $ | 140          |   | $            | 9,275   |              | $
|Receivables,
    net                              |           | 34,823  |              |   |             |   |              | 19,336  |              |  
|Inventories                                       |           | 29,956  |              |   |             |   |              | 11,202  |              |  
|Deferred
    and prepaid expenses                 |           | 3,014   |              |   |             |   |              | 1,132   |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total current assets                              |           | 86,102  |              |   | 140          |   |              | 40,945  |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Long term assets:                                 |           |         |              |   |              |   |              |         |              |  
|Property
    plan and equipment                   |           | 40,040  |              |   |             |   |              | 14,710  |              |  
|Goodwill
    and other intangibles, net           |           | 134,567 |              |   | 131,786      |   |              | 53,247  |              |  
|Inter-company
    receivables (payables)          |           | 64,478  |              |   | (12,147      | ) |              | (52,331 | )            |  
|Investment
    in subsidiaries                    |           | 154,350 |              |   | 40,981       |   |              | (713    | )            |  
|Other
    assets                                  |           | 15,133  |              |   |             |   |              | 11      |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total Assets                                      | $         | 494,670 |              | $ | 160,760      |   | $            | 55,869  |              | $
|                                                  |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Current Liabilities:                              |           |         |              |   |              |   |              |         |              |  
|Current
    portion of long term debt             | $         | 1,618   |              | $ |             |   | $            | 21      |              | $
|Accounts
    payable and accrued liabilities      |           | 32,623  |              |   | 577          |   |              | 13,530  |              |  
|Accrued
    interest                              |           | 6,996   |              |   |             |   |              |        |              |  
|Income
    tax payables (receivables)             |           | 2,324   |              |   | (2,317       | ) |              | 1,641   |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total current liabilities                         |           | 43,561  |              |   | (1,740       | ) |              | 15,192  |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Long Term Liabilities:                            |           |         |              |   |              |   |              |         |              |  
|Long
    term debt                                |           | 302,662 |              |   |             |   |              | 180     |              |  
|Deferred
    income taxes                         |           | 58,073  |              |   |             |   |              | 1,626   |              |  
|Other
    liabilities                             |           | 14,726  |              |   |             |   |              |        |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total Liabilities                                 |           | 419,022 |              |   | (1,740       | ) |              | 16,998  |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Stockholders Equity:                             |           |         |              |   |              |   |              |         |              |  
|Common                                            |           |        |              |   |             |   |              | 7,396   |              |  
|Paid
    in capital                               |           | 101,610 |              |   | 167,519      |   |              | 12,280  |              |  
|Retained
    earnings                             |           | (24,824 | )            |   | (8,664       | ) |              | 26,168  |              |  
|Accumulated
    other comprehensive income (loss) |           | (1,138  | )            |   | 3,645        |   |              | (6,973  | )            |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total Stockholders
    Equity                    |           | 75,648  |              |   | 162,500      |   |              | 38,871  |              |  
|                                                  |           |         |              |   |              |   |              |         |              |  
|Total Liabilities and
    Stockholders Equity    | $         | 494,670 |              | $ | 160,760      |   | $            | 55,869  |              | $
|                                                  |           |         |              |   |              |   |              |         |              |  

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Condensed Consolidating Statement of Cash Flows Information 
  Year Ended September 30, 2005

|                                                         |           |         | Successor    |   |              |  
|-------------------------------------------------------- | --------- | ------- | ------------ | - | ------------ | -
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   | Non-         |  
|                                                         | Aearo     |         | Guarantor    |   | Guarantor    |  
|                                                         | Company I |         | Subsidiaries |   | Subsidiaries |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Net cash provided by operating activities                | $         | 24,475  |              | $ | 17,458       |  
|                                                         |           |         |              |   |              |  
|Net cash used for investing activities                   |           | (3,744  | )            |   |             |  
|                                                         |           |         |              |   |              |  
|Net cash provided by (used for) financing activities     |           | (20,194 | )            |   | (16,740      | )
|                                                         |           |         |              |   |              |  
|Effect of exchange rate on cash and cash equivalents     |           | 844     |              |   | (609         | )
|                                                         |           |         |              |   |              |  
|Increase (decrease) in cash and cash equivalents         | $         | 1,381   |              | $ | 109          |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Cash and cash equivalents at the beginning of the period |           | 18,309  |              |   | 140          |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Cash and cash equivalents at the end of the period       | $         | 19,690  |              | $ | 249          |  
|                                                         |           |         |              |   |              |  

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Condensed Consolidating Statement of Cash Flows Information 
  Six Months Ended September 30, 2004

|                                                                                           |           |        | Successor    |           |              |          
|------------------------------------------------------------------------------------------ | --------- | ------ | ------------ | --------- | ------------ | ---------
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           | Non-         |          
|                                                                                           | Aearo     |        | Guarantor    |           | Guarantor    |          
|                                                                                           | Company I |        | Subsidiaries |           | Subsidiaries |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Net cash provided by operating activities                                                  | $         | (150   | )            | $         | 7,527        |          
|                                                                                           |           |        |              |           |              |          
|Net cash used for investing activities                                                     |           | (3,627 | )            |           |             |          
|                                                                                           |           |        |              |           |              |          
|Net cash provided by (used for) financing activities                                       |           | 18,043 |              |           | (8,280       | )        
|                                                                                           |           |        |              |           |              |          
|Effect of exchange rate on cash                                                            |           | 3,150  |              |           | 142          |          
|                                                                                           |           |        |              |           |              |          
|Increase (decrease) in cash and cash equivalents                                           | $         | 17,416 |              | $         | (611         | )        
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Cash and cash equivalents at the beginning of the period                                   |           | 893    |              |           | 751          |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Cash and cash equivalents at the end of the period                                         | $         | 18,309 |              | $         | 140          |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Condensed Consolidating Statement of Cash Flows InformationSix Months Ended March 31, 2004 |          
|                                                                                           |           |        |              |           |             
|                                                                                           |           |        |              |           | Predecessor  |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           | Aearo  |              | Guarantor |              | Guarantor
|                                                                                           | Company I |        | Subsidiaries |           | Subsidiaries |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Net cash provided by operating activities                                                  | $         | (1,359 | )            | $         | 6,407        |          
|                                                                                           |           |        |              |           |              |          
|Net cash used for investing activities                                                     |           | (3,326 | )            |           |             |          
|                                                                                           |           |        |              |           |              |          
|Net cash used for financing activities                                                     |           | 3,255  |              |           | (6,840       | )        
|                                                                                           |           |        |              |           |              |          
|Effect of exchange rate on cash                                                            |           | 779    |              |           | 978          |          
|                                                                                           |           |        |              |           |              |          
|Increase (decrease) in cash and cash equivalents                                           | $         | (651   | )            | $         | 545          |          
|                                                                                           |           |        |              |           |              |          
|Cash and cash equivalents at the beginning of the period                                   |           | 1,544  |              |           | 206          |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|                                                                                           |           |        |              |           |              |          
|Cash and cash equivalents at the end of the period                                         | $         | 893    |              | $         | 751          |          
|                                                                                           |           |        |              |           |              |          

