ARMOR HOLDINGS INC - 10-K Annual Report

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

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 0-18863

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ARMOR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 59-3392443
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

13386 INTERNATIONAL PARKWAY
JACKSONVILLE, FLORIDA 32218
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(904) 741-5400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class: Common Stock, $0.01 par value
Name of each exchange on which registered: New York Stock Exchange

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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 [x]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12B-2 of the Act)

Yes [ x ] No [ ]

The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of June 30, 2004, the last business day of
the Registrant's most recently completed second fiscal quarter (based on the
closing sale price of the Common Stock on the New York Stock Exchange on such
date) was $1,113,665,784.

The number of shares of the Registrant's Common Stock outstanding as of
March 3, 2005 was 34,172,637.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement for our Annual Meeting of Stockholders to be
held on June 22, 2005, are incorporated by reference into Part III hereof.

TABLE OF CONTENTS AND
CROSS REFERENCE SHEET

Page Number
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PART I Forward Looking Statements 3
Factors That May Affect Our Future Results 3
Item 1. Description of Business 13
Company Overview 13
Material Developments 14
Industry Overview 14
Information Concerning Business Segments and
Geographical Revenues 16
Business Strengths 16
Growth Strategy 18
Acquisitions 19
Recent Developments 20
Products 20
Customers 24
Marketing and Distribution 25
Product Manufacturing and Raw Materials 27
Backlog 28
Competition 28
Employees 29
Research and Development 29
Patents and Trademarks 30
Government Regulation 30
Environmental Laws and Regulations 31
Available Information 31
Discontinued Operations 32
Item 2. Properties 33
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 36

PART II Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 37
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 39
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 60
Item 8. Financial Statements and Supplementary Data 61
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 62
Item 9A. Controls and Procedures 62

PART III 63

PART IV Item 15. Exhibits, Financial Statement Schedules 64

PART I

FORWARD LOOKING STATEMENTS

We believe that it is important to communicate our expectations to our
investors. Accordingly, this report contains discussion of events or results
that have not yet occurred or been realized. You can identify this type of
discussion, which is often termed "forward-looking statements", by such words
and phrases as "expects", "anticipates", "intends", "plans", "believes",
"estimates" and "could be". Execution of acquisition or divestiture strategies,
expansion of product lines and increase of distribution networks or product
sales are examples of issues whose future success may be difficult to predict.
You should read forward-looking statements carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial position, or state other expectations of future performance.
The actions of current and potential new competitors, changes in technology,
seasonality, business cycles and new regulatory requirements are examples of
factors that impact greatly upon strategies and expectations and are outside our
direct control. There may be events in the future that we are not able
accurately to predict or to control. Any cautionary language in this report, and
the risk factors set forth below, provide examples of risks, uncertainties and
events that may cause our actual results to differ from the expectations we
express in our forward-looking statements.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating our business
because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set
forth below, actual results could differ materially from those projected in any
forward-looking statements. Additional risks and uncertainties not presently
known to us, or that we currently consider to be immaterial, may also impact our
business, operating results, liquidity and financial condition. If any of the
following risks occur, our business, operating results, liquidity and financial
condition could be materially adversely affected. In such case, the trading
price of our securities could decline, and you may lose all or part of your
investment.

RISKS RELATED TO OUR INDUSTRY

THE PRODUCTS WE SELL ARE INHERENTLY RISKY AND COULD GIVE RISE TO PRODUCT
LIABILITY AND OTHER CLAIMS.

The products that we manufacture are typically used in applications and
situations that involve high levels of risk of personal injury. Failure to use
our products for their intended purposes, failure to use or care for them
properly, or their malfunction, or, in some limited circumstances, even correct
use of our products, could result in serious bodily injury or death. Given this
potential risk of injury, proper maintenance of our products is critical. Our
products include: body armor and plates designed to protect against ballistic
and sharp instrument penetration; less-lethal products such as less-lethal
munitions, pepper sprays, distraction devices and flameless expulsion grenades;
various models of police batons; rotary and fixed-wing aircraft seating systems;
parachutes; vehicle and hard armoring systems; military helmets; and police duty
gear.

Claims have been made and are pending against certain of our subsidiaries,
involving permanent physical injury and death caused by self-defense sprays and
other munitions intended to be less-lethal. In addition, the manufacture and
sale of certain less-lethal products may be the subject of product liability
claims arising from the design, manufacture or sale of such goods. If these
claims are decided against us and we are found to be liable, we may be required
to pay substantial damages and our insurance costs may increase significantly as
a result. Also, a significant or extended lawsuit, such as a class action, could
also divert significant amounts of management's time and attention. We cannot
assure you that our insurance coverage would be sufficient to cover the payment
of any potential claim. In addition, we cannot assure you that this or any other
insurance coverage will continue to be available or, if available, that we will
be able to obtain it at a reasonable cost. Our cost of obtaining insurance
coverage has risen substantially since September 11, 2001. Any material
uninsured loss could have a material adverse effect on our business, financial
condition and results of operations. In addition, the inability to obtain
product liability coverage would prohibit us from bidding for orders from
certain governmental customers since, at present, many bids from governmental
entities require such coverage, and any such inability would have a material
adverse effect on our business, financial condition, results of operations and
liquidity.

In April 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging, among
other things, that our bullet-resistant soft body armor (vests) manufactured and
sold under the American Body Armor(TM), Safariland(R) and PROTECH(TM) brands, do
not have the qualities and performance characteristics as warranted, thereby
breaching express warranty, implied warranty of merchantability, implied
warranty of fitness for a particular purpose and duty to warn. On August 12,
2004, we reached a preliminary settlement with respect to the class action
lawsuit filed in Duval County, Florida by the Southern States Police Benevolent
Association ("Southern States PBA"). After fairness hearings were held, the
Florida Circuit Court gave final approval to that settlement on November 5,
2004. The other class action lawsuit filed against us by the National
Association of Police Organizations, Inc. ("NAPO"), in Lee County, Florida, was
voluntarily dismissed with prejudice on November 16, 2004.

Pursuant to the terms of the class action settlement with the Southern States
PBA, the warranty on the American Body Armor(TM) Xtreme(R) ZX vest (both NIJ
threat level II and IIIA) has been reduced from 5 years to 2 1/2 years. In
addition, every purchaser of an Xtreme(R) ZX vest has the option to exchange
their vest for either a new ZX vest or any other vest of their choosing from the
American Body Armor(TM), Safariland(R) and PROTECH(TM) product lines plus a
$100.00 transferable rebate coupon applicable towards their next purchase of a
vest. We have also made available on the American Body Armor(TM) website testing
data, protocols and results relating to the testing of our vests. We also
continue to test all of our Zylon(R)-containing vests, and if such testing
demonstrates that the tested vests fail to perform in accordance with their
warranties, we will implement an exchange program for those models on a
reasonably comparable basis to the American Body Armor(TM) Xtreme(R) ZX exchange
program outlined above. Zylon(R) fiber is made by Toyobo, a Japanese
corporation, and is a ballistic fiber widely used in the entire body armor
industry. A final report to the Duval County Court regarding implementation of
the settlement, exchange of vests and on-going testing, will be filed on or
before April 15, 2005. We are also voluntarily cooperating with a request
received in December 2004 from the Department of Justice who is reviewing the
entire industry's use of Zylon(R) fiber in bullet resistant vests.

It should be stressed that our vests are certified by the National Institute of
Justice, have never suffered any penetration in the field and continue to save
lives and protect officers from injury. In fact, neither of the two resolved
class action lawsuits alleged personal injuries of any kind.

Second Chance Body Armor, one of our competitors in the bullet-resistant market,
licenses from Simula a certain patented technology which is used in some of the
body armor it manufactures, but to our knowledge, no lawsuit has been brought
against Second Chance based upon this licensed technology. Although Simula may
be impacted by the pending suits filed against Second Chance regarding its
Zylon(R)-containing vests, the licensed technology is not specifically related
to the use of Zylon(R) fiber. Any adverse resolution of these matters, however,
could have a material adverse effect on our business, financial condition,
results of operations and liquidity.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, AND OUR FAILURE OR INABILITY
TO COMPLY WITH THESE REGULATIONS COULD MATERIALLY RESTRICT OUR OPERATIONS AND
SUBJECT US TO SUBSTANTIAL PENALTIES.

We are subject to federal licensing requirements with respect to the sale in
foreign countries of certain of our products. In addition, we are obligated to
comply with a variety of federal, state and local regulations, both domestically
and abroad, governing certain aspects of our operations and workplace, including
regulations promulgated by, among others, the U.S. Departments of Commerce,
State and Transportation, the Federal Aviation Administration, the U.S.
Environmental Protection Agency and the U.S. Bureau of Alcohol, Tobacco and
Firearms. The U.S. Bureau of Alcohol, Tobacco, and Firearms also regulates us as
a result of our manufacturing of certain destructive devices and by the use of
ethyl alcohol in certain products. We also ship hazardous goods, and in doing
so, must comply with the regulations of the U.S. Department of Transportation
for packaging and labeling. Additionally, the failure to obtain applicable
governmental approval and clearances could adversely affect our ability to
continue to service the government contracts we maintain. Furthermore, we have
material contracts with governmental entities and are subject to rules,
regulations and approvals applicable to government contractors. We are also
subject to routine audits to assure our compliance with these requirements. We
have become aware that we were not in full compliance with certain regulations
governing the export of equipment and related technology used for military
purposes that are applicable to certain of our products. We have made a
voluntary disclosure of such non-compliance to the Office of Defense Trade
Controls Compliance. We are currently in compliance with such regulations and
have undertaken steps to help ensure compliance in the future. We do not believe
that such noncompliance will have a material adverse effect on our business. In
addition, a number of our employees involved with certain of our federal
government contracts are required to obtain specified levels of security
clearances. Our business

may suffer if we or our employees are unable to obtain the security clearances
that are needed to perform services contracted for the U.S. Department of
Defense, one of our major customers. Our failure to comply with these contract
terms, rules or regulations could expose us to substantial penalties, including
the loss of these contracts and disqualification as a U.S. government
contractor.

Like other companies operating internationally, we are subject to the Foreign
Corrupt Practices Act and other laws which prohibit improper payments to foreign
governments and their officials by U.S. and other business entities. We operate
in countries known to experience endemic corruption. Our extensive operations in
such countries create risk of an unauthorized payment by one of our employees or
agents, which would be in violation of various laws including the Foreign
Corrupt Practices Act. Violations of the Foreign Corrupt Practices Act may
result in severe criminal penalties, which could have a material adverse effect
on our business, financial condition, results of operations and liquidity.

WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS AND ASSETS, AND THEREFORE, ARE
SUBJECT TO ADDITIONAL FINANCIAL AND REGULATORY RISKS.

We sell our products in foreign countries and seek to increase our level of
international business activity. Our overseas operations are subject to various
risks, including: U.S.-imposed embargoes of sales to specific countries (which
could prohibit sales of our products there); foreign import controls (which may
be arbitrarily imposed and enforced and which could interrupt our supplies or
prohibit customers from purchasing our products); exchange rate fluctuations;
dividend remittance restrictions; expropriation of assets; war, civil uprisings
and riots; government instability; the necessity of obtaining government
approvals for both new and continuing operations; and legal systems of decrees,
laws, taxes, regulations, interpretations and court decisions that are not
always fully developed and that may be retroactively or arbitrarily applied.

One component of our strategy is to expand our operations into selected
international markets. Military procurement, for example, has traditionally had
a large international base. Countries in which we are actively marketing include
Germany, Canada, France, Italy, the United Kingdom, Norway, Japan, India, Korea
and Australia. We, however, may be unable to execute our business model in these
markets or new markets. Further, foreign providers of competing products and
services may have a substantial advantage over us in attracting consumers and
businesses in their country due to earlier established businesses in that
country, greater knowledge with respect to the cultural differences of consumers
and businesses residing in that country and/or their focus on a single market.
We expect to continue to experience higher costs as a percentage of revenues in
connection with the development and maintenance of international products and
services. In pursuing our international expansion strategy, we face several
additional risks, including:

o foreign laws and regulations, which may vary country by country, that
may impact how we conduct our business;

o higher costs of doing business in foreign countries, including
different employment laws;

o potential adverse tax consequences if taxing authorities in different
jurisdictions worldwide disagree with our interpretation of various
tax laws or our determinations as to the income and expenses
attributable to specific jurisdictions, which could result in our
paying additional taxes, interest and penalties;

o technological differences that vary by marketplace, which we may not
be able to support;

o longer payment cycles and foreign currency fluctuations;

o economic downturns; and

o revenue growth outside of the United States may not continue at the
same rate if it is determined that we have already launched our
products and services in the most significant markets.

We may also be subject to unanticipated income taxes, excise duties, import
taxes, export taxes or other governmental assessments. In addition, a percentage
of the payments to us in our international markets are often in local
currencies. Although most of these currencies are presently convertible into
U.S. dollars, we cannot be sure that convertibility will continue. Even if
currencies are convertible, the rate at which they convert is subject to
substantial fluctuation. Our ability to transfer currencies into or out of local
currencies may be restricted or limited. Any of these events could result in a
loss of business or other unexpected costs, which could reduce revenue or
profits and have a material adverse effect on our business, financial condition,
results of operations and liquidity.

We routinely operate in areas where local government policies regarding foreign
entities and the local tax and legal regimes are often uncertain, poorly
administered and in a state of flux. We cannot, therefore, be certain that we
are in compliance with, or will be protected by, all relevant local laws and
taxes at any given point in time. A subsequent determination that we failed to
comply with relevant local laws and taxes could have a material adverse effect
on our business, financial condition, results of operations and liquidity. One
or more of these factors could adversely affect our future international
operations and, consequently, could have a material adverse effect on our
business, financial condition, results of operation and liquidity.

RISKS RELATED TO OUR BUSINESS

MANY OF OUR CUSTOMERS HAVE FLUCTUATING BUDGETS, WHICH MAY CAUSE SUBSTANTIAL
FLUCTUATIONS IN OUR RESULTS OF OPERATIONS.

Customers for our products include federal, state, municipal, foreign and
military, law enforcement and other governmental agencies. Government tax
revenues and budgetary constraints, which fluctuate from time to time, can
affect budgetary allocations for these customers. Many domestic and foreign
government agencies have in the past experienced budget deficits that have led
to decreased spending in defense, law enforcement and other military and
security areas. Our results of operations may be subject to substantial
period-to-period fluctuations because of these and other factors affecting
military, law enforcement and other governmental spending. A reduction of
funding for federal, state, municipal, foreign and other governmental agencies
could have a material adverse effect on sales of our products and our business,
financial condition, results of operations and liquidity.

THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, U.S. MILITARY BUSINESS WOULD HAVE A
MATERIAL ADVERSE EFFECT ON US.

