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UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, 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, 2004

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            | (IRS Employer          
|incorporation
    or organization)             | Identification
    No.)
|                                               |                        
|5457 West 79thStreet Indianapolis,
    Indiana | 46268                  
|(Address
    of principal executive offices)   | (Zip Code)             

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

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

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

Indicate
      by check mark whether the registrant: (1) has filed all reports required
      to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YesNo


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


The aggregate value of the common stock held by non-affiliates of the registrant as of December 17, 2004 (based upon the book value per share of the common stock) was $0.


The number of shares of the registrant's common stock, par value $.01 per share, outstanding as of December 17, 2004 was 100.


Documents incorporated by reference: None


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TABLE OF CONTENTS

|PART I   | 3                                                                                        
|-------- | -----------------------------------------------------------------------------------------
|Item 1.  | Business                                                                                 
|Item 2.  | Properties                                                                               
|Item 3.  | Legal Proceedings                                                                        
|Item 4.  | Submission of Matters to a Vote of Security Holders                                      
|PART II  | 15                                                                                       
|Item 5.  | Market
    for Registrants Common Equity and Related Stockholder Matters                
|Item 6.  | Selected Financial Data                                                                  
|Item 7.  | Managements
    Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk                               
|Item 8.  | Financial Statements and Supplementary Data                                              
|Item 9.  | Changes
    in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 9A. | Controls
    and Procedures                                                              
|Item 9B. | Other Information                                                                        
|PART III | 77                                                                                       
|Item 10. | Directors and Executive Officers of the Registrant                                       
|Item 11. | Executive Compensation                                                                   
|Item 12. | Security Ownership of Certain Beneficial Owners and Management                           
|Item 13. | Certain Relationships and Related Transactions                                           
|Item 14. | Principal Accountant Fees and Services                                                   
|PART IV  | 89                                                                                       
|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                         

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PARTI

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 $12.7 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 which are sold in more than 70 countries. 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-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 market segments
  in which we compete. For the fiscal year ended September 30, 2004, our net
  sales were $362.8 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. We place a strong emphasis on new product development, innovation
and protection of intellectual property. We manufacture approximately 75% of
the products that we sell.


The Safety Products
segment manufactures hearing protection devices, communication headsets, non-prescription
safety eyewear, face shields, reusable and disposable respirators, hard hats,
fall protection equipment and first aid kits which are sold in more than 70 countries
under its well-known brand names AOSafety®,
E-A-R®,
Peltor®and
SafeWaze.
The Safety Products segment accounted for approximately 76% of our net sales
in fiscal 2004 and approximately 77% in fiscal 2003 and approximately 73% in
fiscal 2002.


The Safety Prescription
Eyewear 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, grind and shape the lenses to the end-users prescription,
and then assemble the glasses using the end-users choice of frame.  The
Safety Prescription Eyewear segment accounted for approximately 11% of our net
sales in fiscal 2004, approximately 13% of our net sales in fiscal 2003 and approximately
14% in fiscal 2002.


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.
Specific product applications for Specialty Composites materials, technology
and engineering expertise include thermal acoustical systems in business and
regional jet aircraft; protective and performance-enhancing components in precision
electronic equipment; thermal acoustical treatments for heavy-duty trucks; and
treatments to control noise, vibration and shock in a wide range of industrial
and commercial equipment. Specialty Composites also produces specially formulated
foam used in the manufacture of the Safety Products segments earplugs.
Specialty Composites accounted for approximately 13% of our net sales in fiscal
2004, approximately 10% of our net sales in fiscal 2003 and approximately 13%
in fiscal 2002.


Products

Safety
  Products Segment

Within Safety Products, we classify our products into five main categories:


| | • | hearing
      protection and communication headsets;
| | - | ----------------------------------------------------
| |   |                                                     
| | • | eye protection;                                     
| |   |                                                     
| | • | face and
      head protection;                     
| |   |                                                     
| | • | respiratory
      protection; and                   
| |   |                                                     
| | • | fall protection.                                    

These products
serve a variety of end-users, such as in the construction, manufacturing, transportation,
forestry, textile, mining, military, motor sports, health care and two-way radio
markets.


Hearing
       Protection and Communication Headsets.Our
        hearing protection products primarily consist of disposable earplugs,
       reusable
  earplugs, passive earmuffs, and communication headsets. We have been a leader
        in hearing conservation research and development since 1972, when we
       first introduced
  the cylindrical disposable earplug. Today, this product is known as the E-A-R®Classic®
  and its yellow color is a registered trademark in the United States of America,
   Canada, Belgium, Netherlands and Luxembourg, and is recognized throughout
  the
  world. This product, as well as other of our disposable plugs such as E-Z-Fit®,
   TaperFit®,
    and E-A-Rsoft®products, are designed to be rolled down or compressed
   before being inserted into the ear, and, as a result of its unique slow recovery

  characteristics, then slowly expand (or recover) to fill the ear
   canal and provide the desired protection. Our disposable earplugs are available

  corded and uncorded and in a variety of packaging options.


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In the reusable
       earplug segment of the market, we offer our patented E-A-R®
    UltraFit® and E-A-R® 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. These products feature articulating
     arms that allow for use in multiple positions and for easy storage around

    the neck. We manufacture, assemble and sell a broad line of passive earmuffs
     and communication headsets under our Peltor® brand. We are
      a leader in providing noise attenuating headsets and wireless and hardwire

    communication headsets. These products provide protection from harmful high
      and low frequency noise and allow for easy communication in noisy or remote

    environments. We also offer auditory systems products, which are sold to
     audiologists  and are used in the testing of hearing.


In 2003, E-A-R®Push-Inswere
introduced, offering all the performance and convenience of a reusable earplug
for the price of a disposable earplug. The products flexible stem allows
for easy insertion and removal with no rolling down, and the patented foam tip
is sized to comfortably fit virtually every size of ear canal. The quick and
easy fit and sure seal combine to provide high noise attenuation. In 2004, we
successfully introduced a line of hearing protectors under the Peltor Next brand
that are targeted against younger workers in the workplace. This new line includes
both disposable and reuseable plugs in vibrant colors and shapes to appeal to
the 18-35 year old worker.


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. We offer a large number
of task-specific non-prescription safety eyewear products under the AOSafety®brand.
The basic categories of eyewear protection products are non-prescription, or plano eyewear
and goggles.


Plano (Non-prescription)
Eyewear. 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® 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.


Goggles.  We manufacture
and 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.


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 dust, flying particles, metal fragments,
chemicals, extreme glare, optical radiation and items dropped from above. The
basic categories of face and head protection are faceshields and hard hats.


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


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Hard Hats.We
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.


Respiratory
Protection.
Respiratory protection products are used to protect against the harmful effects
of contamination and pollution caused by dust, gases, fumes, sprays and other
contaminants. 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.
Pleats Plusoffers
the latest design in particulate respirators. QuickLatch®half
mask respirators offer an innovative, patented on-and-off latching system that
can be accomplished with just one hand.


Fall
      Protection.
      We offer a line of fall protection equipment under the AOSafety®SafeWazebrand
      name as a result of the acquisition of VH Industries, Inc. in March of
      2003.


Other
Protection Products.
We also offer first aid kits predominantly through the Consumer/do-it-yourself
(DIY) market. First aid kits are either for general use or for industrial or
commercial uses. Additional products in this group include safety vests, flagging
tape, and safety cones.


Safety
  Prescription Eyewear Segment

Our Safety Prescription
Eyewear, or SRx, products 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 patient
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.


Specialty
  Composites Segment

Our Specialty Composites
segment manufactures a wide array of energy-absorbing materials that are incorporated
into other manufacturers products to control noise, vibration and shock.
Specialty Composites products fall into three broad categories:


| | • | barriers
      and absorbers for airborne noise control;                          
| | - | ----------------------------------------------------------------------------------
| |   |                                                                                   
| | • | damping
      and isolation products for vibration and shock control; and         
| |   |                                                                                   
| | • | energy control
      products for vibration, shock control and comfort management.
| |   |                                                                                   

Some examples of
end-user applications for such materials include noise and vibration damping
materials used in under-hood and cab treatments for transportation equipment
such as Class 8 heavy trucks, shock protection parts for electronic devices such
as computer hard disk drives and highly damped proprietary materials for the
interior cabins of business and regional jet aircraft. Our products include Tufcote®polyurethane
foams for acoustical applications, Confor®heavily
damped viscoelastic foams for ergonomic cushioning applications and shock protection
and Isodamp®foams
for the reduction of mechanical vibration, noise and shock. Specialty Composites
also produces the specially formulated foams used in the manufacture of Safety
Products earplugs.  The principal strengths of our Specialty Composites
segment are its specialized polyurethane formulations, its thin-sheet casting
capability, its composite technologies and its applications and materials engineering.
These strengths allow us to high value-added composites using casting, extrusion
and molding processes.


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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 Industrial
      Distribution; Consumer; Europe and International. Each of these channels
      has its own sales force and its own distinct yet synergistic sales strategies.


North
        American Industrial Distribution.This
        is the largest channel for Safety Products and includes approximately
        1,000 North American distributors and dealers, of which approximately
        270 qualify for Dialogprogram.
        The Dialogprogram
        is a sales rebate and reward program that encourages North American Industrial
        Distributors to partner with Aearo. Participation in Dialog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 the Companys
        products.


Consumer.Under
      the AOSafety®brand
      name, we are North Americas leading supplier of personal safety products
      in the categories in which we compete. 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. AOSafety®is
      also a supplier in the sporting goods safety marketplace and in the lawn
      and garden, paint, drug and mass merchandise channels.


Europe.We
      have a significant presence in Europe with manufacturing facilities in
      England and Sweden and sales offices in the U.K., Sweden, Norway, Germany,
      France, Italy and Spain. Our historical strength in this market has been
      in passive hearing protection products (E-A-R®)
      sold through over 1,000 industrial distributors, and Peltor Communications
      products sold to the military, sport shooting, and rally sports market
      segments. AOSafety® is the #1 prescription eyewear brand
      in France.


International.We
      export our products around the world, and this channel is managed through
      an inside sales team located in Singapore, Miami (covering the Caribbean
      and Central America), Brazil, Australia, New Zealand and South Africa (covering
      the Middle East) supplemented by independent sales representatives to enhance
      our coverage.


Safety
        Prescription Eyewear Segment (SRx)

Our SRx segment
      employs its own sales force to sell our products throughout North America.
      Approximately 85% of our safety prescription eyewear are 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 utilize
      an inside sales and marketing team, independent manufacturers representatives
      and select distributors to identify global sales opportunities in target
      markets for Specialty Composites products and technologies. Once
      such applications have been identified, our marketing, sales and technical
      staffs work closely with customer product development teams to provide
      the customer with cost-effective, integrated solutions for noise, vibration,
      shock, cushioning and/or comfort management problems. 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.


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


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


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


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


Research
      and Development

We have a
      strong emphasis on new product development, innovation and protection of
      intellectual property in each of our three business segments.


Safety
        Products Segment

We believe
      that our research and development facilities, personnel and programs are
       among the best in the PPE industry. 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 developing 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 and active hearing protection
      products. Similarly, we believe that we have been a pioneer and leader
      in the development and testing of safety eyewear as we maintain and operate
      extensive facilities for the design and testing of these products. We also
      have facilities for the design and testing of respiratory safety equipment.
      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.


Safety
        Prescription Eyewear Segment

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


Specialty
        Composites Segment

Specialty
      Composites research and development efforts focus on developing proprietary
      materials and enhancing existing products in order to meet market and customer
      needs identified by our marketing, and sales staffs.


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.


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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.


Manufacturing
      and Distribution Operations

We manufacture
      approximately 75% of the products that we sell. Our strengths include the
      manufacture of foams (casting, molding and fabricating) for Specialty Composites products
      (including the foam used in the manufacture of earplugs); high-speed assembly
      and packaging of earplugs; plastic injection molding, coating and assembly
      of non-prescription eyewear; and assembly, grinding, polishing and coating
      of prescription eyewear. We also utilize a limited number of contract manufacturers
      in the United States, Mexico, Asia, and Europe to supplement internal operations
      and to assemble and/or manufacture products where we do not have world-class
      processing capabilities. We use selected Asian suppliers for some product
      lines to complement products manufactured by us and fill in product families,
      where it is advantageous to minimize capital expenditures and accelerate
      new product introductions. We will 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, resulting
      in significant improvements in the areas of safety, quality, cost, and
      customer service.


Consistent
      across all of our manufacturing operations is an emphasis on producing
      high-quality products. Currently, all 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,
      and certain customers require ISO certification from all their vendors.


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.


Safety
        Products Segment

We believe
      our Indianapolis, Indiana plant is the largest earplug manufacturing facility
       in the world. It fabricates, molds, assembles and packages hundreds of
      millions of pairs of earplugs annually, utilizing automated, high-speed
      assembly and packaging equipment. The economies of scale present in this
      operation are unique in the hearing protection products industry and we
      believe that they offer us a competitive cost advantage. The plants
      high-speed robotic fabrication, assembly and packaging of earplugs facilitate
      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. These manufactured
      safety products include respiratory, plug and muff type hearing, head and
      face, and a broad offering of safety eyewear protection.


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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 customers and other subsidiaries of the Company.


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


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.  The lenses are then fitted into frames and the finished product is shipped to customers, primarily by U.S. Postal Service for the U.S. market and similar express delivery providers elsewhere.


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 of
these 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.


Specialty Composites Segment


Specialty Composites products
are manufactured in Indianapolis, Indiana, and Newark, Delaware. The Indianapolis
plant supplies specially formulated foam for the Safety Products segments
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 the line. Product development
for this facility is onsite.


Competition and the Personal Protection Equipment Market

The PPE market
is highly fragmented, as a large number of relatively small, independent manufacturers
with limited product lines serve the PPE market. 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. Our advanced
distribution center further facilitates
timely and accurate deliveries. However, the industry has undergone some degree
of consolidation that could potentially increase long-term competitive pressures.


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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 bundling 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.


Employees

As of September
30, 2004, we had 1,582 employees, of whom 990 were primarily engaged in manufacturing,
401 in sales, marketing and distribution, 60 in research and development and
131 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 70 members of the International Union of
Electronic, Electrical, Salaried, Maritime and Furniture Workers (out of a total
of 79 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
of America, 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) 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 NIOSH,
both of which certify respirators. These agencies generally mandate that our
products meet standards established by private groups, such as ANSI. Our products
are also subject to foreign laws and regulations. In particular, they must comply
with the Canadian Standards Association, European Committee for Normalization
and Standards Australia in order to be sold in these markets. 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.
In October 2003, our Varnamo, Sweden facility achieved ISO 14001 certification.


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Item 2. Properties

The Company owns
and/or leases facilities in the United States, Canada, and Europe. The following
table sets forth the location of each, its square footage and the principal function
as of December 15, 2004.


|                             |             | Approximate |          |                                                  
|---------------------------- | ----------- | ----------- | -------- | -------------------------------------------------
|Location                     | Square Feet |             | Function
|                             |             |             |          |                                                  
|SAFETY PRODUCTS              |             |             |          |                                                  
|Southbridge, Massachusetts   |             | 198,984     |          | Manufacturing/Administration                     
|Indianapolis, Indiana (1)    |             | 226,794     |          | Distribution/Customer Service                    
|Indianapolis, Indiana        |             | 81,540      |          | Manufacturing/Corporate Headquarters             
|Concord, North Carolina      |             | 17,500      |          | Manufacturing/Distribution/Customer Service      
|Poynton, England (2)         |             | 74,331      |          | Sales/Manufacturing/Distribution/Customer Service
|Varnamo, Sweden              |             | 124,130     |          | 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              
|                             |             |             |          |                                                  
|SAFETY PRESCRIPTION EYEWEAR  |             |             |          |                                                  
|                             |             |             |          |                                                  
|Chickasha, Oklahoma          |             | 35,000      |          | Manufacturing/Customer Service                   
|Plymouth, Indiana            |             | 9,500       |          | Manufacturing/Customer Service                   
|Mississauga, Ontario, Canada |             | 12,300      |          | Manufacturing/Customer Service                   
|Montreal, Quebec, Canada     |             | 1,800       |          | Customer Service                                 
|Brooklyn Park, Maryland      |             | 1,200       |          | Customer Service                                 
|Dundalk, Maryland            |             | 1,050       |          | Customer Service                                 
|Newport News, Virginia       |             | 1,400       |          | Customer Service                                 
|Richmond, Virginia           |             | 1,800       |          | Customer Service                                 
|                             |             |             |          |                                                  
|                             |             |             |          |                                                  
|SPECIALTY COMPOSITES         |             |             |          |                                                  
|                             |             |             |          |                                                  
|Indianapolis, Indiana        |             | 155,800     |          | Manufacturing/Distribution/Customer Service      
|Newark, Delaware             |             | 79,650      |          | Manufacturing/Distribution                       
|Newark, Delaware             |             | 61,642      |          | Warehouse/Distribution                           
|                             |             |             |          |                                                  

|   
|---
|(1)
|   
|(2)
|   
|(*)

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


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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. Most of these claims are covered by the Asset Transfer Agreement
  entered into on June 13, 1995 by the Company and Aearo Corporation, on the
  one hand, and Cabot Corporation and certain of its subsidiaries (the Sellers),
  on the other hand (the 1995 Asset Transfer Agreement). In the 1995
  Asset Transfer Agreement, so long as Aearo Corporation makes an annual payment
  of $400,000 to Cabot, the Sellers agreed to retain, and Cabot and the Sellers
  agreed to defend and indemnify Aearo Corporation and its subsidiaries against,
  any liability or obligation relating to or otherwise arising under any proceeding
  or other claim against Aearo Corporation and its subsidiaries or Cabot or their
  respective affiliates or other parties with whom any Seller directly or indirectly
  has a contractual liability sharing arrangement which sounds in product liability
  or related causes of action arising out of actual or alleged respiratory medical
  conditions caused or allegedly caused by the use of respirators or similar
  devices sold by Sellers or their predecessors (including American Optical Corporation
  and its predecessors) prior to July 11, 1995. To date, Aearo Corporation has
  elected to pay the annual fee and intends to continue to do so. In addition,
  under the terms of the merger agreement with AC Safety Acquisition Corp. (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.