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Condensed Consolidating Statement of Cash Flows Information
  Year Ended September 30, 2003

|                                                         |           |         | Predecessor  |   |              |  
|-------------------------------------------------------- | --------- | ------- | ------------ | - | ------------ | -
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   | Non-         |  
|                                                         | Aearo     |         | Guarantor    |   | Guarantor    |  
|                                                         | Company I |         | Subsidiaries |   | Subsidiaries |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Net cash provided by operating activities                | $         | 21,292  |              | $ | 5,813        |  
|                                                         |           |         |              |   |              |  
|Net cash used for investing activities                   |           | (19,425 | )            |   |             |  
|                                                         |           |         |              |   |              |  
|Net cash used for financing activities                   |           | (9,510  | )            |   | (13,315      | )
|                                                         |           |         |              |   |              |  
|Effect of exchange rate on cash                          |           | 1,865   |              |   | 7,233        |  
|                                                         |           |         |              |   |              |  
|Increase (decrease) in cash and cash equivalents         | $         | (5,778  | )            | $ | (269         | )
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Cash and cash equivalents at the beginning of the period |           | 7,322   |              |   | 475          |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|                                                         |           |         |              |   |              |  
|Cash and cash equivalents at the beginning of the period | $         | 1,544   |              | $ | 206          |  
|                                                         |           |         |              |   |              |  

|17. | Valuation and Qualifying Accounts                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                
|    | For the periods ended September
        30, 2003, March 31, 2004 , September 30, 2004 and September 30, 2005
        (Dollars
    in thousands)
|   

|                                    |            |       |            |   | Additions |          |                |      |            |        |  
|----------------------------------- | ---------- | ----- | ---------- | - | --------- | -------- | -------------- | ---- | ---------- | ------ | -
|                                    | Balance at |       | Provisions |   |           | Charged  | Net Deductions |      | Balance at |       
|                                    | beginning  |       | Charged to |   |           | to Other |                | From |            | end of |  
|                                    | of Period  |       | Operations |   |           | Accounts | Allowances     |      | Period     |       
|Year ended September 30, 2003       |            |       |            |   |           |          |                |      |            |        |  
|Bad
    Debt Reserve                | $          | 1,524 |            | $ | 243       |          | $              |     | $          | (409   | )
|                                    |            |       |            |   |           |          |                |      |            |        |  
|Six months ended March 31, 2004     |            |       |            |   |           |          |                |      |            |        |  
|Bad
    Debt Reserve                |            | 1,358 |            |   | 233       |          |                |     |            | (97    | )
|                                    |            |       |            |   |           |          |                |      |            |        |  
|                                    |            |       |            |   |           |          |                |      |            |        |  
|                                    |            |       |            |   |           |          |                |      |            |        |  
|Six months ended September 30, 2004 |            |       |            |   |           |          |                |      |            |        |  
|Bad
    Debt Reserve                | $          | 1,494 |            | $ | 137       |          | $              |     | $          | (297   | )
|                                    |            |       |            |   |           |          |                |      |            |        |  
|Year ended September 30, 2005       |            |       |            |   |           |          |                |      |            |        |  
|Bad
    Debt Reserve                |            | 1,334 |            |   | 179       |          |                |     |            | (307   | )

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

None.







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Item 9A. Controls and Procedures

Disclosure controls and procedures are defined by the Securities
and Exchange Commission as those controls and other procedures that are designed
to ensure that information required to be disclosed in the Companys
filings under the Securities Exchange 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 September 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 fourth fiscal quarter of the fiscal year
covered by this Annual Report on Form 10-K that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





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Item 9B. Other Information

None.





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PART III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth certain information with respect to the directors
    and executive officers of the Company as of November 1, 2005.

|Name                         | Age |  | Position                                                                        
|---------------------------- | --- |  | --------------------------------------------------------------------------------
|                            
|Michael A. McLain (1)        | 55  |  | Chief Executive Officer, President and Chairman
       of the Board of Directors
|                             |     |  |                                                                                 
|Jeffrey S. Kulka             | 48  |  | Senior Vice President, Chief Financial Officer and Secretary                    
|                             |     |  |                                                                                 
|James H. Floyd               | 50  |  | President, Aearo Europe and International                                       
|                             |     |  |                                                                                 
|M. Rand Mallitz              | 63  |  | President, Specialty Composites                                                 
|                             |     |  |                                                                                 
|D. Garrad (Gary) Warren, III | 53  |  | President, North American Safety Products Group                                 
|                             |     |  |                                                                                 
|James M. Phillips            | 53  |  | Senior Vice President, Human Resources                                          
|                             |     |  |                                                                                 
|Rahul Kapur                  | 54  |  | Senior Vice President, Corporate Development and Chief Strategy                 
|                             |     |  | Officer                                                                         
|Thomas R. DAmico            | 49  |  | Senior Vice President, Operations and Research and Development                  
|                             |     |  |                                                                                 
|John D. Howard               | 53  |  | Director                                                                        
|                             |     |  |                                                                                 
|Douglas R. Korn (1)(2)       | 43  |  | Director, Chairman of Audit Committee                                           
|                             |     |  |                                                                                 
|Peter S. Cureton (2)         | 31  |  | Director                                                                        
|                             |     |  |                                                                                 
|Nick White                   | 60  |  | Director                                                                        

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

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

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

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

M. Rand Mallitz, President,
    Specialty Composites, joined the Company in January 1992. In January 2005,
    Mr. Mallitz
      was promoted to President, Specialty Composites. Prior to joining the Company,
      he
  was CEO/President of Roth Office Products.

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

Thomas R. DAmico joined the Company in July 2004 and currently serves as Senior Vice President, Operations and Research & Development. Prior to joining Aearo, from 2001 through 2004, Mr. DAmico
was Senior Vice President of Global Manufacturing, Quality, and Procurement for
Diebold, Inc. in North Canton, Ohio and from 1996 through 2001, was Executive
Vice President of Operations for the Genie Division of Overhead Door Corporation
in Alliance, Ohio.

James M. Phillips, Senior Vice President, Human Resources joined the Company
    in May 1998. Prior to joining Aearo, Mr. Phillips worked for Dow Chemical
    Company for more than 20 years in the areas of recruiting, training and
compensation.

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

John D. Howard is a Senior Managing Director of Bear, Stearns & Co. Inc. and group head of Bear Stearns Merchant Banking. Prior to joining Bear Stearns, Mr. Howard was co-Chief Executive Officer of Vestar Capital
Partners Inc., a private investment firm specializing in management buyouts. Mr. Howard is currently a Director of Aéropostale, Inc., New York & Company,
Inc., Seven for All Mankind, LLC, Stuart Weitzman Holdings, LLC, Sutton Place
Group,
LLC, The John Henry Company, and Vitamin Shoppe Industries Inc..