U.S. military contracts account for a significant portion of our business. The
U.S. military funds these contracts in annual increments. These contracts
require subsequent authorization and appropriation that may not occur or that
may be greater than or less than the total amount of the contract. Changes in
the U.S. military's budget, spending allocations and the timing of such spending
could adversely affect our ability to receive future contracts. None of our
contracts with the U.S. military has a minimum purchase commitment, and the U.S.
military generally has the right to cancel its contracts unilaterally without
prior notice. We are the sole-source provider to the U.S. military for the armor
and blast protection systems (up-armoring) for their High Mobility Multi-purpose
Wheeled Vehicles (Up-Armored HMMWV, commonly known as the Humvee). The HMMWVs
are manufactured by AM General Corporation under separate U.S. military
contracts. Should production or deliveries of HMMWVs be significantly
interrupted, or should other single source suppliers significantly interrupt
deliveries of our components for up-armoring the HMMWVs, we will not be able to
deliver such up-armoring systems for the HMMWVs to the U.S. military on
schedule, which could have a material adverse effect on our business, financial
condition, results of operations and liquidity. We also manufacture for the U.S.
military helicopter seating systems, aircraft and land vehicle armor systems,
protective equipment for military personnel and other technologies used to
protect soldiers in a variety of life-threatening or catastrophic situations.
The loss of, or a significant reduction in, U.S. military business for our
aircraft and land vehicle armor systems, other protective equipment, or
helicopter seating systems could have a material adverse effect on our business,
financial condition, results of operations and liquidity.

A REDUCTION OF U.S. FORCE LEVELS IN IRAQ MAY AFFECT OUR RESULTS OF OPERATIONS.

HMMWVs are one of the primary transport vehicles used by the U.S. military in
Iraq. Since the invasion of Iraq by the U.S. and other forces in March 2003, we
have received steadily increasing orders from the U.S. military for the
up-armoring of HMMWVs and the armoring of other tactical trucks. Orders for the
up-armoring of HMMWVs and the armoring of other tactical trucks are the result,
in significant part, from the particular combat situations encountered by the
U.S. military in Iraq, including the use of improvised explosive devices by
enemy combatants. We cannot be certain, therefore, to what degree the U.S.
military would continue placing armoring orders for its HMMWVs and other
tactical trucks, if the U.S. military were to reduce its force levels or
withdraw completely from Iraq. A significant reduction in orders from the U.S.
military for the armoring of HMMWVs and other tactical trucks, following a
reduction of U.S. force levels in Iraq could have a material adverse effect on
our business, financial condition, results of operations and liquidity.

A REPLACEMENT OF THE HMMWV IN THE U.S. MILITARY MAY AFFECT OUR RESULTS OF
OPERATIONS.

The HMMWV was designed as a replacement for the M151 series of jeeps and the
development of new military vehicles is an on-going process. Currently, several
military transport vehicles are in the development stage and are being evaluated
by the U.S. military as possible next-generation replacements for the HMMWV.
Although we believe that the HMMWV will continue for some time to be one of the
primary transport vehicles in the U.S. military, there is no assurance as to
when a replacement for the HMMWV may be selected. In the event the HMMWV is
replaced, we anticipate that any armoring for a replacement vehicle would be
part of the vehicle's original design and that eventually, our HMMWV up-armoring
business would likely decline. Although we anticipate making significant efforts
to obtain armoring contracts for any HMMWV replacement vehicles selected by the
U.S. military, at this time, we cannot determine to what degree, if any, we
would be able to obtain such military contracts. A significant reduction in
orders from the U.S. military for the up-armoring of HMMWVs and our inability to
obtain new armoring contracts following a replacement of the HMMWV in the U.S.
military could have a material adverse effect on our business, financial
condition, results of operations and liquidity.

WE MAY LOSE MONEY OR GENERATE LESS THAN EXPECTED PROFITS ON OUR FIXED-PRICE
CONTRACTS.

Some of our government contracts provide for a predetermined, fixed price for
the products we make regardless of the costs we incur. Therefore, fixed-price
contracts require us to price our contracts by forecasting our expenditures.
When making proposals for fixed-price contracts, we rely on our estimates of
costs and timing for completing these projects. These estimates reflect
management's judgments regarding our capability to complete projects efficiently
and timely. Our production costs may, however, exceed forecasts due to
unanticipated delays or increased cost of materials, components, labor, capital
equipment or other factors. Therefore, we may incur losses on fixed price
contracts that we had expected to be profitable, or such contracts may be less
profitable than expected, which could have a material adverse effect on our
business, financial condition, results of operations and liquidity.

OUR BUSINESS IS SUBJECT TO VARIOUS LAWS AND REGULATIONS FAVORING THE U.S.
GOVERNMENT'S CONTRACTUAL POSITION, AND OUR FAILURE TO COMPLY WITH SUCH LAWS AND
REGULATIONS COULD HARM OUR OPERATING RESULTS AND PROSPECTS.

As a contractor to the U.S. government, we must comply with laws and regulations
relating to the formation, administration and performance of the federal
government contracts that affect how we do business with our clients and may
impose added costs on our business. These rules generally favor the U.S.
government's contractual position. For example, these regulations and laws
include provisions that subject contracts we have been awarded to:

o protest or challenge by unsuccessful bidders; and

o unilateral termination, reduction or modification by the government.

The accuracy and appropriateness of certain costs and expenses used to
substantiate our direct and indirect costs for the U.S. government under both
cost-plus and fixed-price contracts are subject to extensive regulation and
audit by the Defense Contract Audit Agency, an arm of the U.S. Department of
Defense. Responding to governmental audits, inquiries or investigations may
involve significant expense and divert management's attention. Our failure to
comply with these or other laws and regulations could result in contract
termination, suspension or debarment from contracting with the federal
government, civil fines and damages and criminal prosecution and penalties, any
of which could have a material adverse effect on our business, financial
condition, results of operations and liquidity.

OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY,
WE WILL BE ADVERSELY AFFECTED.

The markets in which we operate include a large number of competitors ranging
from small businesses to multinational corporations and are highly competitive.
Competitors who are larger, better financed and better known than we are may
compete more effectively than we can. In order to stay competitive in our
industry, we must keep pace with changing technologies and client preferences.
If we are unable to differentiate our services from those of our competitors,
our revenues may decline. In addition, our competitors have established
relationships among themselves or with third parties to increase their ability
to address client needs. As a result, new competitors or alliances among
competitors may emerge and compete more effectively than we can. There is also a
significant industry trend towards consolidation, which may result in the
emergence of companies which are better able to compete against us.

THERE ARE LIMITED SOURCES FOR SOME OF OUR RAW MATERIALS, WHICH MAY SIGNIFICANTLY
CURTAIL OUR MANUFACTURING OPERATIONS.

The raw materials that we use in manufacturing ballistic resistant garments,
small arms protective insert ("SAPI") plates and armored vehicles include:
ceramic; steel; SpectraShield, a patented product of Honeywell, Inc.; Z-Shield,
a patented product of Honeywell, Inc.; Zylon(R), a patented product of Toyobo
Co., Ltd.; Kevlar(R), a patented product of E.I. du Pont de Nemours Co., Inc.
("du Pont"); and Twaron, a patented product of Akzo-Nobel Fibers, B.V. We
purchase these materials in the form of woven cloth from five independent
weaving companies. In the event du Pont or its licensee in Europe cease, for any
reason, to produce or sell Kevlar(R) to us, we would utilize these other
ballistic resistant materials as a substitute. However, none of SpectraShield,
Twaron, Z-Shield or Zylon(R) is expected to become a complete substitute for
Kevlar(R) in the near future. We enjoy a good relationship with our suppliers of
Kevlar(R), SpectraShield, Twaron, Z-Shield and Zylon(R). The use of Zylon(R) and
Z-Shield in the design of ballistic resistant vests is a recent technological
advancement that is subject to continuing development and study, including
ongoing review by the NIJ. Toyobo is the only producer of Zylon(R), and
Honeywell is the only producer of Z-Shield. Should these materials become
unavailable for any reason, we would be unable to replace them with materials of
like weight and strength. We use a variety of ceramic materials in the
production of SAPI plates and a variety of steels in armoring vehicles. Although
we have a number of suppliers that we deal with in obtaining both ceramic and
steel supplies, the industry generally, including our operations, is
experiencing a limited supply of these materials, which is affecting the
quantity of product that we can complete in any given period. In addition,
SpectraShield, the ballistic fiber backing used in a variety of our ballistic
applications, including SAPI plates, is currently being rationed by the U.S.
Department of Commerce, which could limit the quantity of SAPI plates that we
produce in any given period. Thus, if our supply of any of these materials were
materially reduced or cut off or if there was a material increase in the prices
of these materials, our manufacturing operations could be adversely affected and
our costs increased, and our business, financial condition, results of
operations and liquidity could be materially adversely affected.

WE MAY BE UNABLE TO COMPLETE OR INTEGRATE ACQUISITIONS EFFECTIVELY, IF AT ALL,
AND AS A RESULT MAY INCUR UNANTICIPATED COSTS OR LIABILITIES OR OPERATIONAL
DIFFICULTIES.

We intend to grow through the acquisition of businesses and assets that will
complement our current businesses. We cannot be certain that we will be able to
identify attractive acquisition targets, obtain financing for acquisitions on
satisfactory terms or successfully acquire identified targets. Furthermore, we
may have to divert our management's attention and our financial and other
resources from other areas of our business. Our inability to implement our
acquisition strategy successfully may hinder the expansion of our business.
Because we depend in part on acquiring new businesses and assets to develop and
offer new products, failure to implement our acquisition strategy may also
adversely affect our ability to offer new products in line with industry trends.

We may not be successful in integrating businesses acquired in the future or
those recently acquired into our existing operations. Integration may result in
unanticipated liabilities or unforeseen operational difficulties, which may be
material or require a disproportionate amount of management's attention. Future
acquisitions may result in us incurring additional indebtedness or issuing
preferred stock or additional common stock. Competition for acquisition
opportunities in the industry may rise, thereby increasing our cost of making
acquisitions or causing us to refrain from making further acquisitions. In
addition, the terms and conditions of our senior credit facility, 2.00% Senior
Subordinated Convertible Notes due November 1, 2024 (the "2% Convertible Notes")
and the indenture governing the 8 1/4% Senior Subordinated Notes due 2013 (the
"8.25% Notes") impose restrictions on us that, among other things, restrict our
ability to make acquisitions.

OUR RESOURCES MAY BE INSUFFICIENT TO MANAGE THE DEMANDS IMPOSED BY OUR GROWTH.

We have rapidly expanded our operations, and this growth has placed significant
demands on our management, administrative, operating and financial resources.
The continued growth of our customer base, the types of services and products
offered and the geographic markets served can be expected to continue to place a
significant strain on our resources. In addition, we cannot easily identify and
hire personnel qualified both in the provision and marketing of our products and
systems. Our future performance and profitability will depend in large part on
our ability to attract and retain additional management and other key personnel;
our ability to implement successful enhancements to our management, accounting
and information technology systems; and our ability to adapt those systems, as
necessary, to respond to growth in our business.

WE ARE DEPENDENT ON INDUSTRY RELATIONSHIPS.

A number of our products are components in our customers' final products.
Accordingly, to gain market acceptance, we must demonstrate that our products
will provide advantages to the manufacturers of final products, including
increasing the safety of their products, providing such manufacturers with
competitive advantages or assisting such manufacturers in complying with
existing or new government regulations affecting their products. There can be no
assurance that our products will be able to achieve any of these advantages for
the products of our customers. Furthermore, even if we are able to demonstrate
such advantages, there can be no assurance that such manufacturers will elect to
incorporate our products into their final products, or if they do, that our
products will be able to meet such customers' manufacturing requirements.
Additionally, there can be no assurance that our relationships with our
manufacturing customers will ultimately lead to volume orders for our products.
The failure of manufacturers to incorporate our products into their final
products could have a material adverse effect on our business, financial
condition, results of operations and liquidity.

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, INCLUDING THE
TECHNOLOGIES WE USE TO FURNISH THE UP-ARMORING OF HMMWVS.

We depend upon a variety of methods and techniques that we regard as proprietary
trade secrets. We also depend upon a variety of trademarks, service marks and
designs to promote brand name development and recognition. We rely on a
combination of trade secret, copyright, patent, trademark, unfair competition
and other intellectual property laws as well as contractual agreements to
protect our rights to such intellectual property. Due to the difficulty of
monitoring unauthorized use of and access to intellectual property, however,
such measures may not provide adequate protection. It is possible that our
competitors may access our intellectual property and proprietary information and
use it to their advantage. In addition, there can be no assurance that courts
will always uphold our intellectual property rights, or enforce the contractual
arrangements that we have entered into to protect our proprietary technology.
Any unenforceability or misappropriation of our intellectual property could have
a material adverse effect on our business, financial condition, results of
operations and liquidity. Furthermore, we cannot assure you that any pending
patent application or trademark application made by us will result in an issued
patent or registered trademark, or that, if a patent is issued, it will provide
meaningful protection against competitors or competitor technologies. In
addition, if we bring or become subject to litigation to defend against claimed
infringement of our rights or of the rights of others or to determine the scope
and validity of our intellectual property rights, such litigation could result
in substantial costs and diversion of our resources, which could have a material
adverse effect on our business, financial condition and results of operations.
Unfavorable results in such litigation could also result in the loss or
compromise of our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties on unfavorable terms, or prevent
us from manufacturing or selling our products, any of which could have a
material adverse effect on our business, financial condition, results of
operations and liquidity.

TECHNOLOGICAL ADVANCES, THE INTRODUCTION OF NEW PRODUCTS, AND NEW DESIGN AND
MANUFACTURING TECHNIQUES COULD ADVERSELY AFFECT OUR OPERATIONS UNLESS WE ARE
ABLE TO ADAPT TO THE RESULTING CHANGE IN CONDITIONS.

Our future success and competitive position depend to a significant extent upon
our proprietary technology. We must make significant investments to continue to
develop and refine our technologies. We will be required to expend substantial
funds for and commit significant resources to the conduct of continuing research
and development activities, the engagement of additional engineering and other
technical personnel, the purchase of advanced design, production and test
equipment, and the enhancement of design and manufacturing processes and
techniques. Our future operating results will depend to a significant extent on
our ability to continue to provide design and manufacturing services for new
products that compare favorably on the basis of time to introduction, cost and
performance with the design and manufacturing capabilities. The success of new
design and manufacturing services depends on various factors, including
utilization of advances in technology, innovative development of new solutions
for customer products, efficient and cost-effective services, timely completion
and delivery of new product solutions and market acceptance of customers' end
products. Because of the complexity of our products, we may experience delays
from time to time in completing the design and manufacture of new product
solutions. In addition, there can be no assurance that any new product solutions
will receive or maintain customer or market acceptance. If we are unable to
design and manufacture solutions for new products of our customers on a timely
and cost-effective basis, such inability could have a material adverse effect on
our business, financial condition, results of operations and liquidity.

WE MAY BE ADVERSELY AFFECTED BY APPLICABLE ENVIRONMENTAL LAWS AND REGULATIONS.

We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. We cannot assure you that we are at all times in
complete compliance with all such requirements. Like all companies in our
industry, we are subject to potentially significant fines or penalties if we
fail to comply with environmental requirements. Environmental requirements are
complex, change frequently, and could become more stringent in the future.
Accordingly, we cannot assure you that these requirements will not change in a
manner that will require material capital or operating expenditures or will
otherwise have a material adverse effect on us in the future. In addition, we
are also subject to environmental laws requiring the investigation and clean-up
of environmental contamination. We may be subject to liability, including
liability for clean-up costs, if contamination is discovered at one of our
current or former facilities, in some circumstances even if such contamination
was caused by a third party such as a prior owner. We also may be subject to
liability if contamination is discovered at a landfill or other location where
we have disposed of wastes, notwithstanding that historic disposal practices may
have been in accordance with all applicable requirements. We use
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with our production of tear gas, and these chemicals are hazardous
and could cause environmental damage if not handled and disposed of properly.
Moreover, private parties may bring claims against us based on alleged adverse
health impacts or property damage caused by our operations. The amount of
liability for cleaning up contamination or defending against private party
claims could be material.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.