At September
       30, 2004 and September 30, 2003, the Company has recorded liabilities
      of approximately
    $5.4 million and $4.5 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. This reserve is re-evaluated periodically

    and additional charges or credits to results of operations may result as
      additional  information becomes available. Consistent with the current
      environment being
    experienced by companies involved in asbestos and silica-related litigation,
       there has been an increase in the number of asserted claims that could
      potentially
    involve Aearo Corporation and its subsidiaries, including the Company. Various
       factors increase the difficulty in determining the Companys potential
        liability, if any, in such claims, including the fact that the defendants

    in these lawsuits are often numerous and the claims generally do not specify
        the amount of damages sought. Additionally, the bankruptcy filings of
       other
    companies with asbestos and silica-related litigation could increase the
       Companys
    cost over time. In light of these and other uncertainties inherent in making
        long-term projections, the Company has determined that the five-year
       period
    through fiscal 2009 is the most reasonable time period for projecting asbestos
        and silica-related claims and defense costs. It is possible that the
       Company
    may incur liabilities in an amount in excess of amounts currently reserved.
        However, taking into account currently available information, historical
       experience,
    and the 1995 Asset Transfer Agreement, butrecognizing
     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
      10, 2004, 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, 2005 with a total of 2,459,403 votes in favor and 58,596 abstention
      votes. The stockholders voted to elect the following directors for the
      ensuing year with a total of 2,459,403 votes in favor of each director
      and 58,596 abstention votes for each director: Michael A. McLain, Douglas
      R. Korn and John D. Howard.


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

There is
      no established trading market for our common stock. As of December 1, 2004,
      one hundred percent of our stock was held by our parent, Aearo Corporation.
       As of December 1, 2004, there were outstanding 2,492,618 shares of common
      stock, par value $0.01 per share, of AC Safety Holding Corp. (AC
      Safety Common Stock) the parent of Aearo Corporation. Substantially
      all of the AC Safety 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 December 1, 2004 there were 56 shareholders of record of AC Safety
      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.


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Item
      6. Selected Financial Data

On April
      7, 2004, the Companys parent, Aearo Corporation, was acquired by
      AC Safety Holding Corp. and its subsidiary AC Safety Acquisition Corp.
      for $409.1 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
      period after March 31, 2004.


The selected
      historical financial data as of and for the periods ended September 30,
      2000, 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 is 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.


|                                            |      |         |   |         |         |         |      |         |      | Six
Months
Ended
March 31,2004 |         |  |   | Successor
Six
Months
Ended
September 30,
2004 |     
|------------------------------------------- | ---- | ------- | - | ------- | ------- | ------- | ---- | ------- | ---- | ------------------------------ | ------- |  | - | --------------------------------------------- | ----
|Predecessor                                
|                                            |      |         |   |         |         |         |      |         |     
|Years
          Ended September 30,        
|                                            |     
|                                            | 2000 |         |   | 2001    |         |         | 2002 |         |      | 2003                           |         | 
|                                            |      |         |   |         |         |         |      |         |      |                                |        
|Statement
        of Operations Data:       |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Net Sales                                  |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Safety
        Products                     | $    | 219,685 |   | $       | 206,358 |         | $    | 208,538 |      | $                              | 242,263 |  | $ | 127,964                                       |     
|Safety
        Prescription Eyewear         |      | 39,913  |   |         | 39,076  |         |      | 40,834  |      |                                | 40,028  |  |   | 20,337                                        |     
|Specialty
        Composites                |      | 45,877  |   |         | 38,428  |         |      | 37,495  |      |                                | 34,137  |  |   | 21,278                                        |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Total
        net sales                     |      | 305,475 |   |         | 283,862 |         |      | 286,867 |      |                                | 316,428 |  |   | 169,579                                       |     
|Cost of
        Sales                       |      | 160,759 |   | 155,213 | (2)     | 150,397 | (3)  | 164,019 | (4)  |                                | 89,056  |  |   | 118,491                                       | (6) 
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Gross
        profit                        |      | 144,716 |   |         | 128,649 |         |      | 136,470 |      |                                | 152,409 |  |   | 80,523                                        |     
|Operating
        Expenses                 |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Selling
        and administrative          |      | 95,560  |   |         | 87,286  |         |      | 91,903  |      |                                | 101,257 |  |   | 56,835                                        |     
|Research
        and technical service      |      | 5,528   |   |         | 5,162   |         |      | 5,740   |      |                                | 6,402   |  |   | 3,623                                         |     
|Amortization
        expense                |      | 6,859   |   |         | 6,530   |         |      | 6,293   |      |                                | 267     |  |   | 242                                           |     
|Other
        charges (income), net         |      | (242    | ) |         | 680     |         |      | 1,475   |      |                                | 1,737   |  |   | (506                                          | )   
|Restructuring
        charge                |      | —       |   |         | 9,077   | (2)     |      | (100    | )(3) |                                | —       |  |   | (1,091                                        | )(5)
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Operating
        income                    |      | 37,011  |   |         | 19,914  |         |      | 31,159  |      |                                | 42,746  |  |   | 21,420                                        |     
|Interest
        expense, net               |      | 24,479  |   |         | 23,755  |         |      | 20,091  |      |                                | 19,456  |  |   | 10,836                                        |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Income
        (loss) before income         |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|taxes                                       |      | 12,532  |   |         | (3,841  | )       |      | 11,068  |      |                                | 23,290  |  |   | 10,584                                        |     
|Provision
        (benefit) for income      |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|taxes                                       |      | 3,539   |   |         | (1,907  | )       |      | 1,774   |      |                                | 2,603   |  |   | 2,020                                         |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Net income
        (loss)                   | $    | 8,993   |   | $       | (1,934  | )       | $    | 9,294   |      | $                              | 20,687  |  | $ | 8,564                                         |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Other Data:                                 |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Depreciation
        and amortization       |      | 16,915  |   |         | 16,653  |         |      | 17,251  |      |                                | 11,369  |  |   | 6,173                                         |     
|Capital
        expenditures                |      | 9,552   |   |         | 7,799   |         |      | 9,653   |      |                                | 10,316  |  |   | 5,006                                         |     
|Ratio of
        earnings to fixed          |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|                                            |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Balance
        Sheet Data (at period-end): |      |         |   |         |         |         |      |         |      |                                |         |  |   |                                               |     
|Total assets                                | $    | 266,864 |   | $       | 261,302 |         | $    | 270,169 |      | $                              | 293,516 |  | $ | 298,099                                       |     
|Debt                                        |      | 199,819 |   |         | 202,229 |         |      | 195,562 |      |                                | 213,553 |  |   | 196,463                                       |     
|Stockholders
        equity                |      | 15,949  |   | $       | 9,743   |         |      | 21,527  |      |                                | 33,458  |  |   | 43,714                                        |     

16

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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 charges divided 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, 2001were
         inadequate to cover fixed charges by $3.8 million. Earnings for the
        six
      month period ended September 30, 2004 were 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 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 (See Note 16 of Notes to Consolidated Financial Statements).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3. | During
        fiscal  2002, the Company reversed $ 0.6 million of reserves related
        to the September
      30, 2001 restructuring provision. The adjustment represents a change in
         estimate of the plan for the disposal of certain items of inventory
        and
      the closure of its Ettlingen, Germany plant. The inventory provision of
         $0.5 million was classified as cost of sales with the remaining $0.1
        million
      classified as operating expenses.                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4. | During
        fiscal  2003, the Company reversed $ 0.3 million of reserves related
        to the September
      30, 2001 restructuring provision. The adjustment represents a change in
         estimate of the plan for the disposal of certain items of inventory.
        The
      inventory provision of $0.3 million was classified as cost of sales.                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                                                                                

17

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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 the $12.7 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-A-R® 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 the SafeWaze brand
    name,
  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 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, AC Safety Acquisition Corp. merged with and into
  Aearo
  Corporation with Aearo Corporation surviving the Merger as a wholly-owned subsidiary
   of AC Safety Holding Corp. The aggregate purchase price was approximately
  $409.1
  million, including estimated 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, $4.1 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 the period 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.


Derivatives In
accordance with SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, the Company bifurcated an embedded
call option in our Senior Subordinated Notes, because it was determined to not
be clearly and closely related to the debt host. Valuation methodologies used
to value such derivatives are complex and the assumptions used in the valuation
model for credit spreads, interest rate trends and others are highly judgmental.
This derivative will be marked to market each quarter with a corresponding (gain)
or loss to other (income)/expense.


Income
Taxes The
Company is included in the consolidated tax returns filed by Aearo Corporation.
All taxes are recorded as if separate, standalone returns are filed. The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between book and tax bases
of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets
be reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. 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. In its evaluation of the adequacy of the valuation allowance, the
Company assesses prudent and feasible tax planning strategies. Due to the uncertainties
of realizing these tax benefits, the Company has recorded a full valuation allowance
against these net operating losses and credit carryforwards. The ultimate amount
of deferred tax assets realized could be different from those recorded, as influenced
by potential changes in enacted tax laws and the availability of future taxable
income.


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. 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.


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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. The
      Company adopted the provisions SFAS No. 132(R), Employer Disclosures
       about Pensions and Other Postretirement Benefits, an amendment of FASB
      Statements
    No. 87, 88 and 106 effective January 1, 2004.


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. 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.


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) 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
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 years ended September 30, 2002 and 2003, respectively.
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
in the section, Fiscal 2004 Compared to Fiscal 2003, 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, |     
|------------------------------- | ------------------------- | ----
|                                |                           |     
|2002                            |                           | 2003
|                                |                           |     
|Net sales:                      |                           |     
|Safety Products                 | 72.7                      | %   
|Safety Prescription Eyewear     | 14.2                      |     
|Specialty Composites            | 13.1                      |     
|                                |                           |     
|Total net sales                 | 100.0                     |     
|Cost of sales                   | 52.4                      |     
|                                |                           |     
|Gross profit                    | 47.6                      |     
|Selling and administrative      | 32.0                      |     
|Research and technical services | 2.0                       |     
|Amortization expense            | 2.2                       |     
|Other charges (income), net     | 0.5                       |     
|Restructuring charge            | 0.0                       |     
|                                |                           |     
|Operating income                | 10.9                      | %   
|                                |                           |     

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

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


Fiscal 2003 Compared to Fiscal 2002

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


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


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


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


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


The provision
    for income taxes for the year ended September 30, 2003 was $2.6 million compared
    to $1.8 million for the year ended September 30, 2002. The Companys
     effective tax rate was different from the statutory rate due to the mix
    of
    income between the Companys foreign and domestic subsidiaries. The
    Companys foreign subsidiaries had taxable income in their foreign jurisdictions
    while the Companys domestic subsidiaries have net operating loss carry-forwards
    for income tax purposes. Due to the uncertainty of realizing these tax benefits,
    the tax benefits for net operating loss carry-forwards have been 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. As a result of the acquisition of Peltor®,
    the Companys operations are also affected by changes in exchange rates
    relative to the Swedish Krona. A decline in the value of the Krona relative
    to other currencies can have a favorable impact on the profitability of the
    Company and an increase in the value of the Krona relative to other currencies
    can have a negative impact on the profitability of the Company. 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 AC Safety Holding Corp. 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 AC Safety
    Holding Corp. The aggregate purchase price was approximately $409.1 million,
    including estimated 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, $4.1 million of cash and $101.3 million of equity.


Liquidity and Capital Resources

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


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At September
       30, 2003, the Companys debt structure included: (a) $98.0 million
       of  12.50% Senior Subordinated Notes due 2005 (the 12.50% Notes)
       issued  under an indenture dated as of July 11, 1995 (the Notes
       Indenture)
    and (b) up to an aggregate of $135.0 million under a credit agreement with
        various banks comprised of (i) a secured term loan facility consisting
       of
    loans providing for up to $100.0 million of term loans (collectively the Term
     Loans) with a portion of the Term Loans denominated in foreign currencies
      and (ii) the Revolving Credit Facility providing for up to $30.0 million
     of
    revolving loans for general corporate purposes (collectively the Senior
     Bank Facilities). The amounts outstanding under the Term Loans, Revolving
      Credit Facility and the 12.50% Notes at September 30, 2003, were approximately

    $85.1 million, $11.7 million and $98.0 million, respectively.


On March 10, 2004,
Aearo Corporation, the Companys parent, entered into a Merger Agreement
with AC Safety Holding Corp. and its subsidiary, AC Safety Acquisition Corp.
Pursuant to the terms of the Merger Agreement, on April 7, 2004, AC Safety Acquisition
Corp. merged with and into Aearo Corporation with Aearo Corporation surviving
the Merger as a wholly owned subsidiary of AC Safety Holding Corp. In connection
with this transaction, the Company (i) repaid all outstanding amounts under the
Senior Bank Facilities, terminated all commitments under that facility and redeemed
the 12.50% Notes and (ii) entered into a new senior credit facility, consisting
of a $125.0 million term loan facility due 2011 at a variable interest rate based
on the London Interbank Offering Rate (LIBOR) (1.54%) plus 275 basis
points and a $50.0 million revolving credit facility (collectively the New
Credit Facility) and (iii) issued $175.0 million aggregate principal amount
of 8.25% senior subordinated notes due 2012 (the 8.25% Notes) in
a private placement pursuant to Rule 144A and Regulation S under the Securities
Act of 1933. The amounts outstanding under the New Credit Facility and 8.25%
Notes at September 30, 2004, were approximately $126.0 million and $175.0 million,
respectively. Under the terms of the New Credit Facility and the indenture governing
the 8.25% Notes, the Company is required to comply with certain financial covenants
and restrictions. The Company was in compliance with all financial covenants
and restrictions as of September 30, 2004. At September 30, 2004, the Companys
available lines of credit totaled approximately $48.6 million.


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 $9.5 million for capital expenditures for the year ended September
30, 2004. The Company spent $9.9 million, plus an additional $0.4 million under
capital leases, for capital expenditures for the year ended September 30, 2003
and spent $8.2 million, plus an additional $1.4 million under capital leases,
for capital expenditures for the year ended September 30, 2002. The Company plans
to spend approximately $11.5 million for capital expenditures in fiscal year
2005.


The Companys
net cash provided by operating activities for the year ended September 30, 2004
totaled $41.0 million as compared to $36.7 million for the year ended September
30, 2003. The increase of $4.3 million was due primarily to a $4.9 million increase
related to the improvement in net income adjusted for cash and non-cash charges
(depreciation, inventory purchase accounting adjustment, amortization, deferred
taxes and other), partially offset by a $0.6 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, inventory
and income taxes, partially offset by an increase in cash from accounts payable
and accrued liabilities and other, net.


Net cash used for
investing activities was $9.5 million for the year ended September 30, 2004 as
compared to $22.5 million for the year ended September 30, 2003. The decrease
in net cash used by investing activities is primarily attributed to acquisitions
in the year ended September 30, 2003.


Net cash used for
financing activities for the year ended September 30, 2004 was $10.5 million
compared with net cash used by financing activities for the year ended September
30, 2003 of $25.0 million. The change is primarily due to the financing of the
merger transaction which closed on April 7, 2004.


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The Company maintains
a non-contributory defined benefit cash balance pension plan. The Company utilizes
an outside actuarial firm to estimate pension expense and funding based on various
assumptions including the discount rate and the expected long-term rate of return
on plan assets. To develop the expected long-term rate of return on assets assumption,
the Company considered historical returns and future expectations for returns
for each asset class, as well as the target asset allocation of the pension portfolio.
Over the 11 year period ended September 30, 2004, the returns on the portfolio,
assuming it was invested at the current target asset allocation in prior periods,
would have been a compound annual average return of 9.3%. Considering this information
and the potential for lower future returns due to the generally lower interest
rate environment, the Company selected an 8.0% rate of return on plan asset assumption.
Actual asset returns for the Companys pension plan improved in the last
two fiscal years after two years of negative returns. The estimated effect of
a 1% change in the expected long-term rate of return on plan assets results in
a $0.1 million impact on annual pension expense. The discount rate was also unchanged
at 6.0% for the 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 2004. The following benefit payments, which reflect expected
future service, as appropriate, are expected to be paid (in thousands of dollars):


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

The Company 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.


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, 2004:


|                                  |           |           |                    |       |        |  |   |        |  |   |         |  |   |         | 
|--------------------------------- | --------- | --------- | ------------------ | ----- | ------ |  | - | ------ |  | - | ------- |  | - | ------- | 
|2005                              | 2006-2007 | 2008-2009 | 2010
    and after | Total
|                                  |           |           |                    |       |        |  |   |        |  |   |         |  |   |         | 
|Capital
      lease obligations   | $         | 353       |                    | $     | 705    |  | $ | 368    |  | $ | 32      |  | $ | 1,458   | 
|Operating
      lease obligations |           | 3,296     |                    |       | 5,118  |  |   | 4,357  |  |   | 4,163   |  |   | 16,934  | 
|Mortgage
      obligations        |           | 359       |                    |       | 2,048  |  |   | —      |  |   | —       |  |   | 2,407   | 
|Purchase
      obligations        |           | 809       |                    |       | 2,786  |  |   | —      |  |   | —       |  |   | 3,595   | 
|Respiratory
      commitment      |           | 400       |                    |       | 800    |  |   | 800    |  |   | 800     |  |   | 2,800   | 
|Long term
      debt              |           | 21,794    |                    |       | 43,403 |  |   | 43,173 |  |   | 320,028 |  |   | 428,398 | 
|                                  |           |           |                    |       |        |  |   |        |  |   |         |  |   |         | 
|Total                             | $         | 27,011    |                    | $     | 54,860 |  | $ | 48,698 |  | $ | 325,023 |  | $ | 455,592 | 
|                                  |           |           |                    |       |        |  |   |        |  |   |         |  |   |         | 

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The amounts for
long term debt above include both interest and principal payments. The Company
paid approximately $4.7 million for taxes worldwide in fiscal 2004 and does not
anticipate significant changes to its tax obligations in the future. The Company
has approximately $1.4 million of letters of credit outstanding as of September
30, 2004 and does not anticipate significant changes to its outstanding letters
of credit in the future.