Douglas R. Korn is a Senior Managing Director of Bear, Stearns & Co.
Inc. and an Executive Vice President of Bear Stearns Merchant Banking. Prior
to joining Bear Stearns, Mr. Korn was a Managing Director of Eos Partners, L.P.,
an investment partnership. Mr. Korn is currently a Director of Bally International
AG, Fitz and Floyd, Inc., Reddy Ice Group, Inc. and Vitamin Shoppe Holdings.

Nick White was appointed
    to the Board of Director in November 2004. Mr. White held various executive
    level positions
      with Wal-Mart Stores, Inc. over a 28-year period. He was a member of Wal-Mart’s
      Executive Committee during his last fifteen years with the company. Mr.
      White is currently the President and CEO of White and Associates Consulting
Firm.

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Peter S. Cureton is a Vice President of Bear, Stearns & Co.
Inc. and Bear Stearns Merchant Banking. Prior to joining Bear Stearns, Mr. Cureton
was an Associate at Wellspring Capital Management LLC, a private equity firm.
Mr. Cureton was appointed to the Board of Directors in February 2005.

Our Audit Committee recommends the firm to be appointed as
independent registered public accounting firm to audit the financial statements
and to perform services related to the audit, reviews the scope and results of
the audit with the independent registered public accounting firm, reviews with
management and the independent registered public accounting firm our annual operating
results, considers the adequacy of the internal accounting procedures, considers
the
effect of such procedures on the registered public accounting firms independence
and establishes policies for business values, ethics and employee relations.
The Audit Committee is comprised of Douglas R. Korn and Pete Cureton. The Board of Directors
    is currently searching for an independent financial expert to serve on the
    Audit Committee.

Our Compensation Committee
    has overall responsibility for approving and evaluating our compensation
    plans, policies and programs applicable
      to executive officers. The Compensation Committee is comprised of Michael
      A. McLain and Douglas R. Korn.

We have adopted a code of ethics that applies to all of our Board members and
    to all of our employees, including our Chief Executive Officer, Chief Financial
    Officer, Controller and other finance executives. The Code of Ethics is available
    on our website at www.aearo.com. If we make substantive amendments to the Code of Ethics or grant any waiver, including any implicit waiver,
from a provision of the Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer or Controller, we will make a public disclosure of the nature of such amendment or waiver.

The Companys annual report on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to those reports
file or furnished pursuant to Section 15(a) or 15(d) of the Exchange Act, are
made available free of charge at www.aearo.com.
In addition, the Company will provide, at no cost, paper or electronic copies
of our reports and other filings made with the Securities and Exchange Commission
(SEC). Requests should be directed to the Corporate Secretary at
the principal executive offices listed herein.

Our officers and directors are not subject to Section 16 of the Exchange Act.

Item 11. Executive Compensation

The compensation of executive officers of the Company is determined
by the Compensation Committee of the Board of Directors. The following table
sets forth certain information concerning compensation received by the Chief
Executive Officer and the other four most highly-compensated executive officers
of the Company serving at the end of fiscal 2005 (the Named Executive Officers)
for services rendered to the Company in all capacities (including service as
an officer or director) in fiscal 2005.

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Summary Compensation Table 
  Annual Compensation

|                                                       | FiscalYear |  | Salary |         | Bonus |   |         | Other
           AnnualCompensation |  
|------------------------------------------------------ | ---------- |  | ------ | ------- | ----- | - | ------- | ----------------------------------- | -
|                                                       |            |  |        |         |       |   |         |                                     |  
|Michael A. McLain                                      | 2005       |  | $      | 568,545 |       | $ | 499,279 |                                     | $
|Chief Executive Officer, President and Chairman of the | 2004       |  | $      | 546,252 |       | $ | 474,352 |                                     | $
|Board of Directors                                     | 2003       |  | $      | 515,007 |       | $ | 398,125 |                                     | $
|                                                       |            |  |        |         |       |   |         |                                     |  
|D. Garrad Warren, III                                  | 2005       |  | $      | 297,510 |       | $ | 209,100 |                                     | $
|President, North American Safety Products Group        | 2004       |  | $      | 280,707 |       | $ | 198,605 |                                     | $
|                                                       | 2003       |  | $      | 250,281 |       | $ | 155,284 |                                     | $
|                                                       |            |  |        |         |       |   |         |                                     |  
|Thomas R. DAmico                                      | 2005       |  | $      | 232,553 |       | $ | 162,680 |                                     | $
|Senior Vice President,
    Operations and R&D          | 2004       |  | $      | 47,046  |       | $ | 31,361  |                                     | $
|                                                       | 2003       |  |        |         |       |   |         |                                     |  
|                                                       |            |  |        |         |       |   |         |                                     |  
|James H. Floyd, President, Aearo Europe,               | 2005       |  | $      | 256,140 |       | $ | 179,951 |                                     | $
|Managing Director, International                       | 2004       |  | $      | 242,115 |       | $ | 170,951 |                                     | $
|                                                       | 2003       |  | $      | 216,300 |       | $ | 133,988 |                                     | $
|                                                       |            |  |        |         |       |   |         |                                     |  
|M. Rand Mallitz                                        | 2005       |  | $      | 231,015 |       | $ | 162,763 |                                     | $
|President, Specialty Composites                        | 2004       |  | $      | 221,352 |       | $ | 153,265 |                                     | $
|                                                       | 2003       |  | $      | 212,832 |       | $ | 131,626 |                                     | $

Summary Compensation Table 
Long Term Compensation

|                                         | Awards           |  |   | Payouts                                       |    
|---------------------------------------- | ---------------- |  | - | --------------------------------------------- | ---
|                                         |                  |  |   |                                               |    
|                                         | Fiscal
     Year |  |   | Restricted
           Stock
     Award(s) (4) |    
|                                         |                  |  |   |                                               |    
|                                         |                  |  |   |                                               |    
|Michael A. McLain                        | 2005             |  |   |                                              |    
|Chief Executive Officer, President       | 2004             |  |   |                                              |    
|and Chairman of the Board of Directors   | 2003             |  |   |                                              |    
|                                         |                  |  |   |                                               |    
|D. Garrad Warren, III                    | 2005             |  |   |                                              |    
|President, North American Safety         | 2004             |  |   |                                              |    
|Products Group                           | 2003             |  |   |                                              |    
|                                         |                  |  |   |                                               |    
|Thomas R. DAmico                        | 2005             |  |   |                                              |    
|Senior Vice President, Operations        | 2004             |  | $ | 200,000                                       | (4)
|and R&D                                  | 2003             |  |   |                                              |    
|                                         |                  |  |   |                                               |    
|James H. Floyd, President, Aearo Europe, | 2005             |  |   |                                              |    
|Managing Director, International         | 2004             |  |   |                                              |    
|                                         | 2003             |  |   |                                              |    
|                                         |                  |  |   |                                               |    
|M. Rand Mallitz                          | 2005             |  |   |                                              |    
|President, Specialty Composites          | 2004             |  |   |                                              |    
|                                         | 2003             |  |   |                                              |    