Our certificate of incorporation makes us subject to the anti-takeover
provisions of Section 203 of the General Corporation Law of the State of
Delaware. In general, Section 203 prohibits publicly-held Delaware corporations
to which it applies from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. This provision could
discourage others from bidding for our shares and could, as a result, reduce the
likelihood of an increase in our stock price that would otherwise occur if a
bidder sought to buy our stock.

OUR CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE OF SHARES OF BLANK
CHECK PREFERRED STOCK.

Our certificate of incorporation provides that our board of directors will be
authorized to issue from time to time, without further stockholder approval, up
to 5,000,000 shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each series, including the dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption, including
sinking fund provisions, redemption price or prices, liquidation preferences and
the number of shares constituting any series or designations of any series. Such
shares of preferred stock could have preferences over our common stock with
respect to dividends and liquidation rights. We may issue additional preferred
stock in ways which may delay, defer or prevent a change in control of us
without further action by our stockholders. Such shares of preferred stock may
be issued with voting rights that may adversely affect the voting power of the
holders of our common stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting rights.

THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE.

The market price for our common stock may be highly volatile. We believe that a
variety of factors, including announcements by us or our competitors, current
events such as the war in Iraq, quarterly variations in financial results,
trading volume, general market trends and other factors, could cause the market
price of our common stock to fluctuate substantially. Additionally, due to our
relatively modest size, our winning or losing a large contract may have the
effect of distorting our overall financial results.

WE MAY ISSUE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IN CONNECTION WITH FUTURE
ACQUISITIONS, AND THE SALE OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE.

As part of our acquisition strategy, we anticipate issuing additional shares of
common stock as consideration for such acquisitions. To the extent that we are
able to grow through acquisitions and issue shares of our common stock as
consideration, the number of outstanding shares of common stock that will be
eligible for sale in the future is likely to increase substantially. Persons
receiving shares of our common stock in connection with these acquisitions may
be more likely to sell large quantities of their common stock that may influence
the price of our common stock. In addition, the potential issuance of additional
shares in connection with anticipated acquisitions could lessen demand for our
common stock and result in a lower price than would otherwise be obtained.

OUR STOCK PRICE MAY BE ADVERSELY AFFECTED WHEN ADDITIONAL SHARES ARE SOLD.

If our stockholders sell substantial amounts of our common stock in the public
market, the market price of our common stock could fall. These sales might make
it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate and may require us to issue
greater amounts of our common stock to finance future acquisitions. Additional
shares sold to finance acquisitions may dilute our earnings per share if the new
operations' earnings are below expectations.

OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO PAY DIVIDENDS OR MAKE OTHER
DISTRIBUTIONS TO OUR STOCKHOLDERS.

Our debt agreements, such as the indenture governing the 2% Convertible Notes,
the indenture governing the 8.25% Notes and the senior credit facility, contain
certain financial and other covenants that limit, under certain circumstances,
our ability to pay dividends or make other distributions to our stockholders. We
are permitted to pay dividends and make other distributions to stockholders to
the extent we satisfy the conditions, including the financial and other
covenants, contained in such documents.

WE HAVE A HIGH LEVEL OF DEBT.

Our high level of debt could have important consequences to you and to us. For
example:

o No payment of any kind may be made to our common stockholders without
first meeting our obligations under our senior credit facility, the
indenture governing our 8.25% Notes and the indenture governing our 2%
Convertible Notes;

o We may become more vulnerable to general adverse economic and industry
conditions and adverse changes in governmental regulations;

o We may have to dedicate a substantial portion of our cash flow from
operations to make payments required under our senior credit facility,
the 8.25% Notes and the 2% Convertible Notes, reducing the
availability of cash flow to fund future capital expenditures, working
capital, execution of our growth strategy, research and development
costs and other general corporate requirements;

o We may have limited flexibility in planning for, or reacting to,
changes in our business and our industry, which may place us at a
competitive disadvantage compared with competitors that have less debt
or more financial resources;

o We may have limited ability to borrow additional funds, even when
necessary to maintain adequate liquidity; and

o The terms of our senior credit facility and the indentures governing
the 8.25% Notes and 2% Convertible Notes allow us to incur substantial
amounts of additional debt, subject to certain limitations. We might
incur additional debt for various reasons, including to pay for
additional acquisitions that we may make and assuming debt of
companies that we may acquire.

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

We are a leading manufacturer and provider of armored military and commercial
vehicles, armor kits for the retrofit of military vehicles, protective and
security products for law enforcement and military personnel, aircraft armor,
aircraft safety products, survivability equipment used by military aviators and
other personnel protection technologies. Our customers include domestic and
international military, law enforcement, security and corrections personnel and
government agencies, multinational corporations and individuals. We believe our
success is the result of focusing on several core competencies including
engineering, manufacturing and distributing vehicle armoring systems,
high-quality security products and human safety and survival systems.

Our business is comprised of three reportable business divisions: the Aerospace
& Defense Group, the Products Division and the Mobile Security Division. Set
forth below is a brief description of our three business divisions; a more
detailed description begins on page 20 of this annual report under the caption
"Products".

Aerospace & Defense. The Aerospace & Defense Group supplies human safety and
survival systems to the U.S. military and major aerospace and defense prime
contractors. Our core markets are land, marine and aviation safety and military
personnel protection. The most significant business within the Aerospace &
Defense Group is armoring a variety of light, medium and heavy wheeled vehicles
for the military. We are the sole-source provider to the U.S. military of the
armor and blast protection systems for the Up-Armored HMMWV. We also provide
spare parts and logistical and field support services for Up-Armored HMMWVs
previously shipped by us. We also provide blast and ballistic protection kits
for the standard HMMWV which are installed in the field. Additionally, we
develop ballistic and blast protected armored and sealed truck cabs for other
military tactical wheeled vehicles. For example, we provide land vehicle armor
kits for the Heavy Expanded Mobility Tactical Truck ("HEMTT"), Paletized Load
System ("PLS"), Heavy Equipment Transporter ("HET"), M915 and Armored Security
Vehicle ("ASV").

The Aerospace & Defense Group develops and supplies personnel equipment,
including small arms protection inserts ("SAPI") and other engineered ceramic
body armor, helmets, and other protective and duty equipment. Our products
include, among others, Modular Lightweight Load-Carrying Equipment ("MOLLE")
systems, Outer Tactical Vests ("OTVs") and Warrior Helmets. We are currently the
largest supplier of MOLLE systems for the U.S. Army which is a modular rucksack
that can be configured in a number of ways depending on the needs of the
military mission. We also manufactures OTVs which, when used with SAPI plates,
provide enhanced protection against bullets, mines, grenades and mortar and
artillery shells. SAPI plates have been adopted by the U.S. military as a key
element of the protective equipment worn by U.S. troops.

The Aerospace & Defense Group develops and sells military helicopter seating
systems, helicopter cockpit airbag systems, aircraft armor kits, emergency
bailout parachutes and survival equipment worn by military aircrew. The primary
customers for these products are the U.S. Army, U.S. Marine Corps, Boeing and
Sikorsky Aircraft.

Products. Our Products Division manufactures and sells a broad range of high
quality security products and related consumable items such as concealable and
tactical body armor, hard armor, duty gear, less-lethal munitions, anti-riot
products, police batons, emergency lighting products, forensic products,
firearms accessories, weapon maintenance products, foldable ladders, backpacks
and specialty gloves. Our products are marketed under brand names well
established in the military and law enforcement communities through an extensive
network of domestic and international distributors and a specialized sales
force.

Mobile Security. The Mobile Security Division manufactures and installs armoring
systems for commercial vehicles to protect against varying degrees of ballistic
and blast threats for the global marketplace. The Company manufactures these
systems under highly recognized and respected brand names. Armoring systems are
produced for, among others, limousines, sedans, sport utility vehicles,
commercial trucks and cash-in-transit vehicles. Our customers include U.S.
federal law enforcement and intelligence agencies, foreign heads of state,
multinational corporations, affluent individuals and cash-in-transit operators.

MATERIAL DEVELOPMENTS

Zylon(R) Investigation

Pursuant to the terms of the class action settlement with the Southern States
PBA, the warranty on the American Body Armor(TM) Xtreme(R) ZX vest (both NIJ
threat level II and IIIA) has been reduced from 5 years to 2 1/2 years. In
addition, every purchaser of an Xtreme(R) ZX vest has the option to exchange
their vest for either a new ZX vest or any other vest of their choosing from the
American Body Armor(TM), Safariland(R) and PROTECH(TM) product lines plus a
$100.00 transferable rebate coupon applicable towards their next purchase of a
vest. We have also made available on the American Body Armor website testing
data, protocols and results relating to the testing of our vests. We also
continue to test all of our Zylon(R)-containing vests, and if such testing
demonstrates that the tested vests fail to perform in accordance with their
warranties, we will implement an exchange program for those models on a
reasonably comparable basis to the American Body Armor(TM) Xtreme(R) ZX exchange
program outlined above. Zylon(R) fiber is made by Toyobo, a Japanese
corporation, and is a ballistic fiber widely used in the entire body armor
industry. A final report to the Duval County Court regarding implementation of
the settlement, exchange of vests and on-going testing, will be filed on or
before April 15, 2005. We are also voluntarily cooperating with a request
received in December 2004 from the Department of Justice who is reviewing the
entire industry's use of Zylon(R) fiber in bullet resistant vests.

INDUSTRY OVERVIEW

We participate in the domestic and international markets for military and
commercial security products and armoring systems. Our Aerospace & Defense Group
is a provider of military helicopter seating systems, aircraft and land vehicle
armor systems, protective equipment for military personnel, mobile security
systems used by militaries, MOLLE systems, OTVs, combat helmets and other
technologies used to protect humans in a variety of life-threatening or
catastrophic situations. Our Products Division manufactures and markets a broad
range of high quality security products, equipment and related consumable items
used by military, law enforcement, security and corrections personnel, and other
first responders (e.g., fire and rescue personnel). Our Mobile Security Division
manufactures and installs ballistic and blast protection armoring systems for
commercial vehicles to protect against varying degrees of ballistic and blast
threats that are used by government agencies, law enforcement personnel,
corporations and private individuals. Increasingly, governments, militaries,
businesses, and individuals have recognized the need for security products to
protect them from the risks of terrorism, physical attacks and threats of
violence.

The U.S. government has placed a high priority on fighting terrorism overseas
and securing the homeland from future terrorist attacks. This effort has led
many institutions within the government and private sector to redefine their
strategies to protect against, respond to, and combat terrorism. The creation of
the Department of Homeland Security is one significant step in a reformed and
reorganized effort to make our homeland more secure and better able to respond
in the event of an attack. The Bush Administration's fiscal 2005 budget request
included $40.7 billion for homeland security spending. While it is impossible to
quantify the effects that spending by the U.S. government on homeland security
will have on our businesses, we expect to benefit to the extent that spending is
allocated to increase the number of law enforcement personnel, to purchase
security equipment and consumables used in equipping and training these
personnel, and the armoring of vehicles.

Vehicle Armor Market. Recent conflicts, military actions, and protracted
involvement in peacekeeping missions around the globe have increased the demand
for rapidly deployable and highly mobile armored vehicles. The Up-Armored HMMWV
has proven its ability to survive front-line combat action in Bosnia, Kosovo,
Afghanistan, and Iraq. The Government Electronics and Information Technology
Association, a defense budget forecasting service, estimates that between 2003
and 2007, over $2.2 billion will be spent by the U.S. military for HMMWV
procurement and research and development efforts. The continuing terrorist
attacks on U.S. forces deployed in Iraq and Afghanistan have created significant
interest in providing armor protection for the full range of light, medium and
heavy vehicles. Congressional testimony provided by the U.S. Army leadership has
indicated a desire to procure armor kits for these vehicles that can be
installed on the vehicle at its deployed location. Foreign governments and
militaries are also investing in armored vehicle technology, including the
Up-Armored HMMWV, and other armored vehicle alternatives. In addition, we
believe that the use of lightly armored commercial vehicles in countries with
high levels of crime, terrorism and violence ("high fright areas") around the
world will continue to increase as corporations, foreign governments and wealthy
individuals re-evaluate their personnel protection policies and procedures.

Military Aviation Safety Market. The military aviation safety market is
comprised of three distinct market segments: crash safety, ballistic
survivability, and personnel safety equipment. The primary market for crash
safety is in military helicopters. The marketplace for these features is a
subset of the military helicopter market. The products include crashworthy
seats, airbags, landing gear, fuel systems, and structures. Demand for these
products is currently flat, although there is an expected upturn in the market
for upgrades to aircraft such as the U.S. Army's UH-60M Black Hawk and for
replacement of a wide range of U.S. military helicopters that have been damaged
in combat operations. The ballistic survivability market is both for helicopters
and fixed wing aircraft. Many front line aircraft have some basic armor
protection. There is a growing interest in new protective solutions that can
offer more complete ballistic protection within the limited available weight on
an aircraft. Foreign markets for crash safety and ballistic survivability
products are similar in size to the U.S. market, although the types of aircraft
and customer base are more fragmented. The personnel safety market for aviators
and passengers of aircraft include equipment such as body armor, uniforms and
helmets, survival vests and survival equipment, inflatable life preservers,
parachutes, and emergency oxygen. The market is experiencing some growth as new
ensembles incorporating lessons learned from combat are introduced and
replacement equipment is increased due to the increased pace of operations.

Military Personnel Body Armor Market. A revolution is taking place in the type
and extent to which U.S. forces are being provided protective body armor. In
1998, the Army and Marines adopted a new body armor ensemble called Interceptor.
This ensemble is made up of a soft armor vest for fragmentation protection
(using similar materials and design concepts to law enforcement vests) and hard,
ceramic body armor plates, known as SAPI, inserted into the soft vest to provide
rifle protection over vital organs. The concept was first deployed in a combat
zone in Afghanistan with tremendous success measured in the reduction of
life-threatening chest wounds. During the invasion of Iraq, front line U.S.
forces were widely equipped with the Interceptor system. The use of the
Interceptor system was extended to cover all deployed troops in the combat zone
by order of the Secretary of the Army in mid-2003. Extensive procurement actions
by the Army and Marines are underway to outfit all active, Reserve and National
Guard troops that could be deployed around the world. The market is substantial
and is straining the capacity of the industry to support the need. The product
has a life cycle in use and we expect there will be a sizable ongoing
replacement market in the future. In 2000, the U.S. Special Forces developed a
new combat helmet called the Modular Integrated Communications Helmet ("MICH")
which took advantage of new technologies. Today the US Army has adopted this
helmet design as its standard and is planning to equip all soldiers with the
helmet by the end of 2008.

Law Enforcement Security Products Market. According to the most recent data
available from the Department of Justice, direct expenditures for police
protection services in the United States grew at a compound annual growth rate
of 7.3% from 1984 through 1999, to a total of $65.4 billion in 1999. We
currently believe that this growth rate will continue, as will the growth in the
number of police officers and other first responders in the United States. The
Bush Administration estimates that there are more than 1.9 million first
responders in the United States, categorized as follows:

o Over 17,000 state and local law enforcement agencies employing more
than 700,000 full-time sworn law enforcement personnel.

o 69 federal law enforcement agencies employing more than 88,000
persons.

o Over 1 million firefighters, of which approximately 750,000 are
volunteers

o Over 155,000 nationally registered emergency medical technicians.

INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

For information concerning our business segments and geographical revenues,
please refer to Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 13 to our Consolidated Financial
Statements included elsewhere in this report.

BUSINESS STRENGTHS

We believe that the following strengths are critical to our success as a leading
provider of specialized security products, training and support services, human
safety and survival systems and vehicle armor systems.

Long-Term Relationships with Government and Military Customers. We derive the
majority of our revenues from domestic and foreign law enforcement, government
and military customers. Over many years, we have developed strong relationships
with military, law enforcement, security and corrections customers both in the
U.S. and overseas. We believe that our reputation and longstanding relationships
with customers support our continued growth.

Sole-Source Provider of Up-Armored HMMWVs. We are the sole-source provider of
up-armoring and have developed and own the proprietary technology for new
Up-Armored HMMWVs procured by the U.S. military. Since August 2001, we have
furnished the up-armoring for approximately 5,400 Up-Armored HMMWVs to the U.S.
military. We are also currently under contract to provide spare parts, logistics
and ongoing field support services for the U.S. military's Up-Armored HMMWV
fleet. In addition, we have provided up-armoring of HMMWVs to a number of
foreign military customers including Canada, Egypt, Slovenia and Israel.

Extensive Portfolio of Armor Kits for Military Trucks. The two predominant
developers and manufacturers of mine blast and ballistic protection kits for
military trucks over the last 10 years have been O'Gara-Hess & Eisenhardt and
Simula. With these two organizations together in our Aerospace & Defense Group,
we are able to provide a complete portfolio of kit designs for light, medium and
heavy trucks for the U.S. military and foreign militaries. We are also able to
provide the complete capability of armor technologies, from basic steel armors
to sophisticated ceramic/composite armor systems.

Sole-Source Provider of Aviation Safety Products. We are the sole-source
provider for the following military crew seating systems: UH-60A/L and UH-60M
Black Hawk helicopter, MH-60S and MH-60R Sea Hawk helicopter, AH-1Z Cobra Venom
attack helicopter, AH-64 Apache attack helicopter, UH-1Y Super Huey utility
helicopter and the V-22 Osprey tilt-rotor aircraft. We are the sole-source
provider for the C-17 centerline and side-wall fixed-wing military seating
systems and are the sole-source supplier selected by the U.S. Air Force to
develop a common wall-mounted troop seat for its C-130, C-141 and KC-135
aircraft. Additionally, we are sole-source provider of cockpit airbag systems
for the UH-60 Black Hawk helicopter and the OH-58 Kiowa Warrior helicopter.

Leading Innovator in Load Carrying Equipment. Specialty Defense was the first
producer of the US Army's MOLLE and continues to be the largest supplier of
MOLLE's to the US Government. This load carriage system has allowed the Army to
adapt a single system to mission specific requirement of the individual soldier.
Our association with the MOLLE program resulted in the government making
Specialty Defense the sole licensee of the MOLLE technology for commercial
application. The company has been able to use the MOLLE technology throughout
its development of backpacks, chest harnesses, and accessories for military,
tactical, and law enforcement markets..

Industry-leading Market Position in Body Armor. We manufacture body armor for
the law enforcement community. Within the Armor Holdings family of companies
resides industry-leading technology for the design and manufacturing of soft
body armor designed to protect against handgun threats and, in some cases, other
threats encountered in the line of duty. By virtue of the volume of soft armor
produced by us, we have developed significant supply relationships with fiber
and material suppliers that enable us to manage our costs and obtain proprietary
materials, each of which gives us a market advantage. With the acquisition of
Simula and evolving product lines at PROTECH(TM), we are well positioned in the
hard body armor plates market. The SAPI plates being manufactured at Simula and
PROTECH(TM) are in extremely high demand and are the primary body armor plates
being procured by the U.S. Army and Marine Corps and some special police units
to augment the soft vest to provide rifle protection. At Specialty Defense the
company manufactures the Warrior Advanced Combat Helmet for the US Army, and US
Special Forces.

Valuable Brands with Leading Market Positions. Our products and brands are well
established and have developed a reputation for high quality and dependability.
Due to the life-protecting nature of many of our products, customers prefer
premium, well-recognized brands with quality reputations. We believe that our
strong brand recognition attracts customer loyalty and repeat customer business
and helps us establish leading market share positions with many of our product
offerings.

Broad Portfolio of Products. Our broad product portfolio and our ability to
offer that portfolio in both domestic and overseas markets result in a balanced
revenue mix. Our broad array of security products and armor systems allows us to
be a single-source provider of comprehensive solutions for our customers'
security needs. Cross selling among our products creates additional business
opportunities and increases the value of our client relationships. We believe
that we have superior technology and know-how, which enhance our efforts to
develop new products.

Extensive Distribution Network. We market and deliver our products through an
extensive network of approximately 260 domestic distributors and 200
international distributors, and through a sales force of approximately 40
representatives and specialists. We believe that we have one of the largest
distribution networks of security products, which provides a foundation for our
continued growth and expansion. The diversity of the markets we serve and the
strength of our distribution relationships reduce our dependence on any
particular product, market or customer.

World Leader in Vehicle-Armoring Systems. We have been the world leader in the
vehicle-armoring systems market for over 50 years. Serving clients in some 80
countries on five continents, from U.S. President Truman in the 1940s, to a
current list of over 60 heads-of-state and countless corporate leaders, we have
defeated the threat of violence and delivered the highest level of protection to
the most important people at the most critical times. We offer the industry's
widest selection of protected vehicles, ranging from handgun protection against
random street violence, all the way to protection against assault rifle
ammunitions and even blast protection. Our product range includes armored
passenger vehicles, Cash-In-Transit Vehicles and special purpose vehicles. We
are a pioneer in developing ballistics performance standards, and maintain the
world's largest commercial ballistics database. We have three state-of-the-art
ballistic glass manufacturing facilities, located in the U.S. and Latin America.
Ballistic glass manufactured at these facilities meet the most stringent
standards for esthetical quality and ballistic performance.

Experienced Management Team. Our management team brings extensive knowledge of
our customers and a proven ability to effectively manage our operations. The
core of our management team has been together as a group since 1996. Since then
the team has been augmented through acquisitions in the area of engineering and
research and development to provide the capability to develop a range of new
products. In addition, our management has a proven record of identifying,
executing and integrating strategic acquisitions into our business, including
our largest acquisitions to date: Specialty Defense and Bianchi in 2004, Simula
in 2003 and the O'Gara group of companies in 2001.

GROWTH STRATEGY

We believe the demand for security products, vehicle armor systems and human
safety and survival systems will continue to grow. We expect to address this
growth by offering a comprehensive array of high quality branded security
products to meet the needs of law enforcement and militaries around the globe.
We also expect to continue to develop ballistic and blast protection for
high-end commercial vehicles as well as for military vehicles. We intend to
enhance our leadership position through additional strategic acquisitions by
creating a broad portfolio of products and services to satisfy all of our
customers' increasingly complex security products needs. The following elements
define our growth strategy:

Focus on Core Competencies. Our primary strength lies in our ability to
manufacture and distribute high quality security products, vehicle armoring
systems and human safety and survival systems. We plan to leverage this core
strength by expanding our research and development efforts, developing new
products and acquiring businesses that complement our existing technical base
and manufacturing operations. We plan to continue to streamline our
manufacturing process, aggressively integrate acquisitions and pursue additional
operating efficiencies to maximize the profitability of our business.

Expand Distribution Network and Product Offerings. We plan to leverage our
distribution network by investing in the development of new and enhanced
products that complement our existing offerings and by expanding our range of
branded law enforcement equipment through the acquisition of security products
manufacturers. We believe that a broader product line will further strengthen
our relationships with distributors and enhance our brand appeal with military,
law enforcement and other end users.

Increase Exposure to Military Programs. As the sole-source provider of
Up-Armored HMMWVs for the U.S. military, we believe that we are in a strong
position to capture opportunities to provide armoring of additional vehicles for
the U.S. Department of Defense. We believe the proven success of Up-Armored
HMMWVs in combat has led to increased interest in up-armoring other vehicles.
Examples include recent successful efforts to develop and supply armor kits for
various types of light through heavy tactical trucks and the continued
relationship with the original equipment manufacturers to explore up-armoring
opportunities for the U.S. Army's tactical vehicle fleet. We believe that the
cost and time required to develop an alternative protection system increases the
likelihood that we will maintain our sole source position on this program and
capture additional programs.

Capitalize on Increased Homeland Security Requirements. The creation of the
Department of Homeland Security has increased the U.S. government's focus on
strengthening the infrastructure of homeland security. Our Products Division is
well positioned to provide security equipment and materials required by
military, law enforcement and security personnel to combat terrorism, respond to
attacks and counter homeland threats. Our Mobile Security Division is well
positioned to provide armored vehicles for federal, state and local government
agencies.

Pursue Strategic Acquisitions. Since January 1, 1996, we have completed 24
acquisitions, including Specialty Defense and Bianchi, and integrated the
acquired businesses into our Aerospace & Defense Group, Products Division, and
Mobile Security Division. On November 19, 2004, we entered into a merger
agreement pursuant to which we agreed to acquire Specialty Defense. On December
30, 2004, we entered into a merger agreement pursuant to which we agreed to
acquire Bianchi. We will continue to seek opportunities to make value-based
acquisitions that complement our business operations or expand our product
offerings, improve our technology, provide access to new geographic markets or
provide additional distribution channels and new customer relationships. We have
historically taken a disciplined, value-based approach to evaluating acquisition
opportunities, driven by a prudent use of our capital, rigorous due diligence
standards and a targeted expected return on our investment.

ACQUISITIONS

We pursue a strategy of growth through acquisition by acquiring businesses and
assets that complement our existing operations. We exercise a high degree of
financial discipline and strictly adhere to the following criteria to evaluate
prospective acquisitions, including whether the business to be acquired:

o broadens the scope of products we offer or the geographic areas we
serve;

o offers attractive margins;

o is accretive to earnings;

o offers opportunity to improve profitability by increasing the
efficiency of our operations;

o is managed in a manner consistent with our existing businesses; and

o complements our portfolio of existing businesses by increasing our
ability to meet our customers' needs.

We have completed 24 acquisitions in continuing operations since January 1,
1996. The following table sets forth information regarding each of these
acquired businesses and their respective products:

YEAR OF
BUSINESS OR ASSETS ACQUIRED ACQUISITION DIVISION PRIMARY PRODUCT CATEGORIES
--------------------------- ----------- -------- --------------------------

Bianchi International 2004 Products Duty Gear
The Specialty Group, Inc. 2004 Aerospace & Soldier Equipage
Defense
Kleen-Bore, Inc. 2004 Products Firearm Cleaning Kits
Vector Associates, Inc. (dba ODV, Inc.) 2004 Products Narcotic Identification Kits
Hatch Imports 2003 Products Specialty Gloves and Accessories
Simula 2003 Aerospace & Human Safety and Survival Systems
Defense
911 Emergency Products 2002 Products Warning and Emergency Lighting, Safety
Products
Trasco Bremen 2002 Mobile Security Commercial Vehicles
B-Square 2002 Products Firearm Accessories
Foldable Products Group 2002 Products Safety Products
Evi-Paq 2002 Products Forensics
Speedfeed 2002 Products Firearm Accessories
Identicator 2001 Products Forensics
O'Gara-Hess & Eisenhardt Companies 2001 Aerospace & Commercial and Military Vehicles
Defense and
Mobile Security
Guardian Products 2001 Products Less Lethal Products
Monadnock Lifetime Products 2000 Products Police Batons
Lightning Powder 2000 Products Forensics
Break Free 2000 Products Weapons Maintenance Products
Safariland 1999 Products Duty Gear
Federal Laboratories 1998 Products Less Lethal Products
Protech Armored Products 1998 Products Hard Armor
Supercraft Limited 1997 Products Military Apparel & Outerwear
Defense Technology 1996 Products Less Lethal Products
NIK Public Safety 1996 Products Forensics

RECENT DEVELOPMENTS

Bianchi International Acquisition

On December 30, 2004, we acquired all of the outstanding stock of Bianchi
International ("Bianchi") for $60 million in cash. Bianchi is a manufacturer and
supplier of duty and concealment holsters, belts and accessories under the
Bianchi(R) brand name used primarily by law-enforcement, private security and
military personnel. A supplier of the SPEAR rucksack system for U.S. Special
Operations Forces, Bianchi is also a market leader in the commercial market for
medium and large technical internal frame backpacks and high-end daypacks,
satchels and carrying cases under the Gregory(R) brand name.

The Specialty Group, Inc. Acquisition

On November 18, 2004, we acquired all of the outstanding stock of The Specialty
Group, Inc. ("Specialty Defense") for $92 million in cash, which includes the
assumption of certain outstanding debt. Specialty Defense, based in Dunmore,
Pennsylvania, is a supplier to military and law enforcement customers in the
United States and overseas. Specialty Defense manufactures, among other things,
MOLLE systems, OTVs and Warrior Helmets. Specialty Defense's core products are
made of Kevlar(R) and heavy-duty nylon fabric and webbing and require special
cutting and sewing techniques. Specialty Defense is currently the largest
supplier of MOLLE systems for the U.S. Army. The MOLLE system consists of a
modular rucksack with removable compartments and components and a fighting load
vest with removable pockets for the Rifleman, Pistol, Squad Automatic Weapon
Gunner, Medic and Grenadier configurations. Specialty Defense manufactures OTVs,
which, when used with SAPI plates, provide enhanced armor protection for U.S.
armed forces against mines, grenades, mortar shells, artillery fire and rifle
projectiles. Specialty Defense is one of the three largest suppliers of Warrior
Helmets for the U.S. Army. Specialty Defense also manufactures NATO PASGT
helmets, the Advanced Combat Vehicle Crewman helmet and the Warrior Helmet (the
U.S. Army's next generation helmet), along with related liners and accessories.

PRODUCTS

AEROSPACE & DEFENSE GROUP

We are a provider of ballistic and blast protection-armoring systems for
military vehicles, armored helicopter seating systems, other safety and armoring
systems for military aircraft, and protective equipment for military personnel,
as well as other technologies used to protect humans in a variety of
life-threatening or catastrophic situations. Our military vehicular and aircraft
products are deployed on a wide range of high-profile military platforms
including, among others, the HMMWV and the AH-64 Apache and UH-60 Black Hawk
helicopters. Our body-worn personnel protection equipment is used by the U.S.
Army, Marine Corps, and Air Force Special Operations Forces. Primary customers
include the U.S. military, Boeing, Sikorsky, Bell Helicopter, Oshkosh Truck,
General Motors and the U.S. Coast Guard.

Vehicle Products. Our expertise in military vehicle safety systems focuses on
armor kits for tactical vehicles and ballistic armor systems for combat
vehicles. We are the sole-source provider to the U.S. military of Up-Armored
HMMWVs. The HMMWV chassis is produced by AM General Corporation and shipped
directly to our facility in Fairfield, Ohio, where up-armoring components are
added. The Up-Armored HMMWVs provide exterior protection against various levels
of armor piercing ammunition, overhead airburst protection and underbody blast
protection against anti-tank and anti-personnel mines. In addition, we install
other features designed to enhance crew safety, comfort and performance, such as
air conditioning, weapon turrets and mounts, door locks and shock absorbing
seats. We also supply engineering design and prototype services in support of
the Up-Armored HMMWV program, and supply spare parts and logistics and ongoing
field support services. None of our contracts with the U.S. military have a
minimum purchase commitment and the U.S. military generally has the right to
cancel its contracts unilaterally, at its convenience.