Off-Balance Sheet Arrangements

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


Risk Factors

Because of the
following factors, as well as other factors affecting our operating results and
financial condition, past financial performance should not be considered to be
a reliable indicator of future performance, and investors should not use historical
trends to anticipate results or trends in future periods.


Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our debt obligations.


Our substantial
indebtedness could have important consequences. For example, it could make it
more difficult for us to satisfy our obligations with respect to our indebtedness;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations
to payments on our indebtedness, thereby reducing the availability of our cash
flow to fund working capital, capital expenditures, expansion through acquisitions
and other general corporate purposes; limit our flexibility in planning for,
or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have
less debt; and limit our ability, among other things, to borrow additional funds.


A continued decline in North American and European manufacturing employment could significantly reduce the demand for our products.


We sell a significant
percentage of our products to customers in the manufacturing sector in the United
States, Canada and Europe. There has been a general decline in manufacturing
employment in North America and Europe due to increased automation and worker
productivity and due to the relatively low cost of labor in other countries.
Manufacturing businesses tend to reduce their output and shed part of their workforce
during economic downturns. If the manufacturing sector in the United States,
Canada or Europe continues to experience a decline in manufacturing employment,
a number of our customers are likely to purchase fewer of our products or default
on their payment obligations to us, which could materially and adversely affect
our business, results of operations and financial condition. Furthermore, to
the extent manufacturing operations are transferred to countries where safety
product spending per worker is significantly lower, our sales would be adversely
affected.


The markets
in which we compete are highly competitive. The competitive pressures we face
could materially and adversely affect our business, results of operations and
financial condition.


The PPE market
is highly competitive, with participants ranging in size from small companies
focusing on single types of safety products to large multinational corporations
that manufacture and supply many types of safety 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 our cash flows from operations could be adversely
affected by competitors product innovations and pricing changes made by
us in response to competition from existing or new competitors. Individual competitors
have advantages and strengths in different sectors of the industry, 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.


27


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


In most 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.


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.


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 face lawsuits from time to time alleging that our products infringe

  third-party intellectual property, and/or seeking to invalidate or limit our
     ability to use our intellectual property. Additionally, we may find it necessary

  to initiate litigation to protect our intellectual property. Litigation can
     be costly and time consuming. Litigation expenses, or any damage payments,
    loss
  of market share, or loss of intellectual property rights resulting from third
     party claims, could be significant and result in material losses to us.
    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,
  our competitors could 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 licenses for 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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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. Although we have not experienced any
    material
  uninsured losses due to product liability claims, it is possible that we could
     experience material losses in the future.


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. These lawsuits typically allege that these conditions resulted in
     part from respirators that were negligently designed or manufactured. Cabot

  Corporation is contractually obligated to indemnify us for any losses, including
     costs of defending claims resulting from respiratory products manufactured
    prior
  to our acquisition of the business in July 1995. Nevertheless, we could potentially
     be liable for these losses or claims if Cabot Corporation fails to meet
    its
  obligations to indemnify us. 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. Cabot Corporation is currently handling the defense of all
     the cases, and to date we have not incurred any material costs with respect

  to these lawsuits. 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  indemnification obligations to us, it would have a material adverse
     effect on
  our business.


Also, in the
     event any of our products proves to be defective, we could be required to
    recall
  or redesign such product. 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.


We
        are subject to various environmental laws and any violation of these
        laws could adversely affect our results of operations.


We are subject
     to federal, state and local 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 the
  maintenance of a safe workplace. These laws impose penalties for noncompliance
     and liability for response costs and certain damages resulting from past
    and
  current spills, disposals or other releases of hazardous materials. We could
     incur substantial costs as a result of noncompliance with or liability for
    cleanup
  pursuant to these environmental laws. Environmental laws have changed rapidly
     in recent years, and we may be subject to more stringent environmental laws

  in the future. If more stringent environmental laws 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


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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 2004 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. An increase in the value of the U.S. dollar or Swedish
        Krona could materially and adversely affect our results of operations.


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.


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

  at 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 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 the risks described 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.


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


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, NIOSH and CE. 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 profitability, the
      Company executes two hedging programs, one for transaction exposures, and
      the other for cash flow exposures in foreign operations. The Company utilizes
      forward foreign currency contracts for transaction as well as cash flow
      exposures. For the years ended September 30, 2004, 2003 and 2002, net transaction
      exposures were a loss of $0.5 million, a gain of $0.3 million and a loss
      of $0.2 million, respectively. For the years ended September 30, 2004,
      2003 and 2002, cash flow exposures were a loss of $0.8 million, $2.0 million
      and $0.6 million, respectively. In addition, the Company limits the foreign
      exchange impact on the balance sheet with foreign denominated debt in euros.


SFAS No.
      133 requires that every derivative instrument be recorded in the balance
      sheet as either an asset or liability measured at its fair value. Since
      the Company had no open forward foreign currency contracts as of September
      30, 2004, the Company had recorded no derivative asset or liability at
      September 30, 2004. As a result of open forward foreign currency contracts
      at September 30, 2003, the Company had recorded a $0.4 million derivative
      payable as of September 30, 2003.


The Company
      may 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 results of operations. The impact
      on results of operations was a loss of approximately $0.2 million, a gain
      of approximately $1.0 million and a gain of approximately $0.5 million
      for the years ended September 30, 2004, 2003 and 2002, respectively.


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.


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 and the ceiling was set at 6.25% LIBOR. The collar was
      not designated as a hedge under SFAS No. 133 and, accordingly, the changes
      in fair value were charged directly to earnings. Approximately $0.2 million
      was expensed to earnings for the year ended September, 2003. No amounts
      were recorded to income or expense related to the interest rate collar
      for the year ended September 30, 2002.


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The Company
      has approximately $30.5 million of variable rate debt protected under an
      interest rate cap arrangement through December 31, 2004 at a strike price
      of 1.13 % LIBOR. The approximate fair value of the cap at September 30,
      2004 and September 30, 2003 was $0.1 million. The Company has not elected
      hedge accounting treatment for the interest rate cap as defined under SFAS
      No, 133 and, as a result, any fair value adjustment is charged directly
      to other income/(expense). During the twelve months ended September 30,
      2004, there was no change in the value of the interest rate cap.


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


Commodity
      Risk

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


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Item
        8.Financial
Statements and Supplementary Data

Index to Financial
Statements

---



|REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 35
|----------------------------------------------------------- | --
|CONSOLIDATED
    BALANCE SHEETS                             | 36
|CONSOLIDATED
    STATEMENTS OF OPERATIONS                   | 37
|CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY         | 38
|CONSOLIDATED
    STATEMENTS OF CASH FLOWS                   | 39
|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS              | 40

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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 sheet of Aearo Company I and subsidiaries
    (Aearo  Successor) as of September 30, 2004, and the related
    consolidated statements of operations, stockholders equity, and cash
    flows for the six months ended September 30, 2004. We have also audited the
    accompanying consolidated balance sheet of Aearo Company I and subsidiaries
    (Aearo  Predecessor) as of September 30, 2003 and the related
    statements of operations, stockholders equity and cash flows for the
    six months ended March 31, 2004 and for the years ended September 30, 2003
    and 2002. Our audits also included the financial statement schedule listed
    in the Index at Item 15. These financial statements and financial statement
    schedule are the responsibility of management of the Companies. Our responsibility
    is to express an opinion 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. An audit includes examining,
    on a test basis, evidence supporting the amounts and disclosures in the financial
    statements. An audit also includes assessing the accounting principles used
    and significant estimates made by management, as well as evaluating the overall
    financial statement presentation. We believe that our audits provide a reasonable
    basis for our opinion.


In our opinion,
    such consolidated
financial statements referred to above of Aearo  Successor present fairly,
in all material respects, the financial position of Aearo   Successor at
September 30, 2004, and the results of their operations and their cash flows
for 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 financial position of Aearo  Predecessor
as of September 30, 2003 and the results of their operations and their cash flows
for the six months ended March 31, 2004 and the years ended September 30, 2003
and 2002 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth therein.


As discussed
    in Note 1 to the consolidated financial statements, on April 7, 2004, the
    Company was acquired by AC Safety Holding Corporation. The transaction was
    accounted for as a business combination and the bases of assets and liabilities
    were adjusted to their fair values. Accordingly, the consolidated financial
    statements as of and for the six months ended September 30, 2004 are not
    comparable with prior periods.

DELOITTE & TOUCHE
      LLP Indianapolis,
Indiana
December 23, 2004

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

|                                                                                                         | Predecessor       |         |   | Successor |        
|-------------------------------------------------------------------------------------------------------- | ----------------- | ------- | - | --------- | -------
|                                                                                                         |                  
|September
    30,                                                                                        | September
    30,
|2003                                                                                                     | 2004             
|                                                                                                         |                  
|ASSETS                                                                                                   |                   |         |   |           |        
|CURRENT
    ASSETS:                                                                                      |                   |         |   |           |        
|Cash and cash equivalents                                                                                | $                 | 7,301   |   | $         | 27,724 
|Accounts
    receivable (net of allowance for doubtful accounts of $1,358 and $ 1,334,
    respectively) |                   | 49,146  |   |           | 54,159 
|Inventories                                                                                              |                   | 37,269  |   |           | 40,849 
|Deferred and prepaid expenses                                                                            |                   | 7,321   |   |           | 4,146  
|                                                                                                         |                   |         |   |           |        
|Total current assets                                                                                     |                   | 101,037 |   |           | 126,878
|                                                                                                         |                   |         |   |           |        
|                                                                                                         |                   |         |   |           |        
|LONG TERM
    ASSETS:                                                                                    |                   |         |   |           |        
|Property, plant and equipment, net                                                                       |                   | 48,869  |   |           | 54,750 
|Goodwill,
       net of accumulated amortization of $28,924 as of September
    30, 2003                 |                   | 81,770  |   |           | 133,745
|Other intangible assets, net                                                                             |                   | 57,887  |   |           | 185,855
|Other assets                                                                                             |                   | 3,953   |   |           | 15,144 
|                                                                                                         |                   |         |   |           |        
|Total assets                                                                                             | $                 | 293,516 |   | $         | 516,372
|                                                                                                         |                   |         |   |           |        
|                                                                                                         |                   |         |   |           |        
|LIABILITIES                                                                                              |                   |         |   |           |        
|CURRENT
    LIABILITIES:                                                                                 |                   |         |   |           |        
|Current portion of long-term debt                                                                        | $                 | 17,767  |   | $         | 1,639  
|Accounts payable and accrued liabilities                                                                 |                   | 44,043  |   |           | 46,730 
|Accrued interest                                                                                         |                   | 2,566   |   |           | 6,996  
|U.S. and foreign income taxes                                                                            |                   | 1,746   |   |           | 1,648  
|                                                                                                         |                   |         |   |           |        
|Total current liabilities                                                                                |                   | 66,122  |   |           | 57,013 
|                                                                                                         |                   |         |   |           |        
|                                                                                                         |                   |         |   |           |        
|LONG TERM
    LIABILITIES:                                                                               |                   |         |   |           |        
|Long-term debt                                                                                           |                   | 180,786 |   |           | 302,842
|Deferred income taxes                                                                                    |                   | 1,609   |   |           | 59,699 
|Due to parent                                                                                            |                   | 207     |   |           | —      
|Other liabilities                                                                                        |                   | 11,334  |   |           | 14,726 
|                                                                                                         |                   |         |   |           |        
|Total liabilities                                                                                        |                   | 260,058 |   |           | 434,280
|                                                                                                         |                   |         |   |           |        
|COMMITMENTS
    AND CONTINGENT LIABILITIES                                                               |                   |         |   |           |        
|                                                                                                         |                   |         |   |           |        
|STOCKHOLDERS
    EQUITY                                                                                 |                   |         |   |           |        
|Common
    stock, $.01 par value                                                                        |                   |         |   |           |        
|Authorized100
    shares                                                                                |                   |         |   |           |        
|Issued
    and outstanding100 shares                                                                    |                   | —       |   |           | —      
|Paid in capital                                                                                          |                   | 32,531  |   |           | 101,610
|Retained earnings (deficit)                                                                              |                   | 7,713   |   |           | (19,415
|Accumulated other comprehensive loss                                                                     |                   | (6,786  | ) |           | (103   
|                                                                                                         |                   |         |   |           |        
|Total
    stockholders equity                                                                           |                   | 33,458  |   |           | 82,092 
|                                                                                                         |                   |         |   |           |        
|Total
    liabilities and stockholders equity                                                           | $                 | 293,516 |   | $         | 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                               
|                                          
|Years
        Ended                       
|September
        30,                     
|                                          
|2002                                      
|                                          
|Net sales                                 
|Cost of
      sales                       
|Restructuring                             
|                                          
|Gross
      profit                        
|                                          
|Selling
      and administrative          
|Research
      and technical services     
|Amortization                              
|Other charges                             
|Restructuring                             
|                                          
|Operating
      income                    
|Interest
      income                     
|Interest
      expense                    
|                                          
|Income
      (loss) before provision for  
|income
      taxes                        
|Provision
      (benefit) for income taxes
|                                          
|Net
      income (loss)                   
|                                          

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

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

|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|----------------------------------------------- | ------------- | -------- | ------------- | ------------- | ---- | ----- | ------- |  | - | ------- | - | -
|Accumulated                                    
|Common                                          | Additional    | Retained | Other         | Comprehensive
|                                                | Paid
      In | Earnings | Comprehensive | Income       
|Shares                                          |               | Amount   | Capital       | (Deficit)     | Loss | Total | (Loss) 
|                                                |               |          |               |               |      |       |         |  |  
|Balance,
      October 1, 2001                  | 100           |          | $             |               |      | $     | 32,531  |  | $ | (2,762  | ) | $
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Foreign
      currency translation adjustment   | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|Unrealized
      gain on derivative instruments | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|Net
      minimum pension liability adjustment  |               |          |               |               |      |       |         |  |   |         |   |  
|Net
      income                                | —             |          |               | —             |      |       | —       |  |   | 9,294   |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Comprehensive
      income                      | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Balance,
      October 1, 2002                  | 100           |          |               | —             |      |       | 32,531  |  |   | 6,532   |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Foreign
      currency translation adjustment   | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|Unrealized
      loss on derivative instruments | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|Net
      minimum pension liability adjustment  |               |          |               |               |      |       |         |  |   |         |   |  
|Dividend
      to parent                        |               |          |               |               |      |       |         |  |   | (19,506 | ) |  
|Net
      income                                | —             |          |               | —             |      |       | —       |  |   | 20,687  |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Comprehensive
      income                      | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Balance,
      September 30, 2003               | 100           |          |               | —             |      |       | 32,531  |  |   | 7,713   |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Net
      income                                | —             |          |               | —             |      |       | —       |  |   | 8,564   |   |  
|Foreign
      currency translation adjustment   |               |          |               |               |      |       |         |  |   |         |   |  
|Net
      minimum pension liability adjustment  |               |          |               |               |      |       |         |  |   |         |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Comprehensive
      income                      |               |          |               |               |      |       |         |  |   |         |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Balance,
      March 31, 2004                   | 100           |          |               | —             |      | $     | 32,531  |  | $ | 16,277  |   | $
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|                                                |              
|Capital
      contribution                      | 100           |          |               | —             |      | $     | 101,610 |  | $ | —       |   | $
|Foreign
      currency translation adjustment   | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|Dividend
      to parent for repayment of debt  |               |          |               |               |      |       |         |  |   | (14,305 | ) |  
|Net
      loss                                  | —             |          |               | —             |      |       | —       |  |   | (5,110  | ) |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Comprehensive
      loss                        | —             |          |               | —             |      |       | —       |  |   | —       |   |  
|                                                |               |          |               |               |      |       |         |  |   |         |   |  
|Balance,
      September 30, 2004               | 100           |          | $             | —             |      | $     | 101,610 |  | $ | (19,415 | ) | $
|                                                |               |          |               |               |      |       |         |  |   |         |   |  