|  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | . | Includes contributions
       made on behalf of Mr. McLain to the Company’s 401(k) Savings Plan ($6,450 for 2005, $6,300 for 2004 and
     $5,800 for 2003) and to the Company’s Cash Balance Plan ($13,121 for
     2005, $12,793 for 2004 and $12,541 for 2003). Also includes expenses recognized
     by the Company for unfunded accruals made on Mr. McLain’s behalf to
     the Company’s Supplemental Executive Retirement Plan ($66,732 for
     2005, $52,250 for 2004 and $43,206 for 2003), the Company’s match
     and interest credits to the Company’s Deferred Compensation Plan ($13,867
    for 2004 and $20,308 for 2003) and for the cancellation of options ($714,958).
|  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. |  | Includes
        contributions made on behalf of Mr. Warren to the Company’s 401(k)
        Savings Plan ($6,450 for 2005, $6,300 for 2004 and $5,800 for 2003) and
        to the Company’s Cash Balance Plan ($13,121 for 2005, $12,793 for
        2004 and $12,541 for 2003). Also includes expenses recognized by the
        Company for unfunded accruals made on Mr. Warren’s behalf to the
        Company’s Supplemental Executive Retirement Plan ($22,989 for 2005,
        $18,579 for 2004 and $11,023 for 2003), the Company’s match and
        interest credits to the Company’s Deferred Compensation Plan ($18,330
        for 2004 and $15,132 for 2003) and for the cancellation of options ($812,452).
        Also includes interest earned on 221 deferred preferred stock units held
        in Mr. Warren’s account under the 2004 Aearo Technologies Inc.
        Deferred Compensation Plan ($28,413 for 2005). The deferred preferred
        stock units were redeemed in May 2005 (91 units) and August 2005 (130
    units).                                                                                                            
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. |  | Includes contributions
        made on behalf of Mr. D’Amico to the
      Company’s 401(k) Savings Plan ($8,179 for 2005 and $1,150 for 2004) and
      to the Company’s Cash Balance Plan ($6,600 for 2005 and $0 for 2004). Includes
      expenses recognized by the Company for unfunded accruals made on Mr. D’Amico’s
      behalf to the Company’s Supplemental Executive Retirement Plan ($4,413
      for 2005 and $0 for 2004). Includes a sign-on bonus ($70,000 for 2005)
    and relocation expenses ($19,450 for 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4. |  | Includes the assumed
        fair market value ($200,000) established by the Board of Directors of
        Aearo Technologies Inc. on the date of grant
        of 20,000
      shares of common stock granted to Mr. D’ Amico in August 2004, under the
      Aearo Technologies Inc. Stock Incentive Plan. Full ownership of the shares
      vests in 20% increments over 5 years and may be accelerated in certain
      events. Any unvested shares would be forfeited and returned to Aearo Technologies
      Inc. if Mr. D’Amico were no longer employed by the Company. All the restricted
      shares are entitled to cash dividends and voting rights. On September 30,
      2005, 16,000 restricted shares were held by Mr. D’Amico subject to future
      vesting and were all the shares of restricted stock outstanding under the
      Aearo Technologies Inc. Stock Incentive Plan. The value of the unvested
      shares was $624,000 calculated on the basis of an assumed fair market value
      of $39 per share as established by the Aearo Technologies Inc. Board of
    Directors. Mr. D’Amico was not an employee of the Company in 2003.
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | Includes contributions
        made on behalf of Mr. Floyd to the Company’s 401(k) Savings Plan ($6,350
        for 2005, $6,193 for 2004
        and $5,700 for 2003)
      and to the Company’s Cash Balance Plan ($13,121 for 2005, $12,793 for 2004
      and $12,541 for 2003). Also includes expenses recognized by the Company
      for unfunded accruals made on Mr. Floyd’s behalf to the Company’s
      Supplemental Executive Retirement Plan ($17,467 for 2005, $13,788 for 2004
      and $7,354 for 2003), the Company’s match and interest credits to
      the Company’s Deferred Compensation Plan ($9,970 for 2004 and $9,339
    for 2003) and for the cancellation of options ($194,988).                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | Includes contributions
        made on behalf of Mr. Mallitz to the Company’s 401(k) Savings Plan ($6,726
        for 2005, $6,200 for 2004
        and $5,945 for 2003)
      and to the Company’s Cash Balance Plan ($13,121 for 2005, $12,793 for 2004
      and $12,541 for 2003). Also includes expenses recognized by the Company
      for unfunded accruals made on Mr. Mallitz’s behalf to the Company’s
      Supplemental Executive Retirement Plan ($14,042 for 2005, $11,938 for 2004
      and $6,978 for 2003), the Company’s match and interest credits to
      the Company’s Deferred Compensation Plan ($4,232 for 2004 and $2,418
    for 2003) and for the cancellation of options ($166,553).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|7. |  | Includes payments
        made under the phantom equity plan to Messrs. McLain ($6,322,579), Warren
    ($1,941,935), Floyd ($1,535,484) and Mallitz ($632,258).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

The following table sets forth information concerning the number and value of
    unexercised options to purchase Aearo Technologies Inc. Common Stock held
    by the Named Executive Officers at the end of fiscal 2005. None of the Named
    Executive Officers exercised any options during fiscal 2005.

|                      |                           |  |               | Number
               of Shares Covered byOptions at Fiscal Year-end |             | Value
                   of OutstandingIn-the-money OptionsAt Fiscal Year-end (1) |              
|--------------------- | ------------------------- |  | ------------- | -------------------------------------------------------------------- | ----------- | --------------------------------------------------------------------------------- | -------------
|Name                  | SharesAcquiredOn Exercise |  | ValueRealized |                                                                      | Exercisable |                                                                                   | Unexercisable
|                      |                           |  |               |                                                                      |             |                                                                                   |              
|Michael A. McLain     |                          |  |              |                                                                      | 32,550      |                                                                                   | 97,150       
|D. Garrad Warren, III |                          |  |              |                                                                      | 11,370      |                                                                                   | 33,830       
|James H. Floyd        |                          |  |              |                                                                      | 11,010      |                                                                                   | 32,790       
|M. Rand Mallitz       |                          |  |              |                                                                      | 6,780       |                                                                                   | 20,120       
|Thomas R. DAmico     |                          |  |              |                                                                      | 6,412       |                                                                                   | 16,963       

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|  |   |                                                                                                                                                                                                                                                                                                    
|- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | . | There was no public
        market for Aearo Technologies Inc.’s capital
      stock as of September 30, 2005. Accordingly, these values have been calculated
      on the basis of an assumed fair market of $39 per share as established
    by the Aearo Technologies Inc.’s Board of Directors.
|  |   |                                                                                                                                                                                                                                                                                                    

Director Compensation

The members of the Companys Board of Directors receive
compensation to recognize their contributions for their service to the Company.
The type and amount of compensation is split into two groups. The first group
is the Independent Group that consists of members not employed by the Company
or its major shareholders (i.e. Bear Stearns Merchant Banking and Vestar Capital
Partners). The second group, the Affiliated Group, would consist of those members
either
employed by the Company or its major shareholders of the Company. The Directors
in the Independent Group receive $20,000 annually for their service as Directors
and an additional $1,000 per meeting for physical attendance or $500 per meeting
for phone attendance plus reimbursement of expenses. The Affiliated Group serves
without compensation.