Our experience in high-performance, lightweight armor for aircraft has enabled
us to build a business around armoring thin-skinned vehicles for priority
missions during peacekeeping operations. Work in this area includes ballistic
and mine-blast kits for HMMWVs, 5-ton trucks, and heavy transport trucks all of
which are being produced in our Phoenix, Arizona facility. We are currently
under contract to supply armor kits for HMMWVs and for four platforms of heavy
transport trucks. We also supply engineering design and prototype services in
support of the kit programs, and supply spare parts and logistics and ongoing
field support service. Our main customers for these kits are the U.S. Army and
Marine Corps. Our military vehicle armor business also includes production armor
kits for the ASV (Armored Security Vehicle) - a small armored personnel carrier
used by military police in a peacekeeping role. Similar armor kits are also
provided for the U.S. Army's Stryker vehicle and we produce armored and sealed
truck cabs for the HIMARS (High Mobility Artillery Rocket System). In addition,
as a defense subcontractor, we produce various other armor systems including
armor for fuel containers, missile launchers and pilot protection.

Aviation Safety Systems. Our core capabilities and technologies in the aircraft
safety market include protective seating, inflatable restraints, and armor. We
have been a major supplier of crash-resistant, energy-absorbing seating systems
for military helicopters and other military aircraft to various branches of the
U.S. military and its prime defense contractors, and foreign customers.

We currently supply a substantial portion of the new and replacement crew
seating systems for U.S. military helicopters many of which incorporate our
armor systems. We are the sole supplier of crew seats for 14 different
helicopter models and other variants of these aircraft including the AH-64
Apache attack helicopter, UH-60 Black Hawk utility helicopter, SH-60 Sea Hawk
ASW helicopter, ASW and Transport helicopters, Italy's EH101 MMI ASW and
Transport helicopters, Canada's CH-149 Cormorant Search-and-Rescue helicopter,
and Norway's Sea King Multi-role helicopter. Our customer base includes, among
others, Boeing Helicopters, Sikorsky Aircraft Corporation and Bell Helicopter
and we also supply crew seats directly to various agencies of the U.S.
Department of Defense and various foreign militaries. We also manufacture troop
seats for both helicopters and fixed-wing aircraft including the C-17
Globemaster. Our expertise in helicopter crash safety led to the development of
cockpit airbag systems for the U.S. Army. Our role has evolved into the position
of a helicopter cockpit system integrator incorporating airbags, gas generators
and three-dimensional crash sensors.

Military Personnel Safety Systems and Equipment. Our core products in personnel
safety and equipment include ballistic body armor, helmets, load-carrying gear,
emergency bailout parachutes and other survival equipment. Our military body
armor business includes a range of hard armor plates used in conjunction with
soft vests to minimize injury from handgun and rifle bullets and fragments from
explosive warheads. The primary product in this line is the SAPI plate which has
now become a standard item for all U.S. Army and Marine Corps ground troops.

We also design and manufacture equipment for military personnel including
ballistic vests, helmets, and load carrying products. Through our Specialty
Defense subsidiary, we are a major supplier of soft ballistic vests to our
military customers and have produced various vest types for ground troops,
combat vehicle crewman, and airmen. Today, we are one of three suppliers of the
Interceptor OTV Program. Specialty Defense has also been an innovator in
ballistic composite helmet manufacturing since the military's transition from
steel helmets in the 1980's. Today, we manufacture several versions of the
PASGT, CVC, and Warrior (ACH) helmets which allow us to tailor our helmets to
our customers' needs. We are also one of the largest domestic manufacturers of
heavy weight fabric equipment. We currently supply the U.S. Military with the
MOLLE, Large Field Pack with Internal Frame and a variety of tactical chest
rigs.

Additionally, we manufacture parachute systems including our Thin-Pack Parachute
which incorporates patented environmental sealing technology which reduces
repackaging and maintenance costs and extends the service life of the parachute.
We have also developed a line of flotation collars that are designed to provide
additional buoyancy for a person that enters water in an emergency that can fit
a wide range of applications. Our flotation collars have been adopted by the
U.S. Navy, U.S. Marine Corps and the U.S. Air Force.

Technology Development and Licensing. An important part of our business is a
growing portfolio of licensed technologies. Our principal licenses include soft
armor and a patented family of transparent polymers. Our patented and
proprietary transparent plastics are high-strength, impact resistant,
lightweight and dye compatible which possess the ability to withstand extreme
temperatures and chemical attack. Potential uses for such materials include
transparent armor, laser protection, aircraft canopies, high performance windows
for aircraft and automobiles, industrial and protective lenses and visors,
medical products and sun, sport and ophthalmic lenses.

ARMOR HOLDINGS PRODUCTS

Body Armor. We manufacture and sell a wide array of armor products under the
leading brand names American Body Armor(TM), Safariland(R), ArmorWear(R) and
PROTECH(TM) Tactical that are designed to protect against bodily injury caused
by bullets, knives and explosive shrapnel. Our principal armor products are
ballistic resistant vests, sharp instrument penetration armor, hard armor such
as shields and upgraded armor plates, blast suppression blankets and bomb
protective gear. Our line of ballistic protective vests provides varying levels
of protection depending upon the configuration of ballistic materials and the
standards (domestic or international) to which the armor is built. We primarily
sell ballistic resistant concealable vests, under the brand names Xtreme(R),
Impulse(TM), Matrix(R), and Zero-G(R). Our body armor products that are
manufactured in the United States are certified under guidelines established by
the National Institute of Justice. We also manufacture body armor in Manchester,
England that is certified under various international standards.

We offer three types of body armor, concealable, corrections and tactical armor.
Concealable armor, which generally is worn beneath the user's clothing, is our
basic line of body armor. Tactical and corrections armor is typically worn
externally and is designed to provide protection over a wider area of a user's
body and defeat higher levels of ballistic or sharp instrument threats. Tactical
vests, which are usually manufactured with hard armor ballistic plates that
provide additional protection against rifle fire, are designed to afford the
user maximum protection and may be purchased with enhanced protection against
neck and shoulder injuries. Tactical armor is offered in a variety of styles,
including tactical assault vests, floatation vests, high coverage armor and flak
jackets. We market our tactical vests under the Trimax, TAC 6 and RPM brand
names.

Our sharp instrument penetration armor is designed primarily for use by
personnel in corrections facilities and by other law enforcement employees who
are primarily exposed to threats from knives and other sharp instruments. These
vests are constructed with special, blended fabrics, as well as flexible woven
fabrics and are available in both concealable and tactical models. In addition,
these vests can be combined with ballistic armor configurations to provide
"multi-threat protection" against both ballistic and sharp instrument
penetration.

We also distribute a variety of items manufactured by others, including helmets,
goggles, and face shields for protection from blunt trauma and explosive
shrapnel.

Duty Gear. We are a leading supplier of holsters, belts and accessories for law
enforcement, commercial and military customers worldwide. Uniformed and plain
clothes officers require an assortment of duty gear, which typically include
items such as belts, security holsters, handcuff cases, and flashlight holders.
We manufacture and sell duty gear and commercial offerings under the widely
recognized Safariland(R) and Bianchi(R) brands, which include Nylok(R),
Safari-Laminate(TM), AccuMold(R), AccuMold(R) Elite(TM), and Ranger(TM), as well
as traditional, high quality leather.

Less-Lethal Products. Under the Defense Technology/Federal Laboratories(R),
First Defense(R), MACE(R) for Law Enforcement and Guardian(TM) brands, we
manufacture and sell a complete line of less-lethal, anti-riot and crowd control
products designed to assist law enforcement and military personnel in handling
situations that do not require the use of deadly force. These products, which
generally are available for use only by authorized public safety agencies,
include pepper sprays, tear gas, specialty impact munitions and diversionary
devices. We also market and distribute gas masks to law enforcement and public
safety agencies in the United States.

We hold an exclusive license to use the MACE(R) brand in connection with the
manufacturing and sale of MACE(R) aerosol sprays to law enforcement entities
worldwide. We also manufacture pepper sprays with a patented formula under the
brand name First Defense(R). The products range from small "key-ring" and hand
held units to large volume canisters for anti-riot and crowd control
applications. We also manufacture a wide range of specialty impact munitions
that can be used against either individual targets or in anti-riot and crowd
control situations.

Tactical Products; Structural Armor Systems. We manufacture hard armor products
under the PROTECH(TM) brand name. PROTECH(TM) products include ballistic shields
and other personnel protection accessories and armor products for aircraft,
automobiles and riot control vehicles.

We also manufacture a variety of hard armor ballistic shields primarily for use
in tactical clearance applications and ballistic resistant enclosures for use as
guard booths, shacks and towers. These shields are manufactured using a variety
of ballistic fibers, polyethylene ballistic materials, ballistic steel,
ballistic glass or a combination of

these materials. Other hard armor products include barrier shields and blankets.
These products allow tactical police officers to enter high-threat environments
with maximum ballistic protection.

Other protective and law enforcement equipment. We design, manufacture,
assemble, distribute and market a number of other protective and law enforcement
equipment including portable narcotic identification kits; evidence collection
equipment; finger print products and related specialized products; batons of
wood, alloy steel, acetate, aluminum and polycarbonate products; various firearm
accessories such as non-destructive, non-gunsmith mounts as well as synthetic
stocks and forends; aluminum and steel firearm sight mounts, tools and
accessories; firearms cleaning kits and related accessories; synthetic based
lubricants, cleaners and preservative compounds; emergency lighting products
using LED technology; strong, lightweight and compact ladders designed to be
deployed quickly in emergency situations; high quality gloves, tactical eyewear
and other protective gear. These products are primarily used by patrol officers,
detectives, correction officers, other law enforcement personnel, the military,
federal agencies, and sporting goods and industrial markets. These products are
marketing under several well known brand names such as ODV(TM), NIK(R),
NarcoTest(R), NarcoPouch(R), Identicator(R), Lightning Powder(R), Evi-Paq(R),
Monadnock(R), Speedfeed(R), B-Square(R), Kleen-Bore, 911EP(R), Exo-Tech(TM),
Specialist(R), Operator(R), Centurion(TM), Hatch(R), and Thermal-Air(TM). We
also are a market leader in medium and large internal frame backpacks with our
Gregory(R) brand of retail high-end sporting goods products.

ARMOR MOBILE SECURITY

Commercial Products. We provide armor systems with ballistic and blast
protection for a variety of vehicles, including limousines, sedans, sport
utility vehicles, commercial trucks and cash-in-transit vehicles. We manufacture
these systems under the highly recognized and respected brand names of
O'GARA-HESS & EISENHARDT ARMORING COMPANY(TM), ARMOR MOBILE SECURITY FRANCE,
ARMOR MOBILE SECURITY GERMANY (TRASCO(TM)) and IMPAK(TM). The commercial vehicle
armoring process begins with the disassembly of a new base vehicle. This
disassembly normally involves the removal of the interior trim, seats, doors and
windows. The passenger compartment then is armored with both opaque and
transparent armor. Other features, such as run flat tires and anti-explosive
fuel tanks, may also be added. Finally, the vehicle is reassembled as close to
its original appearance as possible. The entire conversion process results in a
low profile, integrated ballistic protective system. Our relationship with
various vehicle manufacturers has been valuable in allowing us to offer our
customers certain vehicles which maintain the original warranties issued by the
vehicle manufacturer.

We produce fully armored vehicles and light armored vehicles. We also offer
blast protection for specific vehicles by enhancing the ballistic and underbody
protection with proprietary materials and installation methods that protect the
occupants against a defined blast threat.

Fully armored vehicles also include parade cars, which are formal limousines
used predominantly for official functions by a president or other head of state.
These vehicles are usually customized based upon a commercially available
chassis, which we essentially rebuild completely. Because the threat of
organized assassination attempts is greater for heads of state, these vehicles
normally incorporate more sophisticated protection features. These features can
include supplemental air and oxygen systems, air purification systems to protect
against chemical or biological contamination, underbody fire suppressant
systems, tear gas launchers, anti-explosive self-sealing fuel tanks, electric
deadbolt door locks, gun ports and bomb scanners.

We also produce specialty vehicles and cash-in-transit vehicles. Specialty
vehicles are custom built for a specific mission. Examples of specialty vehicles
are escort cars, usually convertibles, and chase cars, usually closed top
vehicles, in which security personnel ride while in a head of state motorcade.
Cash-in-transit vehicles are used by banks or other businesses to transport
currency and other valuables. After starting with a van or small truck, we
modify the base vehicle to provide protection for the cargo and passengers from
ballistic and blast threats.

CUSTOMERS

Aerospace & Defense Group. In 2004, our Aerospace & Defense Group sold
approximately 99.4% of its products in North America, with the balance sold
internationally. Sales of Aerospace & Defense Group products to all branches of
the United States military and its prime contractors such as AM General, Boeing,
Sikorsky Aircraft and Stewart & Stevenson represented approximately 92.6% of the
Aerospace & Defense Group's revenue. The Aerospace & Defense Group's businesses
have relied to a great extent on relatively few major customers, although 2004
saw the development of additional major users of Aerospace & Defense Group
products within their existing customer base (e.g. other users within the U.S.
Army). We believe that historical customers, such as the U.S. Army and other
branches of the U.S. military, to whom we have supplied products for
approximately 25 years, will continue to be major customers. Current commercial
and licensing customers include Boeing, Bell Helicopter Textron, Second Chance
Body Armor, PPG Industries, Intercast Europe, and Avon Rubber Company. The loss
of or significant reduction in sales to a major customer could potentially have
a material adverse effect on our business, operations and financial condition.

The market for military hardware products is worldwide in scope, including the
U.S. military and foreign defense forces. The primary contract for delivery of
Up-Armored HMMWVs is with the U.S. military, although smaller quantities are
also sold overseas. The primary contracts for the armor kit programs are with
the U.S. military. Our Aerospace & Defense Group also serves as a subcontractor
to provide ballistically armored and sealed truck cabs for HIMARS for use by the
U.S. Army and the U.S. Marine Corps, a program that transitioned to low rate
initial production in 2003 and continued in 2004.

Products Division. In 2004, the Products Division sold approximately 80.7% of
its products in North America, with the balance sold internationally. The
primary end users of the Products Division's products are federal, state and
local law enforcement agencies, local police departments, state corrections
facilities, U.S. and allied militaries, highway patrols and sheriffs'
departments. The Products Division's security products are marketed through an
extensive network of approximately 260 domestic distributors and 200
international distributors, and through a sales force of approximately 40
representatives and specialists under brand names that are well established in
the military and law enforcement communities. Our Gregory(R) brand of products
are sold primarily in North America and such sales represent approximately 50%
of Gregory sales.