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               
|                                                                               |   |                         
|Years
        Ended                                                            |   | Six                      | Six                     
|September
        30,                                                          |   | Months
            Ended | Months
            Ended
|                                                                               |   | March
    31,            | September
    30,       
|2002                                                                           |   | 2003                     |                          | 2004 | 2004   
|                                                                               |   |                          |                          |      |        
|CASH FLOWS
      FROM OPERATING ACTIVITIES:                                    |   |                          |                          |      |        
|Net income
      (loss)                                                        | $ | 9,294                    |                          | $    | 20,687 
|Adjustments
      to reconcile net income (loss) to cash provided by operating |   |                          |                          |      |        
|activities                                                                    |   |                          |                          |      |        
|Depreciation                                                                   |   | 10,958                   |                          |      | 11,102 
|Amortization
      of intangible assets and deferred financing costs           |   | 7,848                    |                          |      | 1,775  
|Inventory
      purchase accounting adjustment                                 |   | —                        |                          |      | —      
|Restructuring
      adjustment                                                 |   | (600                     | )                        |      | (270   
|Deferred
      income taxes                                                    |   | 401                      |                          |      | (986   
|Other,
      net                                                               |   | 550                      |                          |      | 395    
|Changes
      in assets and liabilities(net of effects of acquisitions)       |   |                          |                          |      |        
|Accounts
      receivable                                                      |   | (25                      | )                        |      | 1,067  
|Inventories                                                                    |   | (5                       | )                        |      | (443   
|Income
      taxes payable                                                     |   | (1,441                   | )                        |      | 635    
|Accounts
      payable and accrued liabilities                                 |   | (1,994                   | )                        |      | 4,672  
|Other,
      net                                                               |   | 1,553                    |                          |      | (1,934 
|                                                                               |   |                          |                          |      |        
|Net
      cash provided by operating activities                                |   | 26,539                   |                          |      | 36,700 
|                                                                               |   |                          |                          |      |        
|                                                                               |   |                          |                          |      |        
|CASH FLOWS
      FROM INVESTING ACTIVITIES:                                    |   |                          |                          |      |        
|Additions
      to property, plant and equipment                               |   | (8,232                   | )                        |      | (9,886 
|Acquisitions,
      net of cash                                                |   | (9,515                   | )                        |      | (12,600
|Proceeds
      provided by disposals of property, plant and equipment          |   | 13                       |                          |      | 28     
|                                                                               |   |                          |                          |      |        
|Net
      cash used by investing activities                                    |   | (17,734                  | )                        |      | (22,458
|                                                                               |   |                          |                          |      |        
|                                                                               |   |                          |                          |      |        
|CASH FLOWS
      FROM FINANCING ACTIVITIES:                                    |   |                          |                          |      |        
|Distribution
      to stockholders of parent to effect the merger              |   | —                        |                          |      |        
|(Repayment
      of) proceeds from revolving credit facility                   |   | —                        |                          |      | 11,650 
|Repayment
      of old credit facility                                         |   | (8,178                   | )                        |      | (12,826
|Proceeds
      from new credit facility                                        |   | —                        |                          |      | —      
|Repayment
      of new credit facility                                         |   | —                        |                          |      | —      
|Repayment
      of 12.50% senior subordinated notes                            |   | (2,000                   | )                        |      | —      
|Proceeds
      from 8.25% senior subordinated notes                            |   | —                        |                          |      | —      
|Debt
      issue costs                                                         |   | —                        |                          |      | (3,990 
|Dividend
      to parent                                                       |   | (83                      | )                        |      | (19,506
|Repayment
      of capital lease obligations                                   |   | (143                     | )                        |      | (224   
|Repayment
      of long term debt                                              |   | (215                     | )                        |      | (107   
|                                                                               |   |                          |                          |      |        
|Net
      cash used for financing activities                                   |   | (10,619                  | )                        |      | (25,003
|                                                                               |   |                          |                          |      |        
|EFFECT OF
      EXCHANGE RATE ON CASH                                          |   | (1,939                   | )                        |      | 3,582  
|                                                                               |   |                          |                          |      |        
|INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS                         |   | (3,753                   | )                        |      | (7,179 
|                                                                               |   |                          |                          |      |        
|CASH AND
      CASH EQUIVALENTS, BEGINNING OF PERIOD                           |   | 18,233                   |                          |      | 14,480 
|                                                                               |   |                          |                          |      |        
|CASH AND
      CASH EQUIVALENTS, END OF PERIOD                                 | $ | 14,480                   |                          | $    | 7,301  
|                                                                               |   |                          |                          |      |        
|NON-CASH
      INVESTING AND FINANCING ACTIVITIES:                             |   |                          |                          |      |        
|Capital
      Lease Obligations                                                | $ | 1,421                    |                          | $    | 430    
|                                                                               |   |                          |                          |      |        
|CASH PAID
      FOR:                                                           |   |                          |                          |      |        
|Interest                                                                       | $ | 18,697                   |                          | $    | 18,096 
|                                                                               |   |                          |                          |      |        
|Income Taxes                                                                   | $ | 2,649                    |                          | $    | 1,444  
|                                                                               |   |                          |                          |      |        

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

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AEARO COMPANY I AND SUBSIDIARIESNOTES 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 AC Safety
    Holding Corp. and its subsidiary, AC Safety Acquisition Corp. that closed
    on April 7, 2004 (the Merger).  Pursuant to the terms of the
    Merger Agreement, on April 7, 2004 (Acquisition Date), AC Safety
    Acquisition Corp. merged with and into Aearo Corporation with Aearo Corporation
    surviving the Merger as a wholly-owned subsidiary of AC Safety Holding Corp.
    The aggregate purchase price was approximately $409.1 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, $4.1 million
    of cash and $101.3 million of equity. The Company continues to be wholly-owned
    by Aearo Corporation after the Merger. The purpose of the Merger was to effect
    a change of control from Aearo Corporation to the Companys ultimate
    parent AC Safety Holding Corp.


Approximately
    $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 balance sheet
    as of September 30, 2004 and the results of operations subsequent to the
    Acquisition Date are presented on a different basis of accounting than the
    balance sheet as of September 30, 2003 and 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 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 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 purchase price was preliminarily allocated
    as follows (dollars in thousands):


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|Working capital                    | $ | 77,357  |  
|---------------------------------- | - | ------- | -
|Fixed assets                       |   | 55,139  |  
|Other assets and liabilities       |   | 16, 050 |  
|Deferred tax liabilities           |   | (60,954 | )
|Finite lived intangible asset      |   | 74,104  |  
|Indefinite lived intangible assets |   | 114,300 |  
|Goodwill                           |   | 133,140 |  
|                                   |   |         |  
|Purchase price                     | $ | 409,136 |  
|                                   |   |         |  

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):


|                                                      |               | Year
      Ended |  |   | Six  Months Ended | 
|----------------------------------------------------- | ------------- | ---------------- |  | - | ----------------- | 
|                                                      |              
|September
    30,                                     | March
    31, |                  |  |   | September
    30,
|2003                                                  | 2004          | 2004            
|                                                      |               |                 
|                                                      |               |                  |  |   |                   | 
|Sales                                                 | $             | 316,428          |  | $ | 169,579           | 
|Income (loss)
      before provision for income taxes |               | 20,930           |  |   | 12,156            | 
|Net income
      (loss)                               |               | 18,296           |  |   | 9,289             | 
|                                                      |               |                  |  |   |                   | 

|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.


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. 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 were approximately
    $6.1 million, $7.3 million, $4.3 million and $4.9 million for the years ended
    September 30, 2002 and 2003 and the six months ended March 31, 2004 and September
    30, 2004, respectively.


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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.


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 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 years ended September 30, 2002
    and 2003 the accompanying consolidated statements of operations include approximately
    $0.2 million and ($0.3) million, respectively, of transaction (gains)/losses
    included in other (income) charges, 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 (income) charges, 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 (income) charges, net. As of September 30, 2004, relative to these
    exposures, the Company had forward foreign currency contracts open in the
    following amounts:


|                      |        | September30,
          2003 |        |          | September 30,
      2004
|--------------------- | ------ | --------------------------- | ------ | -------- | ------------------------
|                      |       
|Amount                |        | Contract                    | Amount |          | Contract                
|                      |        |                             |       
|Currency              | (000s) | Position                    | (000s) | Position
|                      |        |                             |        |          |                         
|British
      Pound   |        | 3,981                       |        | Buy      |                         
|Canadian
      Dollar |        | 1,625                       |        | Sell     |                         
|Norwegian
      Krona |        | 2,862                       |        | Sell     |                         
|Swedish
      Krona   |        | 158,780                     |        | Buy      |                         
|Swiss Franc           |        | 80                          |        | Sell     |                         
|Euro                  |        | 9,521                       |        | Sell     |                         
|Danish Krona          |        | 2,412                       |        | Sell     |                         

As of September 30, 2004, the Company had less than $0.1 million of unrealized gains associated with the above forward foreign currency contract commitments.


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


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There were no open
forward foreign currency contracts to hedge anticipated sales as of September
30, 2004. The Company does not enter into forward foreign contracts for trading
purposes.


Inventories

Inventories are
stated at the lower of cost or market, cost being determined using the first-in,
first-out (FIFO) method. 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 $2.6 million,
$2.4 million for the years ended September 30, 2002 and 2003, respectively, and
$1.2 million and $1.3 million for each of the six month periods ended March 31,
2004 and September 30, 2004, respectively.


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 difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates. The effective tax rates for the years ended September 30, 2002 and 2003
and each of the six month periods ended March 31, 2004 and September 30, 2004
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 had net operating losses for income tax purposes. Due to
the uncertainty of realizing these tax benefits, deferred tax assets resulting
from net operating losses have been partially offset by a valuation allowance.
The Company is included in the consolidated tax return filed by AC Safety Holding
Corp. All taxes are recorded as if separate, stand alone returns were filed.
Deferred taxes are based on preliminary price allocations and may be subsequently
adjusted.


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

Effective October
1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangibles.
Under the provisions of SFAS No. 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized but are tested at least annually
for impairment. Intangible assets that have finite useful lives will continue
to be 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, 2003 and 2004 before final allocations resulting from the Merger (dollars
in thousands):


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|                                 | Gross  |              | Accumulated |   |         |   | Carrying |      
|-------------------------------- | ------ | ------------ | ----------- | - | ------- | - | -------- | -----
|September
      30, 2003         | Amount | Amortization | Additions   |   | Amount 
|                                 |        |              |             |   |         |  
|Trademarks                       | $      | 74,122       |             | $ | (21,409 | ) | $        | 1,600
|Customer
      Relationship List |        | —            |             |   | —       |   |          | 1,850
|Patents                          |        | 1,916        |             |   | (813    | ) |          | 162  
|Other                            |        | 1,550        |             |   | (1,091  | ) |          | —    
|                                 |        |              |             |   |         |   |          |      
|Total Intangibles                | $      | 77,588       |             | $ | (23,313 | ) | $        | 3,612
|                                 |        |              |             |   |         |   |          |      
|                                 |       



|                                 | 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
|                                 |        |              |             |        |        |   |          |   

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


Estimate of Aggregate Amortization Expense

|Year ending September 30, 2005 | $ | 5,111 | 
|------------------------------ | - | ----- | 
|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 | 

The following presents
the changes in the carrying amount of goodwill for the year ended September 30,
2003 and the six month period ended September 30, 2004 (dollars in thousands):


|                                        | Year                |        |  | Six
      Months |        
|--------------------------------------- | ------------------- | ------ |  | ---------------- | -------
|Ended                                   | Ended              
|September
      30,                     | September
      30,
|2003                                    | 2004               
|                                        |                    
|Beginning
      balance                 | $                   | 67,821 |  | $                | —      
|Pushed down
      in merger transaction |                     | —      |  |                  | 133,140
|Additions                               |                     | 6,808  |  |                  | —      
|Translation
      adjustment            |                     | 7,141  |  |                  | 605    
|                                        |                     |        |  |                 
|Ending balance                          | $                   | 81,770 |  | $                | 133,745
|                                        |                     |        |  |                 

The goodwill recorded as a result of the Merger is not deductible for tax purposes.


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As a result of
the non-amortization provisions of SFAS No. 142, the predecessor Company no longer
recorded approximately $6.1 million of annual amortization relating to goodwill
and indefinite lived intangibles. The following presents amortization expense
and adjusted net income as if SFAS No. 142 had been adopted for each period presented
(dollars in thousands):


|                       | Predecessor |       
|---------------------- | ----------- | ------
|Year                  
|Ended                 
|September 30,         
|2002                  
|                      
|Net income as reported | $           | 9,294 
|Goodwill amortization  |             | 2,965 
|Trademark amortization |             | 3,179 
|                       |             |       
|Adjusted net income    | $           | 15,438
|                       |             |       

Impairment

The Company accounts
for long-lived and certain intangible assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. The Company continually
reviews its long-lived assets and finite-lived intangible assets for events or
changes in circumstances that might indicate the carrying amount of the assets
may not be recoverable. The Company assesses the recoverability of the assets
by determining whether the amortization of such assets over their remaining lives
can be recovered through projected undiscounted future cash flows. The amount
of impairment, if any, is measured based on projected discounted future cash
flows using a discount rate reflecting the Companys average cost of funds.
During the years ended September 30, 2002 and 2003, as a result of normal product/equipment
obsolescence and productivity or capacity enhancement projects, the Company wrote
off approximately $0.5 million and $0.3 million of manufacturing assets, respectively.
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.


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 $1.3 million and $1.4 million for the years
ended September 30, 2002 and 2003, respectively. 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.


Fair Value of Financial Instruments

In accordance with
the requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, the Company has determined the estimated fair value of its
financial instruments using appropriate market information and valuation methodologies.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates are not necessarily indicative of the amounts that could be realized
in a current market exchange. The Companys financial instruments consist
of cash and cash equivalents, accounts receivable, accounts payable, Senior Subordinated
Notes, bank debt (including Term Loans, the Revolving Credit Facility and other
debt), interest rate instruments and a call option. The carrying value of these
assets and liabilities is a reasonable estimate of their fair value at September
30, 2003 and September 30, 2004.


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


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


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


The Companys
Senior Subordinated Notes contain an embedded call option that requires bifurcation
because it was determined to not be clearly and closely related to the debt host
contract. As a result of the preliminary valuation of the embedded call option,
the Company has recorded approximately $2.0 million of a derivative asset and
a corresponding liability on it statement of financial position as of September
30, 2004 The derivative asset will be marked to market each quarter with a corresponding
(gain) or loss to the statement of operations. The corresponding liability will
be amortized to the statement of operations under the effective interest method.


Accounting for Stock-based Compensation

The Company accounts
for stock-based compensation under the recognition and measurement principles
of Accounting Principals Board (APB) No. 25, Accounting for
Stock Issued to Employees. Accordingly, no compensation expense for stock
options has been recognized as all options granted had an exercise price equal
to or above the price of the underlying common stock. 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):


|                                                                                                        | Years
      Ended   |       | Six
      Months Ended |  
|------------------------------------------------------------------------------------------------------- | ------------------- | ----- | ---------------------- | -
|                                                                                                        | September
      30, |       |                        |  
|                                                                                                        |                     |       | March
    31,          |  
|                                                                                                        | 2002                |       | 2003                   |  
|                                                                                                        |                     |       |                        |  
|Net
      income (loss) as reported                                                                     | $                   | 9,294 |                        | $
|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 |                     | (188  | )                      |  
|                                                                                                        |                     |       |                        |  
|Proforma
      net income (loss)                                                                        | $                   | 9,106 |                        | $
|                                                                                                        |                     |       |                        |  

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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:


|                                              | Years
    Ended     |   | Six
    Months Ended |  
|--------------------------------------------- | ------------------- | - | -------------------- | -
|                                              | September
      30, |   |                      |  
|                                              |                     |   | March
    31,        |  
|                                              | 2002                |   | 2003                 |  
|                                              |                     |   |                      |  
|Risk-free
      interest rate                 | 4.52                | % | 4.71                 | %
|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 $17.2 million and $18.3 million for fiscal 2002 and
2003, respectively, and $9.6 million and $9.6 million for the six month periods
ended March 31, 2004 and September 30, 2004, respectively. The Company recovers
a portion of its shipping and handling costs from its customers and records this
recovery in net sales.


Accounting for Derivative Instruments and Hedging Activities

The Company 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 balance
sheet as either an asset or a liability measured at its fair value.


The Company has
formally documented its hedging relationships, including identification of the
hedging instruments and the hedge items, as well as its risk management objectives
and strategies for undertaking each hedge transaction. From time to time the
Company enters into foreign currency exchange contracts and interest rate swap
agreements, which are derivatives as defined by SFAS No. 133. The Company enters
into forward foreign currency contracts to mitigate the effects of changes in
foreign currency rates on profitability and enters into interest rate swap agreements
to hedge its variable interest rate risk. These derivatives are cash flow hedges.
For all qualifying and highly effective cash flow hedges, the changes in the
fair value of the derivatives are recorded in other comprehensive income (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 swaps. 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, 2002 and 2003, the Company reclassified
into earnings net losses of $0.6 million and $2.0 million, respectively, 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.


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


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The Company has
approximately $30.5 million of variable rate debt protected under an interest
rate cap arrangement through December 31, 2004 at a strike price of 1.13% LIBOR.
The fair value of the cap at September 30, 2004 was approximately $0.1 million.
The Company has not elected to take hedge accounting treatment for the interest
rate collar as defined under SFAS No. 133, and, as a result, any fair value adjustment
is charge directly to other income/(expense). No amounts were recorded to income
or expense related to the interest rate cap for the six months ended March 31,
2004 and approximately $0.1 million was recorded as income during the six months
ended September 30, 2004.


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 years ended September 30, 2002 and 2003, the impact on earnings for trade
activities was a net loss of $0.2 million and a net gain of $0.3 million, respectively.
For the six months ended March 31, 2004 and September 30, 2004, the impact on
earnings for trade activities was a net loss of $0.4 million and $0.1 million,
respectively.


The Companys
Senior Subordinated Notes contain an embedded call option that requires bifurcation
because it was determined to not be clearly and closely related to the debt host
contract. As a result of the preliminary valuation of the embedded call option,
the Company has recorded approximately $2.0 million of a derivative asset and
a corresponding liability on it statement of financial position as of September
30, 2004. The derivative asset will be marked to market each quarter with a corresponding
(gain) or loss to the statement of operations. The corresponding liability will
be amortized to the statement of operations under the effective interest method.


New Accounting Pronouncements

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 is currently assessing, but has not
yet determined the effect of SFAS No. 151 on its financial position, results
of operations and cash flows.