Employment Agreements

In connection with the Merger, AC Safety Acquisition Corp.
entered into employment agreements with the following seven senior executives:
Michael McLain, D. Garrad Warren III, M. Rand Mallitz, James M. Phillips, Rahul
Kapur, Jeffrey S. Kulka and James H. Floyd. Aearo Technologies Inc. entered into
an employment agreement with Thomas R. DAmico upon the commencement of
his employment with the Company in July 2004. Under each agreement, the applicable
executive will receive (i) a base salary that will initially be equal to the
base salary received by such executive prior to the Merger and will be subject
to annual review each year beginning with fiscal year 2005, (ii) an annual bonus
that will be
based on the achievement by Aearo Company I and Aearo Technologies Inc. of certain
performance targets and (iii) certain employee benefits under health and welfare
plans and participation in incentive, savings and retirement plans that, for
the period beginning on the consummation of the Merger and ending on the second
anniversary of the consummation of the Merger will be no less favorable in the
aggregate than those currently provided.

Each employment agreement provides the applicable executive
with severance benefits equal to two times the executives base salary if termination occurs within the first two years and one and a half times base salary
if termination occurs after two years (two and a half times and two times, respectively, in the case of Michael McLain) plus the executives target bonus in the event such executive is terminated without cause or such executive terminates his
employment for good reason, in each case, within five years from the date of the closing of the Merger. In the event an executives employment terminates for any other reason, such executive will only be entitled to amounts required by law to
be paid, including a payout of such executives annual base salary through
the date of termination.

Each employment agreement also contains a covenant not to compete and a non-solicitation
    and noninterference provision with respect to employees and customers.

Deferred Compensation Plans

Aearo Plan.Aearo Company I currently maintains a deferred compensation plan for certain of its employees and directors. The plan is a non-qualified plan savings plan
under the IRS code that provides executive officers the opportunity to defer the receipt of base salary and/or bonus. The total amount of Aearo assets and obligations outstanding under the plan was approximately $3.4 million as of September 30,
2005.



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2004 Aearo Technologies Inc. Plan.On
April 7, 2004, Aearo Technologies Inc. adopted the 2004 Deferred Compensation
Plan. A limited group of executives of Aearo Technologies Inc. were credited
with a transaction bonus under the plan as of that date. The bonus amounts credited
under the plan were credited to a deferred compensation account in each participants
name and deemed to be invested in a combination of common stock units and preferred
stock units. Stock units do not have voting or  dividend
rights. However, upon the payment of a stock or cash dividend, participants will
have dividend equivalent rights. In the event of
a stock dividend, the dividend equivalents will be credited in the form of additional
preferred or common stock units, as applicable. In the event of a cash dividend,
each participant will be entitled to a cash payment from Aearo Technologies Inc.
in an amount equal to the aggregate cash dividend that would have been paid
on the preferred or common units, as applicable, credited to the participants
deferred compensation account on the dividend record date as if those units had
actually been shares outstanding. The amounts credited to the participants
 deferred compensation account generally become payable upon the first to occur
of the participants
termination of employment or certain liquidity or other events set forth in the
Aearo Technologies Inc. 2004 Deferred Compensation Plan. Stock units will be
paid in an equal number of shares of common or preferred stock, as applicable.

Employee Stock and Other Benefit Plans

Stock Incentive Plan.In
connection with the Merger, our ultimate parent adopted a Stock Incentive Plan
for the benefit of certain of its employees. Options to acquire 18.5% of the
total outstanding shares of our ultimate parents common stock on a fully diluted basis were granted under the plan. With respect to the options, the plan only permits the issuance of non-qualified options. In addition, common
stock representing a total of 1.5% of the outstanding shares of our ultimate parents
common stock on a fully diluted basis was designated as restricted stock and
made available for grant under the plan for new hires and for incentives for
existing employees of which 20,000 shares of restricted stock have been granted
under the plan. The number of shares of restricted stock and the number of options
to be issued to each new hire or existing employee will be determined by the
Compensation Committee of the Board of Directors of our ultimate parent based
on the recommendation of the Chief Executive Officer. There were no option grants
to any of our Named Executive Officers in fiscal 2005.



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Compensation Committee Interlocks and Insider Participation.Our Compensation Committee makes all executive officer compensation decisions and submits them to our Board of
Directors for final review and approval. The Compensation Committee is comprised of Michael A. McLain and Douglas R. Korn. In addition, no member of our Compensation Committee serves as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.

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

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

401(k) Plan.The
Company has adopted a savings plan (the Savings Plan), which is qualified under Section 401(a) and 401(k) of the Internal Revenue Service
(IRS) Code. All employees of the Company in the United States normally scheduled to work a minimum of 1,000 hours per year are eligible to participate in the Savings Plan effective with their hire date. For each employee who elects to
participate in the Savings Plan and makes a contribution thereto, the Company will make a matching contribution. The Company matches 50.0% of the first 6.0% of compensation contributed. The maximum contribution for any participant for any year is
60.0% of such participants eligible compensation, not to exceed the 401(k)
plan elective deferral limit set forth by the IRS. Contributions to the Savings
Plan will be invested, as the employee directs, in a variety of investment options.

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

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

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

|                                                                              | Annual   |        
|----------------------------------------------------------------------------- | -------- | -------
|                                                                              | Benefits |        
|                                                                              | Payable  |        
|                                                                              |          |        
|Michael A. McLain                                                             | $        | 110,876
|Chief
    Executive Officer, President and Chairman of the Board of Directors |          |        
|                                                                              |          |        
|D. Garrad Warren, III                                                         | $        | 53,815 
|President,
    North American Safety Products Group                           |          |        
|                                                                              |          |        
|Thomas R. DAmico                                                             | $        | 40,273 
|Senior Vice President,
    Operations and R&D                                 |          |        
|                                                                              |          |        
|James H. Floyd                                                                | $        | 62,607 
|President,
    Aearo Europe, Managing Director, International                 |          |        
|                                                                              |          |        
|M. Rand Mallitz                                                               | $        | 29,174 
|President, Specialty Composites                                               |          |        





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Item 12. Security Ownership of Certain Beneficial Owners and Management

Aearo Corporation owns 100% of our capital stock. Aearo Technologies Inc., or
    Holdings, owns 100% of the capital stock of Aearo Corporation. The following
    table sets forth information as of September 30, 2005, with respect to the
    ownership of the capital stock of Holdings by:

| |  | each person known to beneficially own more than 5% of the common stock,
| | - | -----------------------------------------------------------------------
| |   |                                                                        
| |  | each of our directors and executive officers, and                      
| |   |                                                                        
| |  | all of our executive officers and directors as a group.                