Mobile Security Division. In 2004, the Mobile Security Division sold
approximately 20.2% of its products in North America, with the balance sold
internationally. The Mobile Security Division's armored commercial vehicle
customers include governmental and private buyers who purchase both fully and
light-armored vehicles. Governmental buyers and foreign royalty are also
customers for parade cars. Typically, governmental buyers consist of ministries
of foreign affairs, defense and internal affairs and offices of presidential
security. These customers are not constrained in their purchasing decisions by
considerations such as import duties and taxes and are free to search globally
for the best product available. The procurement cycles of governmental buyers
can range from relatively rapid, when the vehicles are for the use of the head
of state or in response to a particular crisis, to prolonged highly documented
bids and evaluations for normally budgeted items. Private customers for armored
commercial vehicles include corporations and individuals. Private buyers tend to
be more price-sensitive and will often purchase locally manufactured vehicles to
reduce taxes and avoid import duties. Local servicing of the vehicle is also a
critical concern to private buyers. Customers for cash-in-transit vehicles are
generally companies that provide cash-in-transit services to financial
institutions. Purchasing decisions for cash-in-transit vehicles depend on many
criteria including insurance, regulatory requirements and costs, and whether the
financial institution is private or governmental.

Approximately 65.3% of our revenues were from our ten largest customers for the
year ended December 31, 2004 ("fiscal 2004"). Approximately 60.7% of our
revenues came from U.S. military contracts. Our Aerospace & Defense Group's ten
largest customers accounted for approximately 93.9% of Aerospace & Defense Group
revenues for Fiscal 2004. The Products Division's ten largest customers
accounted for approximately 26.6% of total revenues of the Products Division for
fiscal 2004. The Mobile Security Division's ten largest customers accounted for
approximately 43.6% of total revenues of the Mobile Security Division for fiscal
2004. Military and governmental contracts generally are awarded on a periodic or
sporadic basis. If the Aerospace & Defense Group were to lose the Up-Armored
HMMWV contract, which continues through June 2008, our financial performance
would experience a material adverse effect.

MARKETING AND DISTRIBUTION

Aerospace & Defense Group. Most of the Aerospace & Defense Group's products are
distributed as a component supplier to original equipment manufacturers ("OEMs")
or as a direct contractor to the U.S. Government. The products are built to
order. We do not directly serve mass consumer markets and supply directly from
manufacturing facilities. Thus, the distribution of the Aerospace & Defense
Group's products does not involve significant inventory, warehousing or shipping
methodologies.

Depending upon the product, we typically employ one of four methods for
marketing: (i) direct sales, (ii) technical teams, typically comprised of a
combination of sales personnel and engineers, (iii) strategic alliances with
OEMs and U.S. Government prime contractors, and (iv) responses to formal request
for proposals in bidding for government contracts.

In marketing our safety restraint and seating products, we endeavor to maintain
close relationships with existing customers and to establish new customer
relationships. Ongoing relationships and repeat customers are an important
source of business for our current and new products.

Our marketing and sales activities in the government sector focus primarily upon
identifying research and development and other contract opportunities with
various agencies of the United States government or with others acting as prime
contractors on government projects. Key members of our engineering and project
management staffs maintain close working relationships with representatives of
the United States military and their prime contractors. Through these
relationships, we monitor needs, trends, and opportunities within current
military product lines.

The Aerospace & Defense Group emphasizes its ability to develop new products, or
product adaptations, quickly and more cost effectively than traditional defense
contractors. In marketing its products to the military, the Aerospace & Defense
Group places strong emphasis on its superior antitank and antipersonnel mine
protection for the occupants of tactical wheeled vehicles. We market our
military products through a combination of trade show exhibitions, print
advertising in military-related periodicals and direct customer visits. We
emphasize the cross-marketing of military and commercial products, which we
believe strengthens the image of each product group. We have also entered into
exclusive teaming and joint marketing agreements with various prime contractors
in connection with the Up-Armored HMMWV and up-armoring for HIMARS and Family of
Medium Tactical Vehicles ("FMTV") for sales in domestic and international
military and commercial areas. Such agreements allow us to benefit from the
prime contractor's marketing network and save on certain selling costs.

Additionally, the Aerospace & Defense Group focuses on the individual warrior
(Soldier, Marine, Seaman, and Airman). This focus area for the company
encompasses those programs where products are worn or carried by the individual
which increases their survivability and mobility. Current programs include the
OTV, MOLLE, and the Warrior/Advanced Combat Helmet (ACH). We take a proactive
approach in addressing the needs of the Department of Defense in this area
through active corporate involvement in the New Equipment Training (NET)
programs, participation in events which focus on the individual warrior, and
having a close working relationship with the Program Executive Office (PEO) for
individual equipage.

Our military sales activities are directed toward identifying contract bid
opportunities with various U.S. government agencies and prime contractors.
International sales are made through the Department of Defense's Foreign
Military Sales Program and directly to foreign military organizations. We have
three full time business development vice presidents who are responsible for
this activity and have contractual arrangements with several outside consultants
who assist the business development vice presidents in their activities.
Proposal preparation and presentation for government projects is done by a team,
which normally consists of program managers, a contracting officer, a cost
accountant and various manufacturing and engineering personnel.

Products Division. As a result of our history of providing high quality and
reliable concealable armor, tactical armor, hard armor, duty gear, less-lethal
munitions, anti-riot products and forensic products, we enjoy broad brand name
recognition and a strong reputation in the law enforcement equipment industry.
The central element of our marketing strategy is to capitalize on our brand name
recognition and reputation among our customers by positioning ourselves as an
international provider of many of the premier security risk management products
that our customers require. By positioning ourselves in this manner, we expect
to capitalize on our existing customer base and our extensive global
distribution network, and to maximize the benefits of our long history of
supplying security related products around the world.

We have designed comprehensive training programs to provide initial and
continuing training in the proper use of our various products. These training
programs, offered by The Armor(R) Training Academy, are typically conducted by
trained law enforcement and military personnel that we hire for such purposes.
Training programs are an integral part of our customer service and product trial
and certification strategies. In addition to enhancing customer satisfaction, we
believe that training also helps breed customer loyalty and brand
awareness/useage. Moreover, many of our products are consumable and used in
training, which generates replacement orders. Our marketing efforts are further
augmented by our involvement with and support of several important law
enforcement associations, including the National Tactical Officers Association,
the International Law Enforcement Firearms Instructors, the American Society of
Law Enforcement Trainers, The FBI National Academy Associates and the
International Association of Chiefs of Police.

Introduced in 2004, the APEX (Award for Performance Excellence) program
continues to strengthen our relationships with our law enforcement distributors.
The distributors benefit from their association with us due to the quality of
our products, the scope of our product line, the high degree of service we
provide and the distributors' opportunity to participate profitably in the sale
of our products. We continually seek to expand our distribution network. As we
identify and acquire businesses that fit strategically into our existing product
portfolio, we maximize our distribution network by offering additional products,
accessing new customers and penetrating new geographic markets. We also sell a
selected number of civilian products into mass merchandise and sporting goods
stores via a network of national sporting goods wholesalers. These products
include concealment holsters, hunting and sports shooting accessories, cleaning
equipment and pepper spray products.

We also sell a broad range of sporting and outdoor recreational products into
big box, mass merchandise sporting goods stores, and outdoor specialty stores.
Depending on the product line we sell via our network of national and
international sporting goods wholesalers or dealer direct. These products
include concealment holsters, sporting holsters, hunting and shooting
accessories, cleaning equipment, pepper spray products, fanny packs, accessory
pouches and back packs.

In addition to our traditional distribution channels, we also sell our products
on the World Wide Web through a variety of sites. GSA-Buy.com contains an
on-line catalog and secured transaction platform for all Products Division
General Services Administration contracts targeting government agencies
exclusively. We also sell a small array of our concealable and competition
holsters to the consumer market on Holsters.com, limiting distribution of our
law enforcement equipment to law enforcement channels of distribution.
Kleen-Bore.com and B-Square.com are also e-commerce sites for select channels of
distribution and customers. Our Armor Forensics products may also be purchased
on-line at redwop.com.

Mobile Security Division. On a worldwide basis, the Mobile Security Division
employs approximately 35 full-time sales professionals. These employees operate
out of Washington, D.C.; Fairfield, Ohio; Sao Paulo, Brazil; Lamballe, France;
Mexico City, Mexico; Bogota, Colombia; Bremen, Germany, Geneva, Switzerland and
Caracas, Venezuela. All personnel have a geographic and/or product-specific
responsibility. In most cases, the sales personnel also recruit and maintain
sales agents or distributors. The agents or distributors have geographic and
product specific agreements, and compensation in most cases is based on a
commission arrangement. Sales personnel use a consultative approach when
offering solutions to customers' security problems. Sales cycles for commercial
physical security products can range from several months to a matter of days,
depending upon the product and the urgency associated with the security problem
being addressed.

PRODUCT MANUFACTURING AND RAW MATERIALS

The Aerospace & Defense Group's production and manufacturing consist principally
of the molding of armor and composite materials, ceramic tile cutting and
grinding, adhesive bonding, sewing, component fabrication, and final assembly.
The Aerospace & Defense Group outsources substantial quantities of machining,
metal fabrication and welding. Our manufacturing capability features
computer-integrated manufacturing programs which, among other things, schedule
and track production, update inventories, and issue work orders to the
manufacturing floor. All products manufactured must meet rigorous standards and
specifications for workmanship, process, raw materials, procedures, and testing,
and in some cases regulatory requirements. Products are functionally tested on a
sample basis as required by applicable contracts. Customers, and in some cases
the United States government as the end user, perform periodic quality audits of
the manufacturing process. Certain customers, including the United States
government, periodically send representatives to our facilities to monitor
quality assurance. The Aerospace & Defense Group's operations are certified to
the ISO Standard by AS9001 and ISO 9001:2000 by British Standards Institution,
Inc. ("BSI").

The raw materials used in manufacturing ballistic resistant garments and
up-armored vehicles include various ballistic fibers such as Kevlar(R), Twaron,
SpectraShield(R), Zylon(R) and Z-Shield(R). Kevlar(R) is a patented product of
E.I. du Pont de Nemours Co., Inc. ("Du Pont") and is only available from Du Pont
and its European licensee. We purchase Twaron, SpectraShield(R), Dyneema(R),
Zylon(R) and Z-Shield(R) fibers directly from the manufacturers, and from
weaving companies who convert the raw fibers into ballistic fabric. We believe
that we enjoy a good relationship with these suppliers. However, if necessary,
we believe that we could readily find replacement weavers. We also use
SpectraShield(R), Dyneema(R) and Kevlar(R) in our hard and vehicle armor
products. Additionally, we use polycarbonates, acrylics, ballistic quality
steel, aluminum, ceramics, and ballistic glass. We are aware of multiple
suppliers for these materials and would not anticipate a significant impact if
we were to lose any suppliers.

We purchase other raw materials used in the manufacture of our various products
from a variety of sources and additional sources of supply of these materials
are readily available. We also own several molds, which are used throughout our
less-lethal product line.

We adhere to strict quality control standards and conduct extensive product
testing throughout our manufacturing processes. Raw materials are also tested to
ensure quality. We have obtained ISO 9001 certification for our Wyoming
manufacturing facility for less-lethal products, our facility in Pittsfield,
Massachusetts for hard armor products, and our facility in Ontario, California
for body armor and duty gear holsters and accessories. We have obtained ISO 9002
certification for our Manchester, England manufacturing facility for body armor
and high visibility garments. ISO standards are promulgated by the International
Organization of Standardization and have been adopted by more than 100 countries
worldwide. We obtain ISO certification by successfully completing an audit
certifying our compliance with a comprehensive series of quality management and
quality control standards.

We emphasize engineering excellence and have an extensive engineering staff.
Design engineers use state-of-the-art two-dimensional and three-dimensional
computer aided design and engineering or CAD/CAE systems in conjunction with
coordinate measuring machines to develop electronic models, which generally are
converted to solid models or prototypes. Manufacturing engineers concentrate on
improvements in the production process and on overall cost reductions from
better methods, fewer components and less expensive materials with equal or
superior quality. Applying these techniques, we reduced both the time and cost
necessary to produce armored vehicles. Our ballistic engineers, in conjunction
with our design and manufacturing engineers, develop and test new ballistic and
blast protection systems that meet ever-changing threats.

BACKLOG

Aerospace & Defense Group. At December 31, 2004, our Aerospace & Defense Group
had unfilled customer orders of approximately $723.7 million. Approximately
$247.5 million of these orders will ship in the first quarter of 2005.

Products Division. At December 31, 2004, the Products Division had unfilled
customer orders of approximately $26.9 million. Substantially all of these
orders will ship in the first quarter of 2005.

Mobile Security Division. At December 31, 2004, the Mobile Security Division had
unfilled customer orders of approximately $58.3 million. Approximately $34.3
million of these orders will be shipped in the first quarter of 2005.

COMPETITION

Aerospace & Defense Group. The market for our Aerospace & Defense Group's
products and services are highly competitive. Numerous suppliers compete for
government defense contracts as prime contractors or subcontractors. Competition
relates primarily to technical know-how, cost, and marketing efforts. The
competition for government contracts relates primarily to the award of contracts
for the development of proposed products. Contracts for supply of products
primarily tends to follow the development contracts because of the extensive
investment necessary to develop and qualify new products. Our military product
lines in armor, parachutes, crash-resistant military seating and flotation
collars have a number of competitors, with none dominating the market. Our
competitive strategy is to be a technology innovator and strategic partner to
first tier suppliers and OEMs. Our present or future products could be rendered
obsolete by technological advances by one or more of our competitors or by
future entrants into our markets. There are a large number of companies that
provide specific armoring packages for tactical wheeled vehicles, helicopters
and selected other military applications.

Products Division. The market for our law enforcement products is highly
competitive and we compete with competitors ranging from small businesses to
multinational corporations. For example, in the body armor business, we compete
by providing superior design, engineering and production expertise in our line
of fully-integrated ballistic and blast protective wear. Our principal
competitors in this market niche include Point Blank Body Armor, Inc. and Second
Chance Body Armor, Inc. as well as several international competitors on a
region-by-region basis. In the less-lethal product industry, we compete by
providing a broad variety of less-lethal products with unique features and
formulations, which, we believe, afford us a competitive advantage over our
competitors. The principal competitive factors for all of our products are
quality of engineering and design, reputation in the industry, production
capability and capacity, price and ability to meet delivery schedules.

Mobile Security Division. The market for the Mobile Security Division's products
and services is highly competitive. We compete in a variety of markets and
geographic regions, with competitors ranging from small businesses to
multinational corporations. We believe that our design, engineering and
production expertise in providing fully integrated ballistic and blast protected
vehicles gives us a competitive advantage over those competitors who provide
protection against only selected ballistic threats.

A number of vehicle armorers in Europe, the Middle East and Latin America armor
primarily locally manufactured automobiles. In the U.S. and in Latin America, we
have a variety of different competitors. In the high-end luxury sedan market we
compete with OEMs, as well as a variety of small independent automotive
integrators such as Carat Duchatelet in Europe. The principal competitive
factors are price, quality of engineering and design, production capability and
capacity, ability to meet delivery schedules and reputation in the industry.

EMPLOYEES

As of January 1, 2005, we have a total of approximately 4,325 employees, of
which approximately 1,573 were employed in the Aerospace & Defense Group,
approximately 1,694 in the Products Division, approximately 1,042 in the Mobile
Security Division, and 16 in our corporate headquarters.

Approximately 27 employees in Armor Products International, our UK subsidiary,
are represented by the General Municipal Boilermaker and Allied Trade Union.
Approximately 41 employees in O'Gara-Hess & Eisenhardt de Mexico, S.A. de C.V.,
our Mexico subsidiary, are represented by Sindicato Progresista "Justo Sierra"
de Trabajadores de Servicios de la Republica Mexicana. Approximately 30
employees in O'Gara-Hess & Eisenhardt do Brazil, our Brazil subsidiary, are
represented by a union. Approximately 12 employees in O'Gara-Hess & Eisenhardt
France S.A., our France subsidiary, are represented by C.F.D.T. Approximately
181 employees in Trasco-Bremen, our Germany subsidiary, are represented by IG
Metall, Bezirk Kuste. None of our remaining employees are represented by unions
or covered by any collective bargaining agreements. We have not experienced any
work stoppages or employee related slowdowns and believe that the relationship
with our employees is good.