In December 2003,
the FASB issued SFAS No. 132(R), Employer Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and
106.  SFAS No. 132(R) revises employers disclosures about pension
plans and other post retirement benefit plans. The additional disclosure requirements
of SFAS No. 132(R) were effective for fiscal years ending after June 15, 2004
and the Company has included the required disclosures in the footnotes to the
consolidated financial statements.


|3. | Inventories
|-- | -----------

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


|                |   | 2003   |  |   |        | 2004 | 
|--------------- | - | ------ |  | - | ------ | ---- | 
|                |   |        |  |   |        |     
|Raw materials   | $ | 8,301  |  | $ | 9,302  |     
|Work in process |   | 11,976 |  |   | 12,087 |     
|Finished goods  |   | 16,992 |  |   | 19,460 |     
|                |   |        |  |   |        |     
|Total           | $ | 37,269 |  | $ | 40,849 |     
|                |   |        |  |   |        |     

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|4. | Property,
      Plant and Equipment
|-- | -----------------------------------

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


|                                          |   | 2003    |  |   |        | 2004 | 
|----------------------------------------- | - | ------- |  | - | ------ | ---- | 
|                                          |   |         | 
|Land                                      | $ | 2,658   |  | $ | 2,483  |     
|Building
      and improvements           |   | 23,391  |  |   | 15,803 |     
|Machinery
      and equipment             |   | 65,770  |  |   | 28,686 |     
|Furniture
      and fixtures              |   | 25,797  |  |   | 5,714  |     
|Construction
      in progress            |   | 5,276   |  |   | 7,084  |     
|                                          |   |         |  |   |        |     
|Gross property,
      plant and equipment |   | 122,892 |  |   | 59,770 |     
|Less 
      accumulated depreciation     |   | 74,023  |  |   | 5,020  |     
|                                          |   |         |  |   |        |     
|Net property,
      plant and equipment   | $ | 48,869  |  | $ | 54,750 |     
|                                          |   |         |  |   |        |     

|   |                        
|-- | -----------------------
|5. | Intangible
      Assets

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


|                                      |   | 2003   |  |   |         | 2004 | 
|------------------------------------- | - | ------ |  | - | ------- | ---- | 
|                                      |   |        | 
|Trademarks
      and trade names      | $ | 75,722 |  | $ | 114,300 |     
|Patents                               |   | 2,078  |  |   | 801     |     
|Non-compete
      agreements          |   | 945    |  |   | 385     |     
|Customer
      relationships          |   | 1,850  |  |   | 73,000  |     
|Other                                 |   | 605    |  |   | —       |     
|                                      |   |        |  |   |         |     
|Gross intangibles
      assets        |   | 81,200 |  |   | 188,486 |     
|Less 
      accumulated amortization |   | 23,313 |  |   | 2,631   |     
|                                      |   |        |  |   |         |     
|Net intangible
      assets           | $ | 57,887 |  | $ | 185,855 |     
|                                      |   |        |  |   |         |     

|   |                                               
|-- | ----------------------------------------------
|6. | Accounts
      Payable and Accrued Liabilities

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


|                                               |   | 2003   |  |   |        | 2004 | 
|---------------------------------------------- | - | ------ |  | - | ------ | ---- | 
|                                               |   |        | 
|Accounts
      payable- trade                  | $ | 21,205 |  | $ | 20,971 |     
|Accrued
      liabilities                      |   |        |  |   |        |     
|Employee
      compensation and benefits       |   | 11,785 |  |   | 13,239 |     
|Rebate
      and commissions                   |   | 4,213  |  |   | 5,412  |     
|Restructuring                                  |   | 2,405  |  |   | —      |     
|Other                                          |   | 4,435  |  |   | 7,108  |     
|                                               |   |        |  |   |        |     
|Accounts
      payable and accrued liabilities | $ | 44,043 |  | $ | 46,730 |     
|                                               |   |        |  |   |        |     
|                                               |   |        |  |   |        |     

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|7. | Debt
|-- | ----

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


|                                                         |   | 2003    |  |   |         | 2004 | 
|-------------------------------------------------------- | - | ------- |  | - | ------- | ---- | 
|                                                         |   |         | 
|Term loans
      and revolving credit facility, due 2004 | $ | 17,357  |  | $ | —       |     
|Term loans
      and revolving credit facility, due 2005 |   | 79,349  |  |   | —       |     
|Term loans,
      due 2011                               |   | —       |  |   | 126,045 |     
|12.50% Notes,
      due 2005                             |   | 98,000  |  |   | —       |     
|8.25% Notes,
      due 2012                              |   | —       |  |   | 175,000 |     
|Mortgage
      note, due 2006                            |   | 2,087   |  |   | 2,000   |     
|Other                                                    |   | 1,760   |  |   | 1,436   |     
|                                                         |   |         |  |   |         |     
|Sub-total
      long term debt                           |   | 198,553 |  |   | 304,481 |     
|Less 
      current portion                             |   | 17,767  |  |   | 1,639   |     
|                                                         |   |         |  |   |         |     
|Total long
      term debt                               | $ | 180,786 |  | $ | 302,842 |     
|                                                         |   |         |  |   |         |     

Debt (Predecessor)

Senior Bank Facilities

The Companys
debt structure included up to an aggregate of $135.0 million under its Credit
Agreement with various banks comprised of (i) a secured term loan facility consisting
of loans providing for up to $100.0 million of term loans (collectively the Old
Term Loans) with a portion of the Old Term Loans denominated in foreign
currencies, (ii) a secured revolving credit facility (Old Revolving Credit
Facility) providing for up to $30.0 million of revolving loans for general
corporate purposes, and (iii) a U.K. overdraft facility of up to an equivalent
of $5.0 million in Great Britain Pounds for working capital requirements as needed
(collectively, the Senior Bank Facilities).  The amounts outstanding
on the Old Term Loans and the Old Revolving Credit Facility at September 30,
2003 were approximately $85.1 and $11.7 million, respectively. No amounts were
outstanding under the U.K. overdraft facility. The Old Term Loans amortized quarterly
over a four-year period.


At the Companys
option, the interest rates per annum applicable to the Senior Bank Facilities
were either (a) an adjusted rate based on the London Interbank Offered Rate (LIBOR)
plus a margin of 3.25% in the case of Term Loans and 2.75% for revolving loans
or (b) the Base Rate, as defined, plus a margin of 2.25% in the case of Term
Loans and 1.75% for revolving loans. The Base Rate is the higher of Bankers Trust
Companys announced prime lending rate or the Overnight Federal Funds rate
plus 0.50%.


On April 7, 2004
the Company (i) repaid all outstanding amounts under the Senior Bank Facilities,
terminated all commitments under that facility and (ii) entered into a new senior
credit facility consisting of a $125.0 million term loan due 2011.


Term Loans

At September 30,
2003, the total balance outstanding of the Term Loans was $85.1 million and interest
rates were 4.4% for the U.S. Dollar Term Loan ($46.3 million US dollars outstanding
at September 30, 2003), 7.0% for the British Pound Term Loan (13.6 million British
Pounds outstanding at September 30, 2003), 5.4% for the Euro Term Loan (9.9 million
Euro outstanding at September 30, 2003), and 6.0% for the Canadian Term Loan
(6.2 million Canadian dollars outstanding at September 30, 2003). For the year
ended September 30, 2003, the weighted average interest rates paid were 4.7%,
7.1%, 6.0%, and 6.3% for the U.S. Dollar Term Loan, the British Pounds Term Loan,
the Euro Term Loan and the Canadian Term Loan, respectively. For the six months
ended March 31, 2004, the weighted average rate paid were 4.5%, 7.1%, 5.4%, and
6.0% for the U.S. Dollar Term Loan, the British Pounds Term Loan, the Euro Term
Loan and the Canadian Term Loan, respectively.


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At September 30,
2003 the balance on the Revolving Credit Facility was $11.7 million, which $5.0
million bore interest at LIBOR (3.89%) and $6.7 million at Base Rate (5.75%).
For the year ended September 30, 2003, the maximum amount outstanding was $16.5
million, the average was $1.7 million and the weighted average interest rate
paid was 5.7% and 4.9% for the six months ended March 31, 2004.


Senior Subordinated Notes

In 1995, Aearo
Company I issued $100.0 million of Notes due 2005 (the 12.50% Notes),
which are unsecured obligations of the Company. The Notes accrued interest at
a rate of 12.50% per annum and interest was payable semiannually on each January
15 and July 15.


The Company repurchased
$2.0 million of Notes in October 2001. On April 7, 2004 the Company redeemed
the 12.50% Notes. In connection with the Merger on April 7, 2004, the remaining
12.50% Notes were purchased for $98.0 million plus a call premium of $1.5 million
which was charged to other charges (income), net for the six months ended September
30, 2004.


Debt (Successor)

New 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 New
Term Loans) with a portion of the New Term Loans denominated in Euros,
(ii) a secured revolving credit facility (New Revolving Credit Facility)
providing for up to $50.0 million of revolving loans for general corporate purposes,
and (iii) an uncommitted incremental term loan facility of up to $60 million
for acquisitions (collectively, the Senior Bank Facilities). The
amounts outstanding on the New Term Loans and New Revolving Credit Facility at
September 30, 2004, were approximately $126.0 and $0 million, respectively. The
New 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 of letters of credit outstanding at September 30, 2004. The New
Term Loans amortize quarterly over a four-year period. Amounts repaid or prepaid
in respect of the New Term Loans may not be re-borrowed. Loans and letters of
credit under the New Revolving Credit Facility will be available until the Revolving
Loan Maturity Date, which is April 7, 2010. The New Term Loans mature on April
7, 2011.


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 million and up to a maximum of $60 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 prepayments 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.


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The Company is
entitled to an Interest Reduction Discount of .25% when the Company achieves
a leverage ratio of less then 4.50. The discount would apply to all New Term
Loans and the New Revolving Credit Facility.


Under the terms
of the Senior Bank Facilities, the Company is required to comply with a number
of affirmative and negative covenants. Among other restrictions, Aearo Company
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, 2004, Aearo
Company I was in compliance with the covenants of the Senior Bank Facilities.
The Senior Bank Facilities are unconditionally guaranteed by AC Safety Holdings
and secured by first priority security interests in substantially all the capital
stock and tangible and intangible assets of the Company.


Term Loans

At September 30,
2004, the total balance outstanding of the New Term Loans was $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 rates paid on New Term Loans were 4.3%
for US dollar debt and 4.9% Euro debt.


No amounts were
outstanding on the New Revolving Credit Facility at September 30, 2004. For the
six months ended September 30, 2004, the maximum amount outstanding was $9.3
million on the New Revolving Credit Facility. The weighted average rate on the
New Revolving 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, to use
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%. The Companys Make Whole option is an embedded derivative that
requires bifurcation from the 8.25% Notes because it was determined that it was
not clearly and closely related to the debt host contract as described in footnote
2.


The 8.25% Notes
indenture contains affirmative and negative covenants and restrictions. As of
September 30, 2004, the Company was in compliance with the covenants of the Notes
indenture. The
Notes are unconditionally
guaranteed on an unsecured senior subordinated basis by the Companys domestic
subsidiaries.


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Maturities

As of September
30, 2004, the scheduled maturity of indebtedness for each of the next five years
and thereafter is as follows (dollars in thousands):


|           |  |   | Amount  | 
|---------- |  | - | ------- | 
|           |  |   |         | 
|2005       |  | $ | 1,639   | 
|2006       |  |   | 3,495   | 
|2007       |  |   | 1,600   | 
|2008       |  |   | 1,547   | 
|2009       |  |   | 1,378   | 
|Thereafter |  |   | 294,822 | 
|           |  |   |         | 
|           |  | $ | 304,481 | 
|           |  |   |         | 

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, 2002, September 30, 2003, March
31, 2004 and September 30, 2004 (dollars in thousands):


|                                             |                 |       | SixMonths
      Ended |                    
|-------------------------------------------- | --------------- | ----- | --------------------- | -------------------
|Years
      Ended                            |                
|September
      30,                          | March
      31, |       |                       | September
      30,
|                                             |                 |       |                      
|2002                                         |                 | 2003  | 2004                  |                    
|                                             |                 |       |                       |                    
|Component
      of net periodic benefit cost |                 |       |                       |                    
|Service
      cost                           | $               | 1,286 |                       | $                  
|Interest
      cost                          |                 | 790   |                       |                    
|Expected
      return on plan assets         |                 | (785  | )                     |                    
|Unrecognized
      prior service cost        |                 | 9     |                       |                    
|Recognized
      actuarial gain              |                 | —     |                       |                    
|                                             |                 |       |                       |                    
|Net
      periodic benefit cost              | $               | 1,300 |                       | $                  
|                                             |                 |       |                       |                    

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|                                                      |               |        | Six      |   |               | Six |  
|----------------------------------------------------- | ------------- | ------ | -------- | - | ------------- | --- | -
|                                                      | Year          |        | Months   |   | Months        |    
|                                                      | Ended         |        | Ended    |   | Ended         |    
|                                                      | September 30, |        | March 31 |   | September 30, |    
|                                                      |               |        |          |   |               |    
|                                                      | 2003          |        | 2004     |   | 2004          |    
|                                                      |               |        |          |   |               |    
|Change in benefit obligation                          |               |        |          |   |               |     |  
|Benefit obligation at beginning of period             | $             | 12,995 |          | $ | 13,031        |     | $
|Service cost                                          |               | 1,510  |          |   | 670           |     |  
|Interest cost                                         |               | 833    |          |   | 371           |     |  
|Benefits paid                                         |               | (707   | )        |   | (337          | )   |  
|Actuarial (gain) loss                                 |               | (1,600 | )        |   | (51           | )   |  
|                                                      |               |        |          |   |               |     |  
|Benefit obligation at end of period                   | $             | 13,031 |          | $ | 13,684        |     | $
|                                                      |               |        |          |   |               |     |  
|                                                      |               |        |          |   |               |     |  
|Change in plan assets                                 |               |        |          |   |               |     |  
|Fair value of plan assets at beginning of period      | $             | 7,956  |          | $ | 8,931         |     | $
|Actual return on plan assets                          |               | 1,119  |          |   | 705           |     |  
|Employer contributions                                |               | 563    |          |   | —             |     |  
|Benefits paid                                         |               | (707   | )        |   | (337          | )   |  
|                                                      |               |        |          |   |               |     |  
|Fair value of plan assets at end of period            | $             | 8,931  |          | $ | 9,299         |     | $
|                                                      |               |        |          |   |               |     |  
|Reconciliation of funded status                       |               |        |          |   |               |     |  
|Funded status                                         | $             | (4,101 | )        | $ | (4,385        | )   | $
|Unrecognized prior service cost                       |               | 107    |          |   | —             |     |  
|Unrecognized actuarial loss                           |               | 176    |          |   | —             |     |  
|                                                      |               |        |          |   |               |     |  
|Net amount recognized                                 | $             | (3,818 | )        | $ | (4,385        | )   | $
|                                                      |               |        |          |   |               |     |  
|Amounts recognized in statement of financial position |               |        |          |   |               |     |  
|Accrued benefit liability                             | $             | (3,818 | )        | $ | (4,385        | )   | $
|                                                      |               |        |          |   |               |     |  



|                                                          |               |        |  | Six |       
|--------------------------------------------------------- | ------------- | ------ |  | --- | ------
|Year                                                      | Months       
|Ended                                                     | Ended        
|September 30,                                             | September 30,
|                                                          |               |       
|2003                                                      | 2004         
|                                                          |              
|Additional information for pension plans with accumulated |               |        |  |     |       
|benefit obligations in excess of plan assets              |               |        |  |     |       
|Projected benefit obligation                              | $             | 13,031 |  | $   | 14,232
|Accumulated benefit obligation                            |               | 12,463 |  |     | 13,464
|Fair value of plan assets                                 |               | 8,931  |  |     | 9,651 

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


|                                                         | 2003 |   |      | 2004 | 
|-------------------------------------------------------- | ---- | - | ---- | ---- | 
|                                                         |     
|Discount
        rate                                    | 6.00 | % | 6.00 | %   
|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. Over the 11 year period ended September 30, 2004, the returns
on the portfolio, assuming it was invested at the current target asset allocation
in prior periods, would have been a compound annual average return of 9.3%. Considering
this information and the potential for lower future returns due to the generally
lower interest rate environment, the Company selected an 8.00% long-term rate
of return asset assumption.


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The weighted
     average asset allocations at September 30, 2003 and 2004, by asset category,

  were as follows:


|                                   | 2003  |   |       | 2004 | 
|---------------------------------- | ----- | - | ----- | ---- | 
|                                   |       |   |       |     
|U.S. equity
      securities       | 60.4  | % | 61.9  | %   
|U.S. fixed
      income securities | 38.4  | % | 37.1  | %   
|Cash and
      cash equivalents    | 1.2   | % | 1.0   | %   
|                                   |       |   |       |     
|                                   | 100.0 | % | 100.0 | %   
|                                   |       |   |       |     

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 $1.1 million into its cash balance plan in fiscal 2005.


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


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

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 each of the years ended September 30, 2002 and 2003, respectively,
and $0.1 million for the six month periods ended March 31, 2004 and September
30, 2004, respectively. The aggregate liability for the SERP Plan was $0.5 million
and $1.0 million for the years ended September 30, 2003 and 2004, respectively.


A 401(k)
      plan,  the Aearo Company Employees 401(k) Savings Plan, was established
      as  of May 1, 1990. Employees normally scheduled to work a minimum of 1,000
      hours
    per year can join the plan immediately and may contribute up to 60% of their
       compensation. The Company contributes amounts equal to 50% of the employees
        contribution to a maximum of 3% of the employees pay. The costs
        to the  Company for this Plan were $0.9 million and $0.9 million for
        the years ended
    September 30, 2002 and 2003, respectively, and $0.4 million and $0.5 million
         for the six month periods ended March 31, 2004 and September 30, 2004,
        respectively.