The amounts and percentages of shares beneficially owned are
reported on the basis of Securities and Exchange Commission (Commission) regulations governing the determination of beneficial ownership of
securities. Under Commission rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of a security if such person has a right to acquire such securities within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such
persons ownership percentage, but not for purposes of computing any other persons
percentage. Under these rules, more than one person may be deemed to be a beneficial
owner of the same securities and a person may be deemed to be a beneficial owner
of securities as to which such person has no economic interest.

Except as otherwise
  indicated in these footnotes, each of the beneficial owners listed has, to
    our knowledge, sole voting and investment power with respect to the
  indicated shares of common stock.

|                                            |  |                                                        |        |  |                                               | 
|------------------------------------------- |  | ------------------------------------------------------ | ------ |  | --------------------------------------------- | 
|                                            |  |                                                        |        |  |                                               | 
|Name of Beneficial Owner                    |  | Number of 
     Shares     Beneficially
         Owned |        |  | Percentage
         of Outstanding
    Shares | 
|                                            |  |                                                        |        |  |                                               | 
|Bear Stearns Merchant Capital II, L.P       |  | 2,013,462                                              | (1)    |  | 79.3                                          | 
|Vestar Equity Partners, L.P.                |  | 238,531                                                | (2)    |  | 9.4                                           | 
|Michael A. McLain                           |  | 117,797                                                | (3)    |  | 4.6                                           | 
|James H. Floyd                              |  | 39,446                                                 | (3)    |  | 1.5                                           | 
|Rahul Kapur                                 |  | 39,446                                                 | (3)    |  | 1.5                                           | 
|D. Garrad Warren III                        |  | 33,699                                                 | (3)    |  | 1.3                                           | 
|M. Rand Mallitz                             |  | 28,091                                                 | (3)    |  | 1.1                                           | 
|James M. Phillips                           |  | 22,405                                                 | (3)(4) |  | *                                             | 
|Thomas R. DAmico                           |  | 33,912                                                 | (3)(5) |  | 1.3                                           | 
|Nick White                                  |  | 3,400                                                  | (3)    |  | *                                             | 
|Jeffrey S. Kulka                            |  | 12,602                                                 | (3)    |  | *                                             | 
|John D. Howard                              |  | 2,013,462                                              | (6)    |  | 79.3                                          | 
|Douglas R. Korn                             |  | 2,013,462                                              | (6)    |  | 79.3                                          | 
|                                            |  |                                                        |        |  |                                               | 
|Directors and Executive Officers as a group |  | 2,582,791                                              |        |  | 98.0                                          | 

|* | Less than one percent.
|- | ----------------------

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(1)Includes
        shares of common stock owned by each of Bear Stearns Merchant Banking
        Partners II, L.P., Bear Stearns Merchant Banking Investors II, L.P.,
        Bear Stearns MB-PSERS II, L.P., The BSC Employee Fund V, L.P. and The
        BSC Employee Fund VI, L.P. Bear Stearns Merchant Capital II, L.P. is
        the general partner of each of these entities. Bear Stearns Merchant
        Capital II, L.P. and each of the foregoing entities is an affiliate of
        Bear, Stearns & Co. Inc. and has an address at 383 Madison Avenue,
        New York, New York 10179.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|(2)Vestar
        Equity Partners, L.P. has an address at 245 Park Avenue, 41st Floor,
        New York, NY 10167.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|(3)The
        amount reported include shares of common stock that may be acquired within
        60 days of September 30, 2005, through the exercise of stock options
        as follows: Mr. McLain  32,550 shares, Mr. Floyd  11,010
        shares, Mr. Kapur  11,010 shares, Mr. Warren  11,370 shares,
        Mr. Mallitz  6,780 shares, Mr. Phillips  6,780 shares, Mr.
        DAmico  6,412 shares, Mr. White  900 shares, Mr. Kulka  11,040
        shares, and all directors and officers as a group  97,852 shares.                                                               

(4)Includes
15,625 shares of common stock held by a trust as to which Mr. Phillips shares
voting and investment power as co-trustee with his spouse.

(5)Includes
16,000 shares of common stock as to which Mr. D’Amico has sole voting
    power but which are subject to vesting and transfer restrictions imposed
    under the Stock Incentive Plan.

(6)Each
of Messrs. Howard, and Korn may be deemed the beneficial owner of the shares
of common stock owned by Bear Stearns Merchant Capital II,
L.P. set forth in note (1) above due to their status as vice president of Bear
Stearns Merchant Banking, senior managing director of Bear Stearns & Co. Inc. and chief executive officer of Bear Stearns Merchant Banking, and senior managing director of Bear Stearns & Co.
Inc. and executive vice president of Bear Stearns Merchant Banking, respectively.
Each such person disclaims beneficial ownership of any such shares.

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Item 13. Certain Relationships and Related Transactions

Stockholder Support
      Agreement

On March 10, 2004, the Company entered into a stockholder support agreement with
    Aearo Technologies Inc., AC Safety Acquisition Corp. and Vestar Equity Partners,
    L.P. The stockholder support agreement contains, among other things, the
    following provisions with respect to Vestar and its affiliates:

| |  | a prohibition
       on sales, dispositions, pledges and other transfers on shares of Aearo
       Corporation capital stock;                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                        
| |  | a non-solicitation and
    non-interference provision with respect to Aearos current employees,
    certain former employees and customers, suppliers, licensees and other business
    relations; and
| |   |                                                                                                                                                                                                        
| |  | an agreement not to
       acquire or otherwise render services to certain of our competitors prior
       to March 10, 2006.                                                                          
| |   |                                                                                                                                                                                                        