RESEARCH AND DEVELOPMENT

We view our research and development efforts as critical to maintaining a
leadership position in the security products and vehicle armoring markets. The
continuously evolving threats of today demand the advancement and application of
state-of-the-art technology to ensure proper protection of our customers. Our
research and development occurs primarily under fixed-price or cost-plus,
government funded contracts as well as Company-sponsored efforts. We seek to
offer superior quality and advanced products and systems to our customers at
competitive prices. To achieve this objective, we engage in ongoing engineering,
research and development activities to improve the reliability, performance and
cost-effectiveness of our existing products. We also design and develop new
products in an ongoing effort to anticipate and meet our customers' evolving
needs.

We have a centrally managed research and development function. We employ
approximately 100 scientific, engineering and other personnel to improve our
existing product lines and to develop new products and technologies in the same
or related fields. To maximize efficiency, we utilize important relationships
with outside testing laboratories, companies and often times our key clients.

PATENTS AND TRADEMARKS

We currently own numerous issued United States and foreign patents and pending
patent applications for inventions relating to our product lines as well as
several registered and unregistered trademarks and service marks relating to our
products and services. The registered trademarks include AMERICAN BODY
ARMOR(TM), B-SQUARE(R), BREAK FREE(R), CLP(R), DEFENSE TECHNOLOGY/FEDERAL
LABORATORIES(R), DEF-TEC PRODUCTS(TM), DISTRACTION DEVICE(R), FEDERAL
LABORATORIES(R), FERRET(R), FIRST DEFENSE(R), IDENTICATOR(R), IDENTIDRUG(R),
IMPAK(TM) LIGHTNING POWDER(R), MONADNOCK(R), NIK(R), O'GARA-HESS & EISENHARDT
ARMORING COMPANY(R), PROTECH(TM), QUIKSTEP LADDERS(TM), SAFARILAND(R),
SAFARILAND DESIGN(R), ARMORWEAR(R), SPEEDFEED(R), 911EP and DESIGN(R), MOBILE
DEFENDER(TM), SIMULITE(R), REINVENTING THE TECHNOLOGY OF SAFETY(R), SIMULA
SAFE(TM), PROTECTING PEOPLE IN MOTION(R), DURACHUTE(R), CLEARGARD(R), ODV(TM),
O'GARA(TM), KLEEN-BORE(TM), SPECIALTY(R), GREGORY(R), BIANCHI(R), NYLOK(R),
SAFARI-LAMINATE(TM), ACCUMOLD(R), ACCUMOLD ELITE(TM), RANGER(TM) and
PEACEKEEPER(R). We also have an exclusive license to use the MACE(R) trademark
in the law enforcement market and a non-exclusive license to use the FLEX-CUF(R)
trademark. Although we do not believe that our ability to compete in any of our
product markets is dependent solely on our patents and trademarks, we do believe
that the protection afforded by our intellectual property provides us with
important technological and marketing advantages over our competitors. Although
we have protected our technologies to the extent that we believe appropriate,
the measures taken to protect our proprietary rights may not deter or prevent
unauthorized use of our technologies. In other countries, our proprietary rights
may not be protected to the same extent as in the United States.

GOVERNMENT REGULATION

We are subject to federal licensing requirements with respect to the sale of
some of our products in foreign countries. In addition, we are obligated to
comply with a variety of federal, state and local regulations, both domestically
and abroad, governing certain aspects of our operations and workplace, including
regulations promulgated by, among others, the U.S. Departments of Commerce,
State and Transportation, the Federal Aviation Administration, the U.S.
Environmental Protection Agency and the U.S. Bureau of Alcohol, Tobacco and
Firearms. The U.S. Bureau of Alcohol, Tobacco, and Firearms also regulate our
manufacturing of certain destructive devices and the use of ethyl alcohol in
certain products. We also ship hazardous goods, and in doing so, must comply
with the regulations of the U.S. Department of Transportation for packaging and
labeling. Additionally, the failure to obtain applicable governmental approval
and clearances could adversely affect our ability to continue to service the
government contracts we maintain. Furthermore, we have material contracts with
governmental entities and are subject to rules, regulations and approvals
applicable to government contractors. We are also subject to routine audits to
assure our compliance with these requirements. We have become aware that we were
not in full compliance with certain regulations governing the export of
equipment and related technology used for military purposes that are applicable
to some of our products. We are currently in compliance with such regulations
and have undertaken steps to help ensure compliance in the future. We do not
believe that such noncompliance will have a material adverse effect on our
business. In addition, a number of our employees involved with certain of our
federal government contracts are required to obtain specified levels of security
clearances. Our business may suffer if we or our employees are unable to obtain
the security clearances that are needed to perform services contracted for the
Department of Defense, one of our major customers. Our failure to comply with
these contract terms, rules or regulations could expose us to substantial
penalties, including the loss of these contracts and disqualification as a U.S.
government contractor.

Like other companies operating internationally, we are subject to the Foreign
Corrupt Practices Act and other laws which prohibit improper payments to foreign
governments and their officials by U.S. and other business entities. We operate
in countries known to experience endemic corruption. Our extensive operations in
such countries create the risk of an unauthorized payment by one of our
employees or agents which would be in violation of various laws including the
Foreign Corrupt Practices Act. Violations of the Foreign Corrupt Practices Act
may result in severe criminal penalties which could have a material adverse
effect on our business, financial condition and results of operations.

ENVIRONMENTAL LAWS AND REGULATIONS

We are subject to federal, state, and local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. While we always strive to operate in compliance with
these requirements, we cannot assure you that we are at all times in complete
compliance with all such requirements. We are subject to potentially significant
fines or penalties if we fail to comply with environmental requirements and we
do not currently carry insurance for such noncompliance events. Although we have
made and will continue to make capital expenditures in order to comply with
environmental requirements, we do not expect material capital expenditures for
environmental controls in 2005. However, environmental requirements are complex,
change frequently, and could become more stringent in the future. Accordingly,
we cannot assure you that these requirements will not change in a manner that
will require material capital or operating expenditures or will otherwise have a
material adverse effect on us in the future.

We are also subject to environmental laws requiring the investigation and
cleanup of environmental contamination. We may be subject to liability,
including liability for cleanup costs, if contamination is discovered at one of
our current or former facilities, in some circumstances even if such
contamination was caused by a third party such as a prior owner. We also may be
subject to liability if contamination is discovered at a landfill or other
location where we have disposed of wastes, notwithstanding that our historic
disposal practices may have been in accordance with all applicable requirements.
The amount of such liability could be material and we do not currently carry
insurance for such environmental cleanups should they be required of us. We use
Orthochlorabenzalmalononitrile and Chloroacetophenone chemical agents in
connection with our production of tear gas, and these chemicals are hazardous
and could cause environmental damage if not handled and disposed of properly.
Simula's principal environmental focus is the handling and disposal of paints,
solvents, and related materials in connection with product finishes, welding,
and composite fabrication.

AVAILABLE INFORMATION

Our Internet address is www.armorholdings.com. We make available free of charge
on or through our Internet website our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports, and the proxy statement for our annual meeting of stockholders as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Forms 3, 4 and 5 filed
with respect to our equity securities under section 16(a) of the Securities
Exchange Act of 1934, as amended, are also available on our Internet website.
All of the foregoing materials are located at the "Investor Relations" tab. The
information found on our website shall not be deemed incorporated by reference
by any general statement incorporating by reference this report into any filing
under the Securities Act of 1933, as amended, or under the Securities Exchange
Act of 1934, as amended, and shall not otherwise be deemed filed under such
Acts.

We have adopted a Code of Ethics for the Chief Executive Officer and Senior
Financial Officers, a Code of Business Conduct and Ethics for directors,
officers, employees, agents, representatives, subsidiaries and affiliates, an
Audit Committee Charter, Complaint Procedures for Accounting and Auditing
Matters, a Compensation Committee Charter, a Nominating/Corporate Governance
Committee Charter, Corporate Governance Guidelines, and an Audit Committee
Pre-Approval Policy, all of which are available at our Internet website at the
tab "Investor Relations." We will provide to any person without charge, upon
request, a copy of the foregoing materials. We intend to disclose future
amendments to the provisions of the foregoing documents, policies and guidelines
and waivers therefrom, if any, on our Internet website and/or through the filing
of a Current Report on Form 8-K with the Securities and Exchange Commission.
Materials we file with the Securities and Exchange Commission may be read and
copied at the Securities and Exchange Commission's Public Reference Room at 450
Fifth Street, NW, Washington, D.C. 20549. You may obtain information on the
operation of the Securities and Exchange Commission's Public Reference Room by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission also maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the Securities and Exchange Commission at
www.sec.gov. Any requests for the foregoing documents from us should be made in
writing to Philip A. Baratelli, our Corporate Controller, Treasurer, and
Secretary, at 13386 International Parkway, Jacksonville, Florida, 32218.

Information on our Internet website does not constitute a part of this Annual
Report on Form 10-K.

DISCONTINUED OPERATIONS

On June 30, 2004, our litigation support services subsidiary, New Technologies
Armor, Inc. ("NTI"), was the last remaining business in discontinued operations.
On July 2, 2004, we sold the security consulting division of NTI. The remaining
division in NTI, consisting primarily of training services, is included as part
of the Products Division segment. In the second quarter of 2004, we recorded an
impairment charge of $1.4 million in integration and other charges in continuing
operations to reduce the carrying value of remaining portion of NTI to its
estimated fair value.

On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33.7 million in consideration to a group of
private investors led by Granville Baird Capital Partners of London, England and
Management. We received $31.4 million in cash at closing and a note receivable
of $2.3 million, which we collected in full in fiscal 2004. We have previously
recorded a loss of $8.8 million on the sale in the fourth quarter of 2003. In
accordance with generally accepted accounting principles, foreign currency
translation unrealized gains and losses, which are included in equity as
accumulated other comprehensive income or loss, are not recognized until the
period of disposition of the related assets and liabilities (which was a large
component of the loss).

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to Aerwav
Integration Services, Inc. ("AIS"). AIS is a wholly owned subsidiary of Aerwav
Holdings, LLC. As consideration for the integrated systems business, we received
a $4.1 million collateralized note due in two years and a warrant for
approximately 2.5% of AIS. Through December 31, 2004, we have received $475,000
in prepayments on the note receivable. We previously recorded a loss of $366,000
on the sale during the second quarter of 2003.

ITEM 2. PROPERTIES

The following table identifies and provides certain information regarding our
principal facilities.

OWNED/
LOCATION ANNUAL RENT LEASED APPROXIMATE SIZE PRODUCTS MANUFACTURED
- ------------------------------- ------------- -------------- ------------------- ---------------------------------------

AEROSPACE & DEFENSE GROUP
Phoenix, AZ $1,165,000 Leased 188,140 sq. ft. Human safety and survival systems
Phoenix, AZ $ 380,000 Leased 25,312 sq. ft. Human safety and survival systems
Phoenix, AZ $ 14,500 Leased 50,000 sq. ft. Human safety and survival systems
Fairfield, OH N/A Owned 130,000 sq. ft. Armored vehicles and ballistic glass
Fairfield, OH $ 292,500 Leased 150,000 sq. ft. Armored vehicles and kits
Fairfield, OH $ 158,300 Leased 40,000 sq. ft. Armored vehicles
Fairfield, OH $ 100,700 Leased 29,550 sq. ft. Armored Vehicles
Pittsfield, MA N/A Owned 19,700 sq. ft. Hard armor and vehicle armor
Dunmore, PA N/A Owned 62,740 sq. ft. Military helmets
Jefferson City, TN N/A Owned 20,000 sq. ft. Military body armor
Jefferson City, TN N/A Owned 37,758 sq. ft. Military body armor
McKee, KY N/A Owned 20,020 sq. ft. Military back pack systems
McKee, KY N/A Owned 32,176 sq. ft. Military back pack systems

PRODUCTS DIVISION
Jacksonville, FL N/A Owned 14 Acres Body armor, forensic products, weapon
70,000 sq. ft. cleaning lubricants
Casper, WY N/A Owned 66 Acres Tear gas, pepper spray, less-lethal
72,234 sq. ft. munitions
Pittsfield, MA $ 107,766 Leased 25,846 sq. ft. Hard armor, vehicle armor
Ontario, CA N/A Owned 117,500 sq. ft. Body armor, duty gear, automotive
accessories
El Segundo, CA $ 69,000 Leased 6,500 sq. ft. Fingerprint equipment
Oxnard, CA $ 147,000 Leased 25,000 sq. ft. Specialty gloves
Fort Worth, TX $ 45,456 Leased 10,000 sq. ft. Scope mounts and rings
Fort Worth, TX $ 17,940 Leased 5,000 sq. ft. Scope mounts and rings
Fort Worth, TX $ 422,000 Leased 35,100 sq. ft. Scope mounts and rings
St. Cloud, MN $ 74,716 Leased 12,000 sq. ft. LED light bars
Fitzwilliam, NH $ 37,500 Leased 22,848 sq. ft. Police batons
Easthampton, MA $ 60,000 Leased 15,000 sq. ft. Gun cleaning kits
Chantilly, VA $ 322,375 Leased 79,423 sq. ft. DOD training
Gresham, OR $ 129,581 Leased 7,160 sq. ft. Litigation support services
Red Deer, Alberta, Canada $ 56,066 Leased 6,720 sq. ft. Foldable ladders
Tijuana, Mexico $ 256,286 Leased 57,722 sq. ft. Duty gear, body armor, automotive
accessories
Temecula, CA $ 294,972 Leased 55,000 sq. ft. Duty gear, back packs
Temecula, CA $ 114,847 Leased 12,500 sq. ft. Duty gear, back packs
Temecula, CA $ 181,920 Leased 36,000 sq. ft. Duty gear, back packs
Calexico, CA $ 172,645 Leased 40,000 sq. ft. Duty gear, back packs
Westhoughton, England N/A Owned 45,000 sq. ft. Body armor and uniforms
Horwich, England N/A Owned 37,000 sq. ft. Body armor and uniforms

OWNED/
LOCATION ANNUAL RENT LEASED APPROXIMATE SIZE PRODUCTS MANUFACTURED
- ------------------------------- ------------- -------------- ------------------- ---------------------------------------

MOBILE SECURITY DIVISION
Fairfield, OH $ 210,000 Leased 70,000 sq. ft. Armored vehicles
Bremen, Germany (1) N/A Leased 11 Acres Armored vehicles
Owned 161,500 sq. ft.
Lamballe, France (2) $ 456,565 Leased 131,516 sq. ft. Armored vehicles
Sao Paulo, Brazil $ 238,902 Leased 56,000 sq. ft. Armored vehicles & ballistic glass
Bogota, Colombia $ 108,898 Leased 35,000 sq. ft. Armored vehicles & ballistic glass
Bogota, Colombia $ 27,360 Leased 6,823 sq. ft. Armored vehicles
Bogota, Colombia $ 28,800 Leased 7,801 sq. ft. Armored vehicles
Mexico City, Mexico N/A Owned 5,380 sq. ft. Armored vehicles
Caracas, Venezuela $ 128,000 Leased 15,360 sq. ft. Armored vehicles

CORPORATE
Jacksonville, FL $ 170,316 Leased 6,930 sq. ft. Corporate headquarters
Jacksonville, FL $ 134,940 Leased 9,000 sq. ft. Information technology center
Arlington, VA $ 87,600 Leased 770 sq. ft. Government affairs office

Note 1 - For accounting purposes, the land underneath our owned facility in
Bremen, Germany is financed by a capital lease that is recorded as a liability
on our financial statements.