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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 and $0.2 million
    for
    the years ended September 30, 2002 and 2003, respectively, and $0.1 million,
     and $0.2 million for the six month periods ended March 31, 2004 and September

    30, 2004, respectively.


|8. | Related
      Party Transactions
|-- | --------------------------------

On April 7, 2004,
AC Safety Holding Corp., 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, AC Safety Holding Corp., 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) $700,000 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 AC Safety Holding Corp.,
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 AC Safety
Holding Corp., 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 AC Safety Holding Corp. or Aearo Corporation in a sale of AC Safety
Holding Corp. or Aearo Corporation. The Successor Agreement will terminate on
the earlier of (i) April 7, 2014, (ii) the consummation of a sale of AC Safety
Holding Corp., 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 AC Safety Holding Corp. 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, AC Safety Holding Corp., 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) $400,000 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 $519,000
      and
    $611,000 for the years ended September 30, 2002 and 2003, respectively, and
       $406,000 for the six months ended March 31, 2004. Payments under the Successor

    Agreement totaled $341,000 for the six months ended September 30, 2004.


|9. | Income
      Taxes
|-- | ------------------

The Company is
included in the consolidated tax return filed by AC Safety Holding Corporation.
All taxes are recorded as if separate, stand alone returns were filed. Deferred
taxes are based on preliminary purchase price allocations and may be subsequently
adjusted. Income (loss) before provision for income taxes was as follows (dollars
in thousands):


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|                                                |   | Years
      Ended 
      September 30, |  | Six
          Months Ended |       
|----------------------------------------------- | - | -------------------------------------- |  | -------------------------- | ------
|                                                |   |                                        |  |                            |       
|                                                |   | 2002                                   |  |                            | 2003  
|                                                |   |                                        |  |                            |       
|Domestic                                        | $ | 4,726                                  |  | $                          | 12,259
|Foreign                                         |   | 6,342                                  |  |                            | 11,031
|                                                |   |                                        |  |                            |       
|Income
      (loss) before provision for income | $ | 11,068                                 |  | $                          | 23,290
|                                                |   |                                        |  |                            |       

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


|                             |   | Years
      Ended 
      September 30, |  | Six
      Months Ended |      
|---------------------------- | - | -------------------------------------- |  | ---------------------- | -----
|                             |   |                                        |  |                        |      
|                             |   | 2002                                   |  |                        | 2003 
|                             |   |                                        |  |                        |      
|U.S.
      Federal and State |   |                                        |  |                        |      
|Current                      | $ | 114                                    |  | $                      | 671  
|Deferred                     |   | 203                                    |  |                        | —    
|                             |   |                                        |  |                        |      
|                             |   | 317                                    |  |                        | 671  
|                             |   |                                        |  |                        |      
|                             |   |                                        |  |                        |      
|Foreign                      |   |                                        |  |                        |      
|Current                      |   | 1,226                                  |  |                        | 1,148
|Deferred                     |   | 231                                    |  |                        | 783  
|                             |   |                                        |  |                        |      
|                             |   | 1,457                                  |  |                        | 1,932
|                             |   |                                        |  |                        |      
|Total                        | $ | 1,774                                  |  | $                      | 2,603
|                             |   |                                        |  |                        |      

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


|                                                     |   | Years
      Ended 
      September 30, |   | Six
      Months Ended |       
|---------------------------------------------------- | - | -------------------------------------- | - | ---------------------- | ------
|                                                     |   |                                        |   |                       
|                                                     |   | 2002                                   |   |                        | 2003  
|                                                     |   |                                        |   |                        |       
|Computed
      tax expense (benefit) at the expected |   |                                        |   |                        |       
|statutory
      rate                                 | $ | 3,729                                  |   | $                      | 7,927 
|State taxes,
      net of federal effects            |   | 82                                     |   |                        | 85    
|Foreign
      income taxed at different rates        |   | (166                                   | ) |                        | (1,174
|Foreign
      dividends                              |   | 324                                    |   |                        | —     
|Non-deductible
      goodwill amortization           |   | 309                                    |   |                        | —     
|Non-deductible
      expenses                        |   | 99                                     |   |                        | 125   
|Increase
      (decrease) in valuation allowance     |   | (2,302                                 | ) |                        | (4,710
|Other, net                                           |   | (301                                   | ) |                        | 350   
|                                                     |   |                                        |   |                        |       
|Provision
      (benefit) for income taxes           | $ | 1,774                                  |   | $                      | 2,603 
|                                                     |   |                                        |   |                        |       

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


|                                            | For
    the     |       
|------------------------------------------- | --------------- | ------
|                                            | Years
    Ended |       
|                                            | September 30,   |       
|                                            |                 |       
|Deferred tax assets (liabilities)           |                 | 2003  
|                                            |                 |       
|Pension and other benefits                  | $               | 1,673 
|Property, plant and equipment               |                 | (2,422
|Intangible assets                           |                 | (4,940
|Restructuring charges                       |                 | 530   
|Inventory                                   |                 | 1,759 
|Unrealized foreign currency exchange        |                 | 1,254 
|Net operating loss and credit carryforwards |                 | 8,096 
|Accrued expenses and other                  |                 | 1,705 
|                                            |                 |       
|Subtotal                                    |                 | 7,655 
|Valuation allowance                         |                 | (9,263
|                                            |                 |       
|Total deferred tax liability                | $               | (1,608
|                                            |                 |       

The deferred liabilities
increased to $72.1 million as of September 30, 2004 for temporary differences
for trademarks and customer relationship lists due to the Merger. The valuation
allowance at September 30, 2003 and 2004 relates to the uncertainty of realizing
the tax benefits of reversing temporary differences and net operating loss carryforwards.
The gross amount of domestic net operating loss carryforwards, before the tax
effect, is approximately $46.0 million as of September 30, 2004. The net operating
loss carryforwards expire at various periods ranging from 2010 to 2021. Due to
the Merger, the Company is limited under tax code section 382 to applying approximately
$4.5 million of net operating losses to net income each year.


|10. | Stockholders
    Equity
|--- | ------------------------

Stock Ownership and Stockholders Agreement

On April 7, 2004,
all holders of the capital stock of AC Safety Holding Corp. 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 AC Safety Holding Corp.; grants to security holders the right to buy their
proportionate percentage of securities offered for sale to BSMM by AC Safety
Holding Corp.; allows AC Safety Holding Corp. 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 AC Safety Holding
Corp. 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


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possessing such
rights or (ii) in connection with which BSMM and its affiliates exercise piggyback registration
rights; provides for the payment by AC Safety Holding Corp. of the fees and expenses
associated with the exercise of registration rights under the stockholders agreement;
restricts the ability of AC Safety Holding Corp. 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 AC Safety
Holding Corp. and to grant AC Safety Holding Corp. 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 AC Safety Holding Corp. information
rights with respect of AC Safety Holding Corp. and its subsidiaries.

The stockholders agreement
will terminate upon the earliest to occur of (i) the dissolution of AC Safety
Holding Corp., (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 AC Safety Holding Corp.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 AC Safety Holding Corp. Board of
Directors.


The Company is
permitted to pay cash dividends to Aearo Corporation and in turn, Aearo Corporation
may pay cash dividends to AC Safety Holding Corp. 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
for the redemption or purchase of the capital stock of the Companys ultimate
parent, AC Safety Holding Corp., held by former employees of the Company or any
of its subsidiaries following the termination of their employment, provided that
the aggregate amount paid by Aearo Corporation with respect to such purchases
or redemptions does not exceed $5.0 million in any fiscal year and $7.5 million
in the aggregate.


Stock Option and Incentive Plans

In connection with
the Merger, our ultimate parent, AC Safety Holding Corp., 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
and upon the sale of the Company the options shall expire.


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.


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Stock Option Activity

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


|                                |         |   |   | Weighted | 
|------------------------------- | ------- | - | - | -------- | 
|                                | Number  |   |   | Average  | 
|                                | of      |   |   | Exercise | 
|                                | Shares  |   |   | Price    | 
|                                |         |   |   |         
|Outstanding, October 1, 2001    | 12,071  |   | $ | 664      | 
|Granted                         | 4,274   |   |   | 600      | 
|Granted                         | 31      |   |   | 800      | 
|Forfeited                       | (456    | ) |   | 600      | 
|                                |         |   |   |          | 
|Outstanding, September 30, 2002 | 15,920  |   |   | 649      | 
|Forfeited                       | (3,997  | ) |   | 800      | 
|                                |         |   |   |          | 
|Outstanding, September 30, 2003 | 11,923  |   | $ | 600      | 
|                                |         |   |   |          | 
|                                |         |   |   |          | 
|Outstanding, April 1, 2004      |         |   |   |          | 
|Granted                         | 369,185 |   | $ | 10.00    | 
|Granted                         | 156,400 |   |   | 17.50    | 
|                                |         |   |   |          | 
|Outstanding, September 30, 2004 | 525,585 |   | $ | 12.23    | 
|                                |         |   |   |          | 

The following table sets forth information regarding options outstanding at September 30, 2004:


|               |  |                |  |             |  |                |  | Weighted    |  | Weighted      
|-------------- |  | -------------- |  | ----------- |  | -------------- |  | ----------- |  | --------------
|               |  |                |  |             |  |                |  | Average     |  | Average       
|Number of      |  |                |  | Number      |  | Weighted       |  | Remaining   |  | Exercise Price
|Shares Covered |  |                |  | Currently   |  | Average        |  | Contractual |  | for Currently 
|by Options     |  | Exercise Price |  | Exercisable |  | Exercise Price |  | Life        |  | Exercisable   
|               |  |                |  |             |  |                |  |             |  |               
|525,585        |  | $10.00-$17.50  |  | 44,893      |  | $12.23         |  | 9.56        |  | $12.61        
|               |  |                |  |             |  |                |  |             |  |               

|11. | Commitments
    and Contingencies
|--- | ---------------------------------

Lease Commitments

The Company leases
certain transportation vehicles, warehouse facilities, office space, and machinery
and equipment under cancelable and non-cancelable operating leases. Rent expense
under such arrangements totaled $5.8 million and $6.0 million for the years ended
September 30, 2002 and 2003, respectively, and $3.1 million for the six month
periods ended March 31, 2004 and September 30, 2004,
respectively. Future
  minimum rental commitments under non-cancelable leases in effect at September
  30, 2004 are as follows (dollars in thousands):


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|2005       | $ | 3,296  | 
|---------- | - | ------ | 
|2006       |   | 2,587  | 
|2007       |   | 2,531  | 
|2008       |   | 2,178  | 
|2009       |   | 2,179  | 
|Thereafter |   | 4,163  | 
|           |   |        | 
|Total      | $ | 16,934 | 
|           |   |        | 

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. Most of these claims are covered by the Asset Transfer Agreement entered
into on June 13, 1995 by the Company and Aearo Corporation, on the one hand,
and Cabot Corporation and certain of its subsidiaries (the Sellers),
on the other hand (the 1995 Asset Transfer Agreement).  In the 1995
Asset Transfer Agreement, so long as Aearo Corporation makes an annual payment
of $400,000 to Cabot, the Sellers agreed to retain, and Cabot and the Sellers
agreed to defend and indemnify Aearo Corporation and its subsidiaries against,
any liability or obligation relating to or otherwise arising under any proceeding
or other claim against Aearo Corporation and its subsidiaries or Cabot or their
respective affiliates or other parties with whom any Seller directly or indirectly
has a contractual liability sharing arrangement which sounds in product liability
or related causes of action arising out of actual or alleged respiratory medical
conditions caused or allegedly caused by the use of respirators or similar devices
sold by Sellers or their predecessors (including American Optical Corporation
and its predecessors) prior to July 11, 1995. To date, Aearo Corporation has
elected to pay the annual fee and intends to continue to do so. In addition,
under the terms of the Merger Agreement with AC Safety Acquisition Corp., Aearo
Corporation agreed to make the annual payment to Cabot for a minimum of seven
years from the Acquisition Date. Aearo Corporation and its subsidiaries could
potentially be liable for claims currently retained by Sellers if Aearo Corporation
elects to cease paying the annual fee or if Cabot and the Sellers no longer are
able to perform their obligations under the 1995 Asset Transfer Agreement. Cabot
acknowledged in 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.

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At
September 30, 2004 and September 30, 2003, the Company has recorded liabilities
of approximately $5.4 million and $4.5 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. This reserve is re-evaluated periodically
and additional charges or credits to results of operations may result as additional
information becomes available. Consistent with the current environment being
experienced by companies involved in asbestos and silica-related litigation,
there has been an increase in the number of asserted claims that could potentially
involve Aearo Corporation and its subsidiaries, including the Company. Various
factors increase the difficulty in determining the Companys potential liability,
if any, in such claims, including the fact that the defendants in these lawsuits
are often numerous and the claims generally do not specify the amount of damages
sought. Additionally, the bankruptcy filings of other companies with asbestos
and silica-related litigation could increase the Companys cost over time.
In light of these and other uncertainties inherent in making long-term projections,
the Company has determined that the five-year period through fiscal 2009 is the
most reasonable time period for projecting asbestos and silica-related claims
and defense costs. It is possible that the Company may incur liabilities in an
amount in excess of amounts currently reserved. However, taking into account
currently available information, historical experience, and the 1995 Asset Transfer
Agreement, but recognizing the inherent uncertainties in the projection of any
future events, it is managements opinion that these suits or claims should
not result in final judgments or settlements in excess of the Companys
reserve that, in the aggregate, would have a material effect on the Companys
financial condition, liquidity or results of operations.

|12. | Acquisitions
|--- | ------------

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

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

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

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

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On
March 14, 2003,
the Company acquired VH Industries, Inc. (VH) of Concord, North Carolina
for $11.6 million. The acquisition has been accounted for as a purchase transaction
in accordance with SFAS No. 141, and, accordingly, the consolidated financial
statements for the periods subsequent to March 14, 2003 reflect the purchase
price, including transaction costs, allocated to tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values as of
March 14, 2003. The purchase price of $11.6 million, inclusive of acquisition
fees and costs to restructure operations, was allocated based on the fair value
of assets and liabilities acquired, which consisted primarily of inventory, receivables,
fixed assets and accrued liabilities. The excess of purchase price over the fair
market value of assets acquired of $9.4 million consisted of $5.9 million of
goodwill and $1.6 million of trademarks and $1.9 million of other intangibles.

|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):

|                                    |                         | Years
          Ended |  |      | Six
          Months Ended |              
|----------------------------------- | ----------------------- | --------------------- |  | ---- | -------------------------- | -------------
|                                    |                         |                       |  |      |                            |              
|                                    | September
          30, |                       |  |      |                            |              
|                                    |                         |                       |  |      |                            | March
    31,
|                                    | 2002                    |                       |  | 2003 |                            | 2004         
|                                    |                         |                       |  |      |                            |              
|Safety
        Products             | $                       | 208,538               |  | $    | 242,263                    |              
|Safety
        Prescription Eyewear |                         | 40,834                |  |      | 40,028                     |              
|Specialty
        Composites        |                         | 37,495                |  |      | 34,137                     |              
|                                    |                         |                       |  |      |                            |              
|Total                               | $                       | 286,867               |  | $    | 316,428                    |              
|                                    |                         |                       |  |      |                            |              

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

|                                                |                   | Years
    Ended |   |      | Six
    Months Ended |              
|----------------------------------------------- | ----------------- | --------------- | - | ---- | -------------------- | -------------
|                                                |                   |                 |   |      |                      |              
|                                                | September
    30, |                 |   |      |                     
|                                                |                   |                 |   |      |                      | March
    31,
|                                                | 2002              |                 |   | 2003 |                      | 2004         
|                                                |                   |                 |   |      |                      |              
|Safety Products                                 | $                 | 42,608          |   | $    | 50,670               |              
|Safety Prescription Eyewear                     |                   | 1,714           |   |      | 462                  |              
|Specialty Composites                            |                   | 3,488           |   |      | 2,713                |              
|                                                |                   |                 |   |      |                      |              
|Segment profit                                  |                   | 47,810          |   |      | 53,845               |              
|                                                |                   |                 |   |      |                      |              
|                                                |                   |                 |   |      |                      |              
|Depreciation                                    |                   | 10,958          |   |      | 11,102               |              
|Amortization of intangibles                     |                   | 6,293           |   |      | 267                  |              
|Inventory purchase accounting adjustment        |                   | —               |   |      | —                    |              
|Bond call premium                               |                   | —               |   |      | —                    |              
|Restructuring charges                           |                   | (600            | ) |      | (270                 | )            
|Interest, net                                   |                   | 20,091          |   |      | 19,456               |              
|                                                |                   |                 |   |      |                      |              
|Income (loss) before provision for income taxes | $                 | 11,068          |   | $    | 23,290               |              
|                                                |                   |                 |   |      |                      |              

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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 $3.5 million and $3.2 million for the years ended September 30, 2002
    and 2003, respectively. 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.
    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):


|                                  |                           |                      |  |      |        |                  
|--------------------------------- | ------------------------- | -------------------- |  | ---- | ------ | -----------------
|                                  | Years
    Ended           | Six
    Months Ended
|                                  | September
            30, |                      |  |      |       
|                                  |                           | March
    31,        |  |      |        | September
    30,
|                                  | 2002                      |                      |  | 2003 |        | 2004             
|                                  |                           |                      |  |      |        |                  
|Safety Products                   | $                         | 8,657                |  | $    | 8,978  |                  
|Safety Prescription
      Eyewear |                           | 717                  |  |      | 707    |                  
|Specialty
      Composites        |                           | 1,584                |  |      | 1,417  |                  
|                                  |                           |                      |  |      |        |                  
|Total                             | $                         | 10,958               |  | $    | 11,102 |                  
|                                  |                           |                      |  |      |        |                  

Identifiable
    assets by business segment (dollars in thousands):


|                                  |      | September
        30, | 
|--------------------------------- | ---- | --------------------- | 
|                                  |     
|                                  | 2003 |                       | 
|                                  |      |                       | 
|Safety Products                   | $    | 247,048               | 
|Safety Prescription
      Eyewear |      | 14,788                | 
|Specialty
      Composites        |      | 18,475                | 
|Corporate                         |      | 13,205                | 
|                                  |      |                       | 
|Total                             | $    | 293,516               | 
|                                  |      |                       | 

Corporate includes
    cash and other assets not allocated to segments.


Goodwill by
    business segment based on the preliminary purchase price allocation (dollars
    in thousands):


|                                  |   | Year
            Ended | 
|--------------------------------- | - | ---------------------- | 
|September
            30,        
|2004                             
|                                  |   |                        | 
|Safety Products                   | $ | 99,373                 | 
|Safety Prescription
      Eyewear |   | 14,979                 | 
|Specialty
      Composites        |   | 19,393                 | 
|                                  |   |                        | 
|Total                             | $ | 133,745                | 
|                                  |   |                        | 

Corporate
      includes  cash and other assets not allocated to segments.