Professional Services Agreement

On April 7, 2004, Aearo Technologies Inc., Aearo Corporation
and Aearo Company I entered into a professional services agreement with Bear
Stearns Merchant Manager II, LLC, or BSMM (the Successor Agreement).
 Under the terms of the Successor Agreement, Aearo Technologies Inc., Aearo Corporation
and Aearo Company I retained BSMM to provide certain management consulting and
financial advisory services, for which the Company will pay BSMM an annual advisory

fee equal to the greater of (i) $0.7 million and (ii) 1.25% of the Adjusted Consolidated
EBITDA (as defined in our credit facility as in effect on April 7, 2004, plus,
to the extent deducted in arriving at Consolidated EBITDA, the aggregate advisory
 fee paid under the Successor Agreement and any fees paid to Vestar Capital Partners
or any of its affiliates) by the Company and its subsidiaries. If Aearo Technologies
Inc., Aearo Corporation or Aearo Company I engages BSMM with respect to any
merger, acquisition, disposition, recapitalization, issuance of securities, financing
or similar transaction, the Company will pay BSMM a transaction fee to be negotiated
between the parties. If the parties do not agree on a fee, the transaction fee
 will be 1.0% of the aggregate enterprise value paid or provided to Aearo Technologies
Inc., Aearo Corporation or Aearo Company I. BSMM will also be entitled to a fee
(a Company Sale Fee)
of 0.65% of the aggregate enterprise value paid to Aearo Technologies Inc. or
Aearo Corporation in a sale of Aearo Technologies Inc. or Aearo Corporation.
The Successor Agreement
will terminate on the earlier of (i) April 7, 2014, (ii) the consummation of
a sale of Aearo Technologies Inc., Aearo Corporation
or Aearo Company I, (iii) termination upon thirty days written notice by
BSMM and (iv) the consummation of a qualified public offering of Aearo Technologies
Inc. common stock. If not terminated by the foregoing, upon the tenth anniversary
of the date of the Successor Agreement and the end of each year thereafter, the
term is
automatically extended for an additional year unless terminated by either party
at least 30 days prior to such year end. Under the Successor Agreement, Aearo
Technologies Inc., Aearo Corporation and Aearo Company I have agreed to indemnify
BSMM for any and all claims and losses arising out of, or relating, to the professional
services agreement.

Stockholders Agreement

On April 7, 2004, all holders of the capital stock of Aearo
Technologies Inc. entered into and became subject to a stockholders agreement that governs certain aspects of our relationship with our security holders. The
stockholders agreement, among other things:

| |  | allows
          security holders to join, and allows BSMM and its affiliates to require
          security holders to join, in any sale or transfer of shares of common
          stock or preferred stock by BSMM to any third party prior to a qualified
          public offering of common stock or preferred stock, following which
          (when aggregated with all prior such sales or transfers) BSMM and its
          affiliates shall have disposed of in excess of a certain specified
          percentage of the number of shares of common stock or preferred stock,
          as applicable, that BSMM and its affiliates owned as of the closing
          of the Merger;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | restricts the ability of certain security holders to transfer,
      assign, sell, gift, pledge, hypothecate or encumber, or otherwise dispose
      of, common stock or preferred stock or all or part of the voting power
      associated with common stock or preferred stock, subject to certain specified
    exceptions;                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | grants to BSMM the right to designate members of the board of
    directors of Aearo Technologies Inc.;                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | grants to security holders the right to buy their proportionate
      percentage of securities offered for sale to BSMM by Aearo Technologies
    Inc.;                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | allows Aearo Technologies Inc. and BSMM to repurchase all or
      any portion of the common stock and preferred stock held by directors,
      employees and consultants of Aearo Corporation at varying prices upon the
      termination of their employment with Aearo Corporation for any reason (including
    death or disability);                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | grants demand and piggyback registration rights to BSMM
        and allow security holders to include securities in a registration statement
        filed
      by Aearo Technologies Inc. with respect to an offering of common stock
      or preferred stock (i) in connection with the exercise of any demand rights
      by BSMM and its affiliates or any other security holders possessing such
      rights or (ii) in connection with which BSMM and its affiliates exercise “piggyback” registration
    rights;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | provides for the payment by Aearo Technologies Inc. of
        the fees and expenses associated with the exercise of registration rights
        under
    the stockholders’ agreement;                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | restricts the ability of Aearo Technologies Inc. and its subsidiaries
    to enter into certain transactions with BSMM and its affiliates; and                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | provides for non-operating board members of our management to
      vote their shares at the direction of Aearo Technologies Inc. and to grant
    Aearo Technologies Inc. a proxy in respect of their shares;                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | restricts our ability to amend the certificate of designations
      governing our series A preferred stock without the approval of certain
    of our security holders; and                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | • | grant to the security holders of Aearo Technologies Inc. information
    rights with respect of Aearo Technologies Inc. and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                               

The stockholders agreement will terminate upon the earliest to occur of (i) the dissolution of Aearo Technologies Inc., (ii) the occurrence of any event that reduces the number of security holders to one, (iii) the
consummation of a qualified initial public offering of Aearo Technologies Inc.s
common stock and (iv) the transfer to a person or group other than BSMM and its
affiliates of a number of shares of common stock having the power to elect a
majority of the Aearo Technologies Inc. Board of Directors.

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Item 14. Principal Accountant Fees and Services

Audit Fees

The firm of Deloitte and Touche, LLP (Deloitte) has served as the Companys
independent registered public accounting firm for each of the last two fiscal
years ended September 30, 2004 and 2005. The aggregate fees billed by Deloitte
are as follows:

|                   | 2004 |         |  | 2005 |        
|------------------ | ---- | ------- |  | ---- | -------
|                   |      |         |  |      |        
|Audit fees         | $    | 493,800 |  | $    | 318,500
|                   |      |         |  |      |        
|Audit related fees |      | 63,690  |  |      | 144,241
|                   |      |         |  |      |        
|Tax fees           |      | 525,415 |  |      | 427,997
|                  
|

Audit related fees in the fiscal year ended September 30, 2005 included approximately
    $0.1 million related to various consulting activities related to acquisitions,
    financing, benefit plan audits and 404 readiness consulting. Audit related
    fees in the fiscal year ended September 30, 2004 included approximately $0.1
    million related to consulting activities related to acquisitions and benefit
plan audits.

Tax fees in the fiscal
    year ended September 30, 2005 related to tax compliance, tax advice and planning
    services. Tax fees in the
      fiscal year ended September 30, 2004 included approximately $0.4 million
      related to the Merger Agreement and $0.1 million related to tax compliance,
      tax advice and planning services. Services include preparation of federal
      and state tax returns, tax planning and assistance with various business
      issues including correspondence with taxing authorities.

The Audit Committee reviewed the audit and non-audit services
rendered by Deloitte and concluded that such services were compatible with maintaining
the auditors independence. All audit and non-audit services
performed by our independent registered public accounting firm are approved in advance by the Board of Directors or the Audit Committee to ensure that such services do not impair the auditors independence.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

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

|a) | 1.                                                                        | Financial Statements:         
|-- | ------------------------------------------------------------------------- | ------------------------------
|   | See Index to financial statements under Item 8 on page 37 of this report.
|   |                                                                           |                               
|   | 2.                                                                        | Financial Statement Schedules:
|   | None.                                                                    
|   |                                                                           |                               
|   | 3.                                                                        | Exhibits:                     
|   | See Index of Exhibits on pages 100 to 101 hereof.                        