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


|                                  |                      |               |  |      |        |                  
|--------------------------------- | -------------------- | ------------- |  | ---- | ------ | -----------------
|Years
    Ended                   | Six
    Months Ended
|September
        30,             |                     
|                                  |                      | March
    31, |  |      |        | September
    30,
|                                  | 2002                 |               |  | 2003 |        | 2004             
|                                  |                      |               |  |      |        |                  
|Safety Products                   | $                    | 7,921         |  | $    | 8,888  |                  
|Safety Prescription
      Eyewear |                      | 499           |  |      | 379    |                  
|Specialty
      Composites        |                      | 791           |  |      | 619    |                  
|Reconciling
      items           |                      | 442           |  |      | 430    |                  
|                                  |                      |               |  |      |        |                  
|Total                             | $                    | 9,653         |  | $    | 10,316 |                  
|                                  |                      |               |  |      |        |                  

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


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


|                               |                       |         |  |                   |         | 
|------------------------------ | --------------------- | ------- |  | ----------------- | ------- | 
|YearsEnded                     | Six  Months
    Ended
|September
    30,              |                       |         |  |                  
|                               | March
    31,         |         |  | September
    30,
|                               | 2002                  |         |  | 2003              | 2004    | 
|                               |                       |         |  |                   |         | 
|United States
      of America | $                     | 175,358 |  | $                 | 187,106 | 
|Canada                         |                       | 20,997  |  |                   | 22,965  | 
|United Kingdom                 |                       | 13,115  |  |                   | 15,562  | 
|Germany                        |                       | 10,984  |  |                   | 11,859  | 
|Sweden                         |                       | 10,710  |  |                   | 15,392  | 
|France                         |                       | 10,097  |  |                   | 9,967   | 
|Italy                          |                       | 4,933   |  |                   | 7,044   | 
|All others                     |                       | 40,673  |  |                   | 46,533  | 
|                               |                       |         |  |                   |         | 
|Total                          | $                     | 286,867 |  | $                 | 316,428 | 
|                               |                       |         |  |                   |         | 



The sales as
    shown above represent the value of shipments into the customer's country
    of residence. For the years ended September 30, 2002 and 2003 and the six
    months ended March 31, 2004 and September 30, 2004, no single customer accounted
    for more than 10% of sales.


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


|                               |      | September
            30, | 
|------------------------------ | ---- | ------------------------- | 
|                              
|                               | 2003 |                           | 
|                               |      |                           | 
|United States
      of America | $    | 183,910                   | 
|Canada                         |      | 10,293                    | 
|United Kingdom                 |      | 21,870                    | 
|Germany                        |      | 299                       | 
|Sweden                         |      | 70,744                    | 
|France                         |      | 5,773                     | 
|All others                     |      | 627                       | 
|                               |      |                           | 
|Total                          | $    | 293,516                   | 
|                               |      |                           | 

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|14. | Quarterly
      Financial Data (Unaudited)
|--- | ------------------------------------------

The following
    table contains selected unaudited quarterly financial data for fiscal years
    2003 and 2004.


|                                                      |                              |        | 
|----------------------------------------------------- | ---------------------------- | ------ | 
|                                                     
|                                                      | QUARTERLY
    FINANCIAL DATA |        | 
|                                                      | (In
    Thousands)           |        | 
|                                                      |                              |       
|                                                      | Fiscal
    Year              |        | 
|                                                      | 2003                         |        | 
|                                                      |                              |        | 
|                                                      | First                        |        | 
|                                                      |                              |        | 
|                                                      |                              |        | 
|Net sales                                             | $                            | 68,717 | 
|Cost of
      sales                                   |                              | 35,645 | 
|                                                      |                              |        | 
|                                                      |                              |        | 
|Gross profit                                          |                              | 33,072 | 
|Restructuring
      charge                            |                              | —      | 
|                                                      |                              |        | 
|Income (loss)
      before provision for income taxes |                              | 1,640  | 
|                                                      |                              |        | 
|Net Income
      (loss)                               |                              | 1,034  | 

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
|--- | -------------

On September
    30, 2001 the Company recorded an unusual charge of $11.4 million related
    to a restructuring plan announced by the Company to improve its competitive
    position and long-term profitability. The plan 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.


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


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


During the second
    quarter of 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.


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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,     2001 |       | Reversals |   | Charges |   | September 30,2002 |       
|-------------------------- | ---------------------- | ----- | --------- | - | ------- | - | ----------------- | ------
|                           |                        |       |           |   |         |   |                   |       
|Employee termination costs | $                      | 1,849 |           | $ | —       |   | $                 | (1,119
|Lease agreements           |                        | 3,249 |           |   | —       |   |                   | (897  
|Loss on disposal of assets |                        | 800   |           |   | (100    | ) |                   | —     
|Other                      |                        | 445   |           |   | —       |   |                   | (398  
|                           |                        |       |           |   |         |   |                   |       
|Total                      | $                      | 6,343 |           | $ | (100    | ) | $                 | (2,414
|                           |                        |       |           |   |         |   |                   |       

|                                   | September
          30,      2002 |       | Reversals |   | Charges |  | September
          30,2003 |       
|---------------------------------- | --------------------------------- | ----- | --------- | - | ------- |  | --------------------------- | ------
|                                   |                                   |       |           |   |         |  |                             |       
|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
|                                   |                                   |       |           |   |         |  |                             |       

|                                   | September
          30,      2003 |       | Reversals |   | Charges |   | March
    31,      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% Senior Subordinated 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 based on the preliminary allocation of purchase
price. 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 Consolidated Statement of Operations 
Six Months Ended September 30, 2004

|                                 | Successor    |             
|-------------------------------- | ------------ | ------------
|                                
|                                 |              |             
|Aearo                            | Guarantor    | Guarantor   
|Company I                        | Subsidiaries | Subsidiaries
|                                 |              |             
|Net sales                        | $            | 146,074     
|Cost of sales                    |              | 93,959      
|                                 |              |             
|Gross profit                     |              | 52,115      
|                                 |              |             
|Selling and administrative       |              | 41,766      
|Research and technical services  |              | 2,657       
|Amortization                     |              | 1,868       
|Other charges (income), net      |              | 9,456       
|                                 |              |             
|Operating income (loss)          |              | (3,632      
|Interest expense (income), net   |              | 15,649      
|                                 |              |             
|Income (loss) before taxes       |              | (19,281     
|Income tax provision (benefit)   |              | (8,394      
|Equity in subsidiaries earnings |              | 5,718       
|                                 |              |             
|Net income (loss)                | $            | (5,169      
|                                 |              |             

Condensed Consolidated Statement of Operations 
Six Months Ended March 31, 2004

|                                 | Predecessor  |             
|-------------------------------- | ------------ | ------------
|                                
|                                 |              |             
|Aearo                            | Guarantor    | Guarantor   
|Company I                        | Subsidiaries | Subsidiaries
|                                 |              |             
|Net sales                        | $            | 122,913     
|Cost of sales                    |              | 71,142      
|                                 |              |             
|Gross profit                     |              | 51,771      
|                                 |              |             
|Selling and administrative       |              | 42,612      
|Research and technical services  |              | 2,351       
|Amortization                     |              | 168         
|Other charges (income), net      |              | 6,815       
|Restructuring charges (income)   |              | (1,091      
|                                 |              |             
|Operating income                 |              | 916         
|Interest expense (income), net   |              | 10,117      
|                                 |              |             
|Income (loss) before taxes       |              | (9,201      
|Income tax provision (benefit)   |              | (4,642      
|Equity in subsidiaries earnings |              | 13,053      
|                                 |              |             
|Net income                       | $            | 8,494       
|                                 |              |             

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Condensed Consolidated Statement of Operations 
Year Ended September 30, 2003

|                                 | Predecessor |                           
|-------------------------------- | ----------- | --------------------------
|                                
|Aearo     CompanyI               |             | Guarantor     Subsidiaries
|                                 |             |                           
|Net sales                        | $           | 235,767                   
|Cost of sales                    |             | 133,645                   
|Restructuring charges (income)   |             | (270                      
|                                 |             |                           
|Gross profit                     |             | 102,392                   
|                                 |             |                           
|Selling and administrative       |             | 76,935                    
|Research and technical services  |             | 4,509                     
|Amortization                     |             | 150                       
|Other charges (income), net      |             | 13,347                    
|                                 |             |                           
|Operating income                 |             | 7,451                     
|Interest expense (income), net   |             | 17,983                    
|                                 |             |                           
|Income (loss) before taxes       |             | (10,532                   
|Income tax provision (benefit)   |             | (8,422                    
|Equity in subsidiaries earnings |             | 22,680                    
|                                 |             |                           
|Net income                       | $           | 20,570                    
|                                 |             |                           

Condensed Consolidated Statement of Operations
Year Ended September 30, 2002

|                                 | Predecessor  |             
|-------------------------------- | ------------ | ------------
|                                
|                                 |              |             
|Aearo                            | Guarantor    | Guarantor   
|Company
           I             | Subsidiaries | Subsidiaries
|                                 |              |             
|Net sales                        | $            | 220,869     
|Cost of sales                    |              | 126,869     
|Restructuring charges (income)   |              | (500        
|                                 |              |             
|Gross profit                     |              | 94,500      
|                                 |              |             
|Selling and administrative       |              | 71,971      
|Research and technical services  |              | 4,267       
|Amortization                     |              | 684         
|Other charges (income), net      |              | 13,104      
|Restructuring charges (income)   |              | —           
|                                 |              |             
|Operating income                 |              | 4,474       
|Interest expense (income), net   |              | 18,623      
|                                 |              |             
|Income (loss) before taxes       |              | (14,149     
|Income tax provision (benefit)   |              | (7,239      
|Equity in subsidiaries earnings |              | 15,874      
|                                 |              |             
|Net income                       | $            | 8,964       
|                                 |              |             

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Condensed Consolidated Balance SheetYear Ended September 30, 2004

|                                               | Successor    
|---------------------------------------------- | -------------
|                                               |              
|                                               |              
|                                               | Aearo        
|                                               | Company
    I
|                                               |              
|Current Assets:                                |              
|Cash and cash equivalents                      | $            
|Receivables, net                               |              
|Inventories                                    |              
|Deferred and prepaid expenses                  |              
|                                               |              
|Total current assets                           |              
|                                               |              
|Long term assets:                              |              
|Property plan and equipment                    |              
|Goodwill and other intangibles, net            |              
|Inter-company receivables (payables)           |              
|Investment in subsidiaries                     |              
|Other assets                                   |              
|                                               |              
|Total Assets                                   | $            
|                                               |              
|Current Liabilities:                           |              
|Current portion of long term debt              | $            
|Accounts payable and accrued liabilities       |              
|Accrued interest                               |              
|Income tax payables (receivables)              |              
|                                               |              
|Total current liabilities                      |              
|                                               |              
|Long Term Liabilities:                         |              
|Long term debt                                 |              
|Deferred income taxes                          |              
|Other liabilities                              |              
|                                               |              
|Total Liabilities                              |              
|                                               |              
|Stockholders
    Equity:                      |              
|Common                                         |              
|Paid in capital                                |              
|Retained earnings                              |              
|Accumulated other comprehensive income (loss)  |              
|                                               |              
|Total Stockholders
    Equity                 |              
|                                               |              
|Total Liabilities
    and Stockholders Equity | $            
|                                               |              

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Condensed Consolidated
  Balance SheetYear
  Ended September 30, 2003

|                                                 | Predecessor    
|------------------------------------------------ | ---------------
|                                                 |                
|                                                 |                
|                                                 | Aearo          
|                                                 | Company
      I
|                                                 |                
|Current
      Assets:                            |                
|Cash
      and cash equivalents                  | $              
|Receivables,
      net                           |                
|Inventories                                      |                
|Deferred
      and prepaid expenses              |                
|                                                 |                
|Total current
      assets                       |                
|                                                 |                
|Long term
      Assets:                          |                
|Property
      plan and equipment                |                
|Goodwill
      and other intangibles, net        |                
|Inter-company
      receivables (payables)       |                
|Investment
      in subsidiaries                 |                
|Other
      assets                               |                
|                                                 |                
|Total Assets                                     | $              
|                                                 |                
|Current
      Liabilities:                       |                
|Current
      portion of long term debt          | $              
|Accounts
      payable and accrued liabilities   |                
|Accrued
      interest                           |                
|Income
      tax payables                        |                
|                                                 |                
|Total current
      liabilities                  |                
|                                                 |                
|Long Term
      Liabilities:                     |                
|Long
      term debt                             |                
|Due
      to parent                              |                
|Deferred
      income taxes                      |                
|Other
      liabilities                          |                
|                                                 |                
|Total Liabilities                                |                
|                                                 |                
|Stockholders
      Equity:                      |                
|Common                                           |                
|Paid
      in capital                            |                
|Retained
      earnings                          |                
|Accumulated
      other comprehensive income     |                
|                                                 |                
|Total Stockholders
      Equity                 |                
|                                                 |                
|Total Liabilities
      and Stockholders Equity | $              
|                                                 |                

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Condensed Consolidated
  Statement of Cash FlowsSix
  Months Ended September 30, 2004

|                                                               | Successor      
|-------------------------------------------------------------- | ---------------
|                                                               |                
|                                                               |                
|                                                               | Aearo          
|                                                               | Company
      I
|                                                               |                
|Net cash
      provided by operating activities                | $              
|Net
      cash used for investing activities                   |                
|Net cash
      provided by (used for) financing activities     |                
|Effect of
      exchange rate on cash                          |                
|                                                               |                
|Increase
      (decrease) in cash and cash equivalents         | $              
|                                                               |                
|Cash and
      cash equivalents at the beginning of the period |                
|                                                               |                
|Cash and
      cash equivalents at the end of the period       | $              
|                                                               |                

Condensed
  Consolidated Statement of Cash FlowsSix
  Months Ended March 31, 2004

|                                                         | Predecessor        
|-------------------------------------------------------- | -------------------
|                                                         |                    
|                                                         |                    
|                                                         | Aearo              
|                                                         | Company
          I
|                                                         |                    
|Net cash provided by operating activities                | $                  
|Net cash used for investing activities                   |                    
|Net cash used for financing activities                   |                    
|Effect of exchange rate on cash                          |                    
|                                                         |                    
|Increase (decrease) in cash and cash equivalents         | $                  
|Cash and cash equivalents at the beginning of the period |                    
|                                                         |                    
|Cash and cash equivalents at the end of the period       | $                  
|                                                         |                    

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Condensed
  Consolidated Statement of Cash Flows
  Year Ended September 30, 2003

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

Condensed
  Consolidated Statement of Cash Flows
  Year Ended September 30, 2002

|                                                               | Predecessor  |             
|-------------------------------------------------------------- | ------------ | ------------
|                                                               |              |             
|                                                               |              |             
|                                                               | Aearo        |             
|Company
      I                                                | Subsidiaries | Subsidiaries
|                                                               |              |             
|Net cash
      provided by operating activities                | $            | 7,136       
|Net cash
      used for investing activities                   |              | (13,598     
|Net cash
      used for financing activities                   |              | 6,314       
|Effect of
      exchange rate on cash                          |              | (2,268      
|                                                               |              |             
|Increase
      (decrease) in cash and cash equivalents         | $            | (2,416      
|Cash and
      cash equivalents at the beginning of the period |              | 9,738       
|                                                               |              |             
|Cash and
      cash equivalents at the beginning of the period | $            | 7,322       
|                                                               |              |             

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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, 2004,
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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PARTIII

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 December 1, 2004.


|Name                               |  | Age |  | Position                                                                        
|---------------------------------- |  | --- |  | --------------------------------------------------------------------------------
|                                   |  |     |  |                                                                                 
|Michael
      A. McLain (1)        |  | 54  |  | Chief Executive
      Officer, President, and Chairman of the Board of Directors
|                                   |  |     |  |                                                                                 
|Jeffrey
      S. Kulka             |  | 47  |  | Senior Vice
      President, Chief Financial Officer, Treasurer, and Secretary  
|                                   |  |     |  |                                                                                 
|James H.
      Floyd               |  | 49  |  | President,
      Aearo Europe and International                                 
|                                   |  |     |  |                                                                                 
|M. Rand
      Mallitz              |  | 62  |  | Senior Vice
      President, Specialty Composites                               
|                                   |  |     |  |                                                                                 
|D. Garrad
      (Gary) Warren, III |  | 52  |  | President,
      North American Safety Products Group                           
|                                   |  |     |  |                                                                                 
|James M.
      Phillips            |  | 52  |  | Senior Vice
      President, Human Resources                                    
|                                   |  |     |  |                                                                                 
|Rahul Kapur                        |  | 53  |  | Senior Vice
      President, Corporate Development and Chief Strategy Officer   
|                                   |  |     |  |                                                                                 
|Thomas R.
      DAmico            |  | 48  |  | Senior Vice
      President, Operations and Research and Development            
|                                   |  |     |  |                                                                                 
|John D.
      Howard (2)           |  | 52  |  | Director                                                                        
|                                   |  |     |  |                                                                                 
|Douglas
      R. Korn (1)(2)       |  | 42  |  | Director,
      Chairman of Audit Committee                                     
|                                   |  |     |  |                                                                                 
|Nick White                         |  | 59  |  | 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 Cluett American Corporation, and Little Rapids Corporation.


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


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


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


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. He worked
for Dow Chemical Company for more than 20 years and has worked in recruiting,
training and compensation for many diverse divisions of Dow.


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


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
Aeropostale, Inc., Integrated Circuit Systems, Inc., New York & Company and
several private companies.


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 32 year period. He was a member
of Wal-Mart's Executive Committee during his last five years with the company.


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Our Audit Committee
     recommends the firm to be appointed as independent accountants to audit
    the
  financial statements and to perform services related to the audit, reviews
    the  scope and results of the audit
     with the independent accountants, reviews with management and the independent

  accountants our annual operating results, considers the adequacy of the internal
     accounting procedures, considers the effect of such procedures on the accountants
  independence and establishes policies for business values, ethics and employee
   relations. The Audit Committee is comprised of Douglas R. Korn and John D.
  Howard.
  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 Securicies 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.


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Item 11.   Executive
  Compensation

The compensation
       of executive officers of the Company is determined by the Board of Directors.

    The following table sets forth certain information concerning compensation
       received by the Chief Executive Officer and the other four most highly-compensated

    executive officers of the Company serving at the end of fiscal 2004 (the Named
     Executive Officers) for services rendered to the Company in all capacities
      (including service as an officer or director) in fiscal 2004.


Summary
  Compensation TableAnnual
  Compensation

|                                                             | Fiscal |       |              |         |  |   |         |  |   | Other     |    
|------------------------------------------------------------ | ------ | ----- | ------------ | ------- |  | - | ------- |  | - | --------- | ---
|Year                                                         | Salary | Bonus | Compensation
|                                                             |        |       |              |         |  |   |         |  |   |           |    
|Michael
      A. McLain                                      | 2004   |       | $            | 546,252 |  | $ | 474,352 |  | $ | 7,122,747 | (1)
|Chief Executive
      Officer, President and Chairman of the | 2003   |       | $            | 515,007 |  | $ | 398,125 |  | $ | 81,855    |    
|Board of
      Directors                                     | 2002   |       | $            | 500,004 |  | $ | 225,069 |  | $ | 86,797    |    
|                                                             |        |       |              |         |  |   |         |  |   |           |    
|D. Garrad
      Warren, III                                  | 2004   |       | $            | 280,707 |  | $ | 198,605 |  | $ | 2,810,389 | (2)
|President,
      North American Safety Products Group        | 2003   |       | $            | 250,281 |  | $ | 155,284 |  | $ | 44,496    |    
|                                                             | 2002   |       | $            | 243,000 |  | $ | 87,507  |  | $ | 64,250    |    
|                                                             |        |       |              |         |  |   |         |  |   |           |    
|Jeffrey
      S. Kulka                                       | 2004   |       | $            | 212,475 |  | $ | 150,782 |  | $ | 2,434,358 | (3)
|Senior Vice
      President, Chief Financial Officer,        | 2003   |       | $            | 187,476 |  | $ | 115,946 |  | $ | 25,838    |    
|Treasurer
      and Secretary                                | 2002   |       | $            | 179,403 |  | $ | 65,540  |  | $ | 25,295    |    
|                                                             |        |       |              |         |  |   |         |  |   |           |    
|James H.
      Bernhardt, Senior Vice President and Chief    | 2004   |       | $            | 198,942 |  | $ | 137,315 |  | $ | 2,272,888 | (4)
|Marketing
      Officer                                      | 2003   |       | $            | 196,783 |  | $ | 118,230 |  | $ | 33,226    |    
|                                                             | 2002   |       | $            | 189,451 |  | $ | 66,620  |  | $ | 37,773    |    
|                                                             |        |       |              |         |  |   |         |  |   |           |    
|James H.
      Floyd, President, Aearo Europe,               | 2004   |       | $            | 242,115 |  | $ | 170,951 |  | $ | 1,773,223 | (5)
|Managing
      Director, International                       | 2003   |       | $            | 216,300 |  | $ | 133,988 |  | $ | 34,934    |    
|                                                             | 2002   |       | $            | 207,934 |  | $ | 75,623  |  | $ | 52,721    |    
|                                                             |        |       |              |         |  |   |         |  |   |           |    

|  
|--
|1.
|  
|2.
|  
|3.
|  
|4.

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|5. | Includes
      contributions made on behalf of Mr. Floyd to the Company’s 401(k) Savings
      Plan ($6,200) and to the Company's Cash Balance Plan ($12,793). Also includes
      expenses recognized by the Company for unfunded accruals made on Mr. Bernhardts
      behalf to the Company's Supplemental Executive Retirement Plan ($13,788),
      the Companys match and interest credits to the Company's Deferred
      Compensation Plan ($9,970), payments made under the phantom equity plan
      ($1,535,484) and for the cancellation of options ($194,988).
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table
sets forth information concerning the number and value of unexercised options
to purchase AC Safety Holding Corp. Common Stock held by the Named Executive
Officers at the end of fiscal 2004. None of the Named Executive Officers exercised
any options during fiscal 2004.


|Name                              |                                  |                              |  |               |             |        |  |               |  |   | Value
      of Outstanding
|--------------------------------- | -------------------------------- | ---------------------------- |  | ------------- | ----------- | ------ |  | ------------- |  | - | --------------------------
|Number
      of Shares Covered by | In-the-money
      Options      
|Shares                            | Options
      at Fiscal Year-end | At
      Fiscal Year-end (1)
|Acquired                          | Value                            |                              | 
|On
      Exercise                 | Realized                         | Exercisable                  |  | Unexercisable | Exercisable |        |  | Unexercisable
|                                  |                                  |                              |  |               |             |        |  |               |  |   |                           
|Michael
      A. McLain           |                                  | —                            |  | —             |             | 10,850 |  | 118,850       |  | $ | —                         
|D. Garrad
      Warren, III       |                                  | —                            |  | —             |             | 3,790  |  | 41,410        |  |   | —                         
|Jeffrey
      S. Kulka            |                                  | —                            |  | —             |             | 3,680  |  | 38,420        |  |   | —                         
|James
      H. Bernhardt          |                                  | —                            |  | —             |             | —      |  | —             |  |   | —                         
|James
      H. Floyd              |                                  | —                            |  | —             |             | 3,670  |  | 40,130        |  |   | —                         
|                                  |                                  |                              |  |               |             |        |  |               |  |   |                           

|  
|--
|1.

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 7 senior executives: Michael McLain, D. Garrad Warren III, M. Rand
Mallitz, James M. Phillips, Rahul Kapur, Jeffrey S. Kulka and James H. Floyd.
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 AC Safety Holding Corp. 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.


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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
non-interference 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 $2.9 million as of September 30,
2004.


2004
AC Safety Holding Corp. Plan.On
April 7, 2004, AC Safety Holding Corp. adopted the 2004 Deferred Compensation
Plan. A limited group of executives of AC Safety Holding Corp. 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 AC Safety Holding Corp. 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 AC Safety Holding Corp. 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. 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.


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The following
     table sets forth certain information relating to option grants for Named
    Executive
  Officers pursuant to the S5tock Incentive Plan for the year ended September
     30, 2004.


|                            |                  |          |                                     |                |        |         |          |  | Potential
      Realizable Value at | 
|--------------------------- | ---------------- | -------- | ----------------------------------- | -------------- | ------ | ------- | -------- |  | ----------------------------------- | 
|% of
      Total            |                  |          | Assumed
      Annual Rates of Stock
|Options                     |                  |          | Price
      Appreciation for Option
|Number
      of             | Granted
      in | Exercise |                                     | Term
      (1)
|Underlying                  | the Fiscal       | Price    | Expiration                          |                |        |        
|Name                        | Options          | Year     | ($/Shr)                             | Date           | 5% ($) | 10% ($)
|                            |                  |          |                                     |                |        |         |          |  |                                     | 
|M. McLain                   | 108,500          |          | 20.6                                |                | 10     |         | 07/19/14 |  | 345,892                             | 
|M. McLain                   | 21,200           |          | 4.0                                 |                | 10     |         | 07/19/11 |  | 86,305                              | 
|D. Garrad
      Warren, III | 37,900           |          | 7.2                                 |                | 10     |         | 07/19/14 |  | 120,748                             | 
|D. Garrad
      Warren, III | 7,300            |          | 1.4                                 |                | 10     |         | 07/19/11 |  | 29,718                              | 
|J. Kulka                    | 36,800           |          | 7.0                                 |                | 10     |         | 07/19/14 |  | 115,717                             | 
|J. Kulka                    | 5,300            |          | 1.0                                 |                | 10     |         | 07/19/11 |  | 21,576                              | 
|J. Floyd                    | 36,700           |          | 7.0                                 |                | 10     |         | 07/19/14 |  | 116,346                             | 
|J. Floyd                    | 7,100            |          | 1.4                                 |                | 10     |         | 07/19/11 |  | 28,904                              | 
|                            |                  |          |                                     |                |        |         |          |  |                                     | 
|                            |                  |          |                                     |                |        |         |          |  |                                     | 

|(1) | Potential
      Realizable Value is based on assumed growth rates for the 10 and 7-year
      option term (5% annual growth results in a stock price of $16.29 for the
      10 year option term and $14.07 for the 7 year option term and 10% annual
      growth rate results in a stock price of $25.94 for the 10 year option term
      and $19.49 for the 7 year option term).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.


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.


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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.


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                                                         | $ | 109,461 | 
|Chief
      Executive Officer, President and Chairman of the Board of Directors |   |         | 
|D. Garrad
      Warren, III                                                     | $ | 53,071  | 
|President,
      North American Safety Products Group                           |   |         | 
|Jeffrey
      S. Kulka                                                          | $ | 57,488  | 
|Senior
      Vice President, Chief Financial Officer, Treasurer and Secretary   |   |         | 
|James H.
      Bernhardt                                                        | $ | 5,512   | 
|Senior
      Vice President and Chief Marketing Officer                         |   |         | 
|James H.
      Floyd                                                            | $ | 62,017  | 
|President,
      Aearo Europe, Managing Director, International                 |   |         | 

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Item
12.  Security Ownership of Certain Beneficial Owners and Management

Aearo Corporation
    owns 100% of our capital stock. AC Safety Holding Corp., or Holdings, owns
    100% of the capital stock of Aearo Corporation. The following table sets
    forth information 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.


|                                                    |                              |        | Percentage
            of | 
|--------------------------------------------------- | ---------------------------- | ------ | ------------------------- | 
|Number
          of Shares                          | Outstanding                 
|Name
          of Beneficial Owner                  | Beneficially
          Owned | Shares
|                                                    |                              |        |                           | 
|Bear Stearns
        Merchant Capital II, L.P.(1)   | 2,015,962                    |        | 80.1                      | 
|Vestar
        Equity Partners, L.P.(2)             | 238,531                      |        | 9.5                       | 
|Michael
        A. McLain                           | 85,247                       |        | 3.4                       | 
|James H.
        Floyd                              | 28,436                       |        | 1.1                       | 
|Rahul Kapur                                         | 28,436                       |        | 1.1                       | 
|D. Garrad
        Warren III                        | 22,239                       |        | *                         | 
|M. Rand
        Mallitz                             | 21,311                       |        | *                         | 
|James M.
        Phillips                           | 15,625                       |        | *                         | 
|Jeffrey
        S. Kulka                            | 1,562                        |        | *                         | 
|Thomas
        A. DAmico                           | 7,500                        |        | *                         | 
|John D.
        Howard(3)                           | 2,015,962                    |        | 80.1                      | 
|Douglas
        R. Korn(3)                          | 2,015,962                    |        | 80.1                      | 
|Nick White                                          | —                            |        | *                         | 
|Directors
        and Executive Officers as a group | 2,464,849                    |        | 97.9                      | 

| | 
| | 

|   
|---
|*  
|   
|(1)
|   
|(2)
|   
|(3)

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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 AC Safety Holding
Corp., 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,
AC Safety Holding Corp., 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, AC Safety Holding Corp., 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) $700,000 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 AC Safety Holding Corp.,
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 AC Safety
Holding Corp., 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 AC Safety Holding Corp. or Aearo Corporation in a sale of AC Safety
Holding Corp. or Aearo Corporation. The Successor Agreement will terminate on
the earlier of (i) April 7, 2014, (ii) the consummation of a sale of AC Safety
Holding Corp., 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 AC Safety Holding Corp. 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, AC Safety Holding Corp., 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 AC Safety Holding Corp. 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 AC Safety
      Holding Corp.;                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | grants to
      security holders the right to buy their proportionate percentage of securities
      offered for sale to BSMM by AC Safety Holding Corp.;                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | allows AC
      Safety Holding Corp. 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 AC Safety Holding
      Corp. 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 AC Safety Holding Corp. of the fees and expenses associated
      with the exercise of registration rights under the stockholders agreement;                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | restricts
      the ability of AC Safety Holding Corp. 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 AC Safety Holding Corp. and to grant AC Safety Holding
      Corp. 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 AC Safety Holding Corp. information rights with
      respect of AC Safety Holding Corp. and its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                     

The stockholders
    agreement will terminate upon the earliest to occur of (i) the dissolution
         of AC Safety Holding Corp., (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 AC Safety Holding Corp.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 AC Safety Holding Corp. 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
public accountants for each of the last two fiscal years ended September 30,
2003 and 2004. The aggregate fees billed by Deloitte are as follows:


|           |   | 2003    |  |   | 2004    | 
|---------- | - | ------- |  | - | ------- | 
|           |   |         |  |   |         | 
|Audit fees | $ | 275,000 |  | $ | 287,000 | 
|           |   |         |  |   |         | 
|Tax fees   |   | 84,000  |  |   | 86,500  | 
|           |   |         |  |   |         | 
|Other fees |   | 312,000 |  |   | 709,405 | 

Other fees in the
fiscal year ended September 30, 2004 included approximately $631,000 related
to the Merger Agreement. Other fees in the fiscal year ended September 30, 2003
included approximately $120,000 related to a transfer price study.


Tax fees relate
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 auditors 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, and Reports on
  Form 8-K

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:                                        
|   | See Schedule
      II on page 94 of this report.                               
|   |                                                                                
|   | 3.
      Exhibits:                                                             
|   | See Index
      of Exhibits on pages 96 to 97 hereof.                          

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SCHEDULE
  II
  AEARO COMPANY I

VALUATION
      AND QUALIFYING ACCOUNTSFor
  the periods ended September 30, 2002, September 30, 2003, March 31, 2004 and
  September 30, 2004(Dollars
in thousands)

|                                          |   |                    |  |   | Additions        |  |                  |  |   |                       |   |  
|----------------------------------------- | - | ------------------ |  | - | ---------------- |  | ---------------- |  | - | --------------------- | - | -
|                                          |   |                    |  |   |                  |  |                  |  |   |                       |   |  
|                                          |   | Balance
      at   |  |   | Provisions       |  | Charged
      to |  |   |                       |   |  
|                                          |   | beginning
      of |  |   | Charged
      to |  | Other            |  |   | Net
      Deductions  |   |  
|                                          |   | Period             |  |   | Operations       |  | Accounts         |  |   | From
      Allowances |   |  
|                                          |   |                    |  |   |                  |  |                  |  |   |                       |  
|Year ended
      September 30, 2002       |   |                    |  |   |                  |  |                  |  |   |                       |   |  
|Bad
      Debt Reserve                    | $ | 831                |  | $ | 999              |  | —                |  | $ | (306                  | ) | $
|                                          |   |                    |  |   |                  |  |                  |  |   |                       |   |  
|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                  | ) |  

90

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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:December
      20, 2004 | By:/s/
      Michael A. McLain                        
|                             |                                                       
|                             | Michael
      A. McLain                               
|                             | Chief
      Executive Officer, President, and Chairman
|                             | of
      the Board of Directors                       

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

|Date: December
      20, 2004 | /s/
      Michael A. McLain                          
|----------------------------- | -----------------------------------------------------
|                              |                                                      
|                              | Michael
      A. McLain                              
|                              | President,
      Chief Executive Officer and Chairman
|                              | (Principal
      Executive Officer)                  
|                              |                                                      
|Date: December
      20, 2004 | /s/ Jeffrey
      S. Kulka                           
|                              |                                                      
|                              | Jeffrey
      S. Kulka                               
|                              | Senior Vice
      President, Chief Financial Officer,
|                              | Treasurer
      and Secretary                        
|                              |                                                      
|Date: December
      20, 2004 | /s/ John
      D. Howard                             
|                              |                                                      
|                              | John D.
      Howard, Director                       
|                              |                                                      
|Date: December
      20, 2004 | /s/ Douglas
      R. Korn                            
|                              |                                                      
|                              | Douglas
      R. Korn, Director                      
|                              |                                                      
|Date: December
      20, 2004 | /s/ Nick
      White                                 
|                              |                                                      
|                              | Nick White,
      Director                           
|                              |                                                      

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INDEX
  OF EXHIBITS

|Exhibit
      Number |  | Description
      of Exhibit                                                                                                                                                                                                                                                                                                                                                                              
|-------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|2.1                  |  | Agreement
      and Plan of Merger among Aearo Corporation, AC Safety Holding Corp. 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                                                                                                                                                                                                                                                                                                                                                                           
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|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)                                                                                                                                                                                                                                                                                                                                                     
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|4.3*                 |  | Registration
      Rights Agreement, dated as of April 7, 2004, among Aearo Company I, Cabot
      Safety Intermediate Corporation, VH Industries, Inc. and the Initial Purchasers                                                                                                                                                                                                                        
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.1*                |  | Credit Agreement
      among AC Safety Holding Corp., 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 AC Safety Holding Corp., 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                                                                                                                                                                                                                                                                                
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.4*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and D. Garrad Warren III                                                                                                                                                                                                                                                                             
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.5*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and M. Rand Mallitz                                                                                                                                                                                                                                                                                  
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.6*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and James M. Phillips                                                                                                                                                                                                                                                                                
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.7*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and Rahul Kapur                                                                                                                                                                                                                                                                                      
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.8*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and Jeffrey S. Kulka                                                                                                                                                                                                                                                                                 
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.9*                |  | Executive
      Employment Agreement dated March 10, 2004, between AC Safety Acquisition
      Corp. and James H. Floyd                                                                                                                                                                                                                                                                                   
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.10*               |  | AC Safety
      Holding Corp. 2004 Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                             
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|10.11*               |  | AC Safety
      Holding Corp. 2004 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                   
|                     |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|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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