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
    Act of 1934, the Registrant has duly caused this report to be signed on its
    behalf by the undersigned thereunto duly authorized.

|                              | Aearo Company I                                 
|----------------------------- | ------------------------------------------------
|                              |                                                 
|Date:November
       20, 2005 | By: /s/ Michael A. McLain                       
|                              |                                                 
|                              | Michael A. McLain                               
|                              | Chief Executive Officer, President, and Chairman
|                              | of the Board of Directors                       

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

|Date: November
       20, 2005 | /s/ Michael A. McLain                                                                                                  
|------------------------------ | -----------------------------------------------------------------------------------------------------------------------
|                               |                                                                                                                        
|                               | Michael A. McLain                                                                                                      
|                               | President, Chief Executive
       Officer and Chairman (Principal Executive Officer)                                   
|                               |                                                                                                                        
|                               |                                                                                                                        
|Date: November 20, 2005        | /s/ Jeffrey S. Kulka                                                                                                   
|                               |                                                                                                                        
|                               | Jeffrey S. Kulka                                                                                                       
|                               | Senior Vice President,
       Chief Financial Officer and Secretary (Principal
       Financial and Accounting Officer)
|                               |                                                                                                                        
|                               |                                                                                                                        
|Date: November 20, 2005        | /s/ John D. Howard                                                                                                     
|                               |                                                                                                                        
|                               | John D. Howard, Director                                                                                               
|                               |                                                                                                                        
|                               |                                                                                                                        
|Date: November 20, 2005        | /s/ Douglas R. Korn                                                                                                    
|                               |                                                                                                                        
|                               | Douglas R. Korn, Director                                                                                              
|                               |                                                                                                                        
|                               |                                                                                                                        
|Date: November 20, 2005        | /s/ Nick White                                                                                                         
|                               |                                                                                                                        
|                               | Nick White, Director                                                                                                   
|                               |                                                                                                                        
|                               |                                                                                                                        
|Date: November 20,
    2005    | /s/Pete Cureton                                                                                                        
|                               |                                                                                                                        
|                               | Pete Cureton, Director                                                                                                 

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INDEX OF EXHIBITS

|Exhibit Number |  | Description of Exhibit                                                                       
|-------------- |  | ---------------------------------------------------------------------------------------------
|               |  |                                                                                              
|2.1            |  | Agreement and Plan of Merger among Aearo Corporation, Aearo Technologies Inc.                
|               |  | and AC Safety Acquisition Corp. dated March 10, 2004 (Incorporated by reference to           
|               |  | Exhibit 2.1 of Aearo
       Corporations Current
    Report on Form 8-K filed April 22, 2004
|               |  | (File No. 33-96190))                                                                         
|3.1*           |  | Certificate of Incorporation of Aearo Company I                                              
|3.2            |  | Bylaws of Aearo Company I (Incorporated by reference to Exhibit 3.2 of Aearo                 
|               |  | Company Is Quarterly
    Report on Form 10-Q for the quarter ended March 31, 2005)          
|4.1*           |  | Indenture, dated as of April 7, 2004, among Aearo Company I, Cabot Safety                    
|               |  | Intermediate Corporation, VH Industries, Inc. and J.P. Morgan Trust Company, as              
|               |  | Trustee                                                                                      
|4.2*           |  | Form of Exchange Note (included in Exhibit 4.1)                                              
|10.1*          |  | Credit Agreement among Aearo Technologies Inc., Aearo Corporation, Aearo                     
|               |  | Company I, the various Lenders party thereto, Bear Stearns Corporate Lending, as             
|               |  | Syndication Agent, National City Bank of Indiana, as Co-Documentation Agent,                 
|               |  | Wells Fargo Bank, N.A., as Co-Documentation Agent, and Deutsche Bank AG, New                 
|               |  | York Branch, as Administrative Agent dated April 7, 2004                                     
|10.2           |  | Professional Services Agreement among Aearo Technologies Inc., AC Safety                     
|               |  | Acquisition Corp., Aearo Company I and Bear Stearns Merchant Manager II, LLC                 
|               |  | dated April 7, 2004
    (Incorporated by reference to Exhibit 10.1 to Aearo Corporations    
|               |  | Current Report on Form 8-K filed April 22, 2004 (File No. 33-96190))                         
|10.3*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and Michael A. McLain (M)                                                  
|10.4*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and D. Garrad Warren III (M)                                               
|10.5*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and M. Rand Mallitz (M)                                                    
|10.6*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and James M. Phillips (M)                                                  
|10.7*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and Rahul Kapur (M)                                                        
|10.8*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and Jeffrey S. Kulka (M)                                                   
|10.9*          |  | Executive Employment Agreement dated March 10, 2004, between AC Safety                       
|               |  | Acquisition Corp. and James H. Floyd (M)                                                     
|10.10*         |  | Aearo Technologies Inc. 2004 Deferred Compensation Plan (M)                                  
|10.11+         |  | Aearo Technologies Inc. 2004 Stock Incentive Plan (M)                                        
|10.12          |  | First Amendment, dated as of April 28, 2005, with respect to the Credit Agreement,           
|               |  | dated as of April 7, 2004, among Aearo Technologies Inc. and Aearo Corporation, as           
|               |  | guarantors, the other guarantors party thereto, the various lenders party thereto, Bear      
|               |  | Stearns Corporate Lending, as Syndication Agent, National City Bank of Indiana and           
|               |  | Wells Fargo Bank, N.A., as Co-Document Agents, and Deutsche Bank AG , New                    
|               |  | York Branch as Administrative Agent. (Incorporated by reference to Exhibit 10.12 of          
|               |  | Aearo Company Is
    Current Report on Form 10-Q for the quarter ended March 31,            
|               |  | 2005)                                                                                        
|10.13+         |  | Executive Employment Agreement dated July 13, 2004, between Aearo Technologies               
|               |  | Inc. and Thomas R. DAmico.
    (M)                                                          
|10.14+         |  | Summary of Management Incentive Plan for Executives other than the CEO. (M)                  
|10.15+         |  | Summary of Management Incentive Plan for the CEO. (M)                                        
|10.16+         |  | Nonqualified Deferred Compensation Plan, effective August 5, 1999, as amended.               
|               |  | (M)                                                                                          

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|       |  |                                                                                       
|------ |  | --------------------------------------------------------------------------------------
|10.17+ |  | Summary of Executive Supplemental Severance Pay Policy, as in effect December 1,      
|       |  | 2002. (M)                                                                             
|12.1+  |  | Computation of Ratio of Earnings to Fixed Charges                                     
|21.1+  |  | Subsidiaries of Aearo Company I                                                       
|31.1+  |  | Certificate of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley 
|       |  | Act of 2002.                                                                          
|31.2+  |  | Certificate of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley 
|       |  | Act of 2002.                                                                          
|32.1+  |  | Certificate of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adapter
|       |  | pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            
|32.2+  |  | Certificate of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adapter
|       |  | pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                            

|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|*   | Incorporated
       by reference to the same numbered exhibit to the registration statement
    on Form S-4, No. 333-116676, of Aearo Company I
|    |                                                                                                                                                
|+   | Filed herewith.                                                                                                                                
|    |                                                                                                                                                
|(M) | Identifies management contract or compensatory plan.                                                                                           

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