Note 2 - For accounting purposes, the Lamballe, France facility is considered
owned and financed by a capital lease that is recorded as a liability on our
financial statements.

We believe our manufacturing, warehouse and office facilities are suitable and
adequate and afford sufficient manufacturing capacity for our current and
anticipated requirements. We believe we have adequate insurance coverage for our
properties and their contents.
- --------------------------------------------------------------------------------

ITEM 3. LEGAL PROCEEDINGS

On January 16, 1998, our Services Division ceased operations in Angola and
subsequently became involved in various disputes with SHRM S.A. ("SHRM"), its
minority joint venture partner, relating to the Angolan joint venture known as
Defense System International Africa ("DSIA"). Since March 1998, we have been and
continue to be involved in various legal proceedings before French courts with
SHRM, which is part of the Compass Group, regarding damages from the
circumstances under which DSIA ceased doing business in Angola due to the decree
of the Angolan government expelling the employees of our Services Division from
Angola.

Kroll, Inc. Matters
- -------------------

O'Gara-Hess & Eisenhardt Armoring de Brasil Ltda. ("OHE Brazil") was assessed
41.1 Million Reals (US $15.5 million based on the exchange rate as of December
31, 2004) by the Brazilian tax authorities. OHE Brazil has appealed the tax
assessments and the cases are pending. To the extent that there may be any
liability resulting from such assessments, we believe that we are entitled to
indemnification from Kroll, Inc. for up to $7.8 million under the terms of our
purchase agreement dated April 20, 2001, because the events in question with
respect to up to $7.8 million of such assessments occurred prior to our purchase
of the O'Gara Companies from Kroll, Inc.

In 1999 and prior to our acquisition of OHEAC in 2001, several of the former
employees of Kroll O'Gara Company de Mexico, S.A. de C.V. ("O'Gara Mexico"), a
subsidiary of OHEAC, commenced labor claims against O'Gara Mexico seeking
damages for unjustified termination. In late 2004, the principal labor claim was
settled by us for approximately $1.9 million and two of the remaining claims
were settled for approximately $52,000. We believe that we are entitled to
indemnification from Kroll, Inc. with respect to these settlement payments and
we are currently engaged in discussions with Kroll, Inc. with respect to this
matter.

In December 2001, O'Gara-Hess & Eisenhardt France S.A., which was acquired from
Kroll, Inc. ("OHE France"), sold its industrial bodywork business operated under
the name Labbe/Division de O'Gara Hess & Eisenhardt France/ Carrosserie
Industriells ("Carrosserie") to SNC Labbe. Subsequent to the sale, the Labbe
Family Trust ("LFT"), owner of the leasehold interest upon which the Carrosserie
business is operated, sued OHE France and SNC Labbe claiming that the transfer
of the leasehold was not valid because LFT had not given its consent to the
transfer as required under the terms of the lease. LFT sought to have OHE
France, as the sole tenant, maintain and repair the leased building with an
estimated cost of between US $4.2 and US $8.3 million, based on the exchange
rate as of December 31, 2004. The case is currently pending, and while we are
contesting the allegations vigorously, we are unable to predict the outcome of
this matter. Although we do not have any insurance coverage for this matter, at
this time, we do not believe this matter will have a material impact on our
financial position, operations or liquidity.

Matters Involving Zylon(R) Fiber
- --------------------------------

lines plus a $100.00 transferable rebate coupon applicable towards their next
purchase of a vest. We have also made available on the American Body Armor(TM)
website testing data, protocols and results relating to the testing of our
vests. We also continue to test all of our Zylon(R)-containing vests, and if
such testing demonstrates that the tested vests fail to perform in accordance
with their warranties, we will implement an exchange program for those models on
a reasonably comparable basis to the American Body Armor(TM) Xtreme(R) ZX
exchange program outlined above. Zylon(R) fiber is made by Toyobo, a Japanese
corporation, and is a ballistic fiber widely used in the entire body armor
industry. A final report to the Duval County Court regarding implementation of
the settlement, exchange of vests and on-going testing, will be filed on or
before April 15, 2005. We are also voluntarily cooperating with a request
received in December 2004 from the Department of Justice who is reviewing the
entire industry's use of Zylon(R) fiber in bullet resistant vests.

Other Matters
- -------------

In addition to the above, in the normal course of business, we are subjected to
various types of claims and currently have on-going litigations in the areas of
products liability, general liability and intellectual property. Our products
are used in a wide variety of law enforcement situations and environments. Some
of our products can cause serious personal or property injury or death if not
carefully and properly used by adequately trained personnel. We believe that we
have adequate insurance coverage for most claims that are incurred in the normal
course of business. In such cases, the effect on our financial statements is
generally limited to the amount of our insurance deductible or self-insured
retention. Our annual insurance premiums and self insurance retention amounts
have risen significantly over the past several years and may continue to do so
to the extent we are able to purchase insurance coverage. At this time, we do
not believe any such claims or pending litigation will have a material impact on
our financial position, operations and liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock, par value $.01 per share (the "Common Stock") is traded under
the symbol "AH" on the New York Stock Exchange (the "NYSE"). The following table
sets forth the range of high and low sales prices for our Common Stock on the
NYSE for the years ended December 31, 2004 and 2003 and for the first quarter of
2005 (through March 3, 2005).

HIGH LOW
---- ---

2005
1st Quarter - through March 3, 2005 ..... $47.85 $37.68

2004
4th Quarter ............................. $49.49 $36.10
3rd Quarter ............................. $41.67 $32.01
2nd Quarter.............................. $40.35 $31.60
1st Quarter.............................. $33.45 $24.80

2003
4th Quarter ............................. $27.35 $16.46
3rd Quarter ............................. $17.80 $12.83
2nd Quarter.............................. $14.95 $ 9.91
1st Quarter.............................. $14.60 $ 9.40

HOLDERS

As of March 3, 2005, we had approximately 329 stockholders of record. Only
record holders of shares held in "nominee" or street names are included in this
number.

DIVIDENDS

We have never declared or paid cash dividends on our Common Stock. Our debt
agreements, such as the indenture governing the 2% Convertible Notes, the 8.25%
Notes and the senior credit facility, contain certain financial and other
covenants that limit, under certain circumstances, our ability to pay dividends
or make other distributions to our stockholders. We are permitted to pay
dividends and make other distributions to stockholders to the extent we satisfy
the conditions, including the financial and other covenants, contained in such
documents.

RECENT SALES OF UNREGISTERED SECURITIES

None.

RECENT PURCHASES OF OUR REGISTERED EQUITY SECURITIES

We did not purchase any shares of our common stock during 2004.

ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL OVERVIEW

FIVE-YEAR SUMMARY

The table below sets forth a summary of our results of operations and
financial condition as of and for the periods then ended.

2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Total revenues (1) $979,683 $365,172 $305,117 $197,100 $139,904
Operating income $145,715 $ 35,729 $ 38,365 $ 26,673 $ 19,869
Income from continuing operations $ 80,577 $ 17,006 $ 21,337 $ 14,684 $ 10,847
Net income (loss) (2) $ 80,539 $ 10,886 $(17,689) $ 10,128 $ 17,048

Basic income from continuing operations
per common share $ 2.56 $ 0.61 $ 0.70 $ 0.61 $ 0.48

Diluted income from continuing operations
per common share $ 2.44 $ 0.59 $ 0.69 $ 0.59 $ 0.46
Basic earnings (loss) per share $ 2.56 $ 0.39 $ (0.58) $ 0.42 $ 0.75
Diluted earnings (loss) per share $ 2.44 $ 0.38 $ (0.57) $ 0.41 $ 0.73

Note 1 - Revenue and operating income for all periods presented represents
revenue from continuing operations only, while net income includes income and
losses from discontinued operations.

Note 2 - 2003 and 2002 net income (loss) includes a pre-tax charge for
impairment of long-lived assets of discontinued operations of $12.4 million and
$30.3 million, respectively. 2001 net income (loss) includes a pre-tax
restructuring charge of $10.3 million in discontinued operations.

Cash and cash equivalents $ 421,209 $111,926 $ 16,551 $ 53,719 $ 7,257
Total assets $1,292,351 $585,626 $367,753 $388,057 $225,957
Working capital $ 289,578 $168,644 $100,591 $142,723 $ 67,937
Total debt $ 501,128 $191,030 $ 8,188 $ 8,085 $ 40,517
Long-term obligations $ 196,929 $168,508 $ 5,240 $ 4,640 $ 38,288
Stockholders' equity $ 565,196 $295,365 $288,077 $326,019 $166,771

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Statements that are predictive in nature, that
depend upon or refer to future events or conditions or that include the words
such as "expects", "anticipates", "intends", "plans", "believes", "estimates",
"could be" and similar expressions are forward looking statements. Although we
believe that these statements are based upon reasonable assumptions, we can give
no assurance that our goals will be achieved. For more information, see "Forward
Looking Statements" contained in Part I of this report.

Our actual results may differ from those expressed or implied in forward-looking
statements. We believe that we are subject to a number of risk factors,
including, without limitation: the inherent unpredictability of currency
fluctuations; competitive actions, including pricing; the ability to realize
cost reductions and operating efficiencies, including the ability to implement
headcount reduction programs timely and in a manner that does not unduly disrupt
business operations and the ability to identify and to realize other
cost-reduction opportunities; general economic and business conditions; our
ability to successfully execute changes to operations, such as integration of
recent and future acquisitions and the move of our corporate headquarters and
certain of our manufacturing operations, without disrupting our operations; and
our ability to obtain supplies and raw materials without disruption.

Any forward-looking statements in this report should be evaluated in light of
these and other important risk factors listed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Annual Report on Form 10-K including the accompanying financial statements.

COMPANY OVERVIEW

CONTINUING OPERATIONS

Effective in the first quarter 2004, we instituted a new segment reporting
format to include three reportable business divisions: Aerospace & Defense
Group, Armor Holdings Products, also referred to as our Products Division, and
Armor Mobile Security, also referred to as our Mobile Security Division. The
Aerospace & Defense Group was formed upon the completion of our acquisition of
Simula, Inc. on December 9, 2003. The Aerospace & Defense Group also includes
the military business, including armor and blast protection systems for
Up-Armored HMMWVs, and other military vehicle armor programs, which previously
were included in our Mobile Security Division. The Aerospace & Defense Group
also includes the SAPI plate produced by our Protech subsidiary in Pittsfield,
Massachusetts, which was previously reported as part of the Products Division.
The historical results of these businesses have been reclassified as part of the
Aerospace & Defense Group. This reporting change was made to better reflect
management's approach to operating and directing the businesses, and, in certain
instances, to align financial reporting with our market and customer segments.

Aerospace & Defense. Our Aerospace & Defense Group supplies human safety and
survival systems to the U.S. military, and major Aerospace & Defense prime
contractors. Our core markets are military aviation safety, military personnel
safety, and land and marine safety. Under the brand name O'Gara-Hess &
Eisenhardt, we are the sole-source provider to the U.S. military of the armor
and blast protection systems for Up-Armored HMMWVs. We are also under contract
with the U.S. Army to provide spare parts, logistics and ongoing field support
services for the currently installed base of approximately 8,350 Up-Armored
HMMWVs. Additionally, we provide blast and ballistic protection kits for the
standard HMMWVs, which are installed on existing equipment in the field. Our
Aerospace & Defense Group was subcontracted to develop a ballistic and blast
protected armored and sealed truck cab for the HIMARS, a program recently
transitioned by the U.S. Army and U.S. Marine Corps from

developmental to a low rate of initial production, deliveries of which commenced
in 2003 and continued in 2004. We also supply armor sub-systems for other
tactical wheeled vehicles. Through Simula, we provide military helicopter
seating systems, helicopter cockpit airbag systems, aircraft armor and land
vehicle armor kits for the HMMWV, HEMTT, PLS, HET, M915 and ASV, body armor and
other protective equipment for military personnel, emergency bailout parachutes
and survival ensembles worn by military aircrew. The primary customers for our
products are the U.S. Army, U.S. Marine Corps, Boeing, and Sikorsky Aircraft.
Most of Simula's aviation safety products are provided on a sole source basis.
The U.S. armed forces have adopted ceramic body armor as a key element of the
protective ensemble worn by our troops in Iraq and Afghanistan. Simula was the
developer of this specialized product called SAPI, and is one of the largest
supplier to U.S. forces. We also supply ceramic body armor from our Protech
subsidiary based in Pittsfield, Massachusetts. Specialty Defense, with
operations in Pennsylvania, Tennessee, and Kentucky, is a supplier to military
and law enforcement customers in the United States and overseas. Specialty
Defense manufactures, among other things, MOLLE systems, OTVs and Warrior
Helmets. Specialty Defense's core products are made of Kevlar(R) and heavy-duty
nylon fabric and webbing and require special cutting and sewing techniques.
Specialty Defense is currently the largest supplier of MOLLE systems for the
U.S. Army. The MOLLE system consists of a modular rucksack with removable
compartments and components and a fighting load vest with removable pockets for
the Rifleman, Pistol, Squad Automatic Weapon Gunner, Medic and Grenadier
configurations. Specialty Defense manufactures OTVs, which, when used with SAPI
plates, provide enhanced armor protection for U.S. armed forces against mines,
grenades, mortar shells, artillery fire and rifle projectiles. Specialty Defense
is one of the three largest suppliers of Warrior Helmets for the U.S. Army.
Specialty Defense also manufactures NATO PASGT helmets, the Advanced Combat
Vehicle Crewman helmet and the Warrior Helmet (the U.S. Army's next generation
helmet), along with related liners and accessories. In 2000, the U.S. Special
Forces developed a new combat helmet called the MICH which took advantage of new
technologies. Today, the US Army has adopted this helmet design as its standard
and is planning to equip all soldiers with the helmet by the end of 2008.

Products. Our Products Division manufactures and sells a broad range of high
quality security products, equipment and related consumable items, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories, weapon maintenance products, foldable
ladders and specialty gloves. Our Products Division's products are marketed
under brand names that are well established in the military and law enforcement
communities such as AMERICAN BODY ARMOR(TM), XTREME(R), MATRIX(R), B-SQUARE(R),
BREAK FREE(R), CLP(R), DEFENSE TECHNOLOGY/FEDERAL LABORATORIES(R), DEF-TEC
PRODUCTS(TM), DISTRACTION DEVICE(R), FEDERAL LABORATORIES(R), FERRET(R), FIRST
DEFENSE(R), IDENTICATOR(R), IDENTIDRUG(R), LIGHTNING POWDER(R), MONADNOCK(R),
NIK(R), PROTECH(TM), QUIKSTEP LADDERS(TM), PORTAL LADDERS(TM), QUICKSHIELD(TM),
SAFARILAND(R), SPEEDFEED(R), 911EP(R), ODV(TM), KLEEN-BORE(TM), GREGORY(R),
BIANCHI(R), NYLOK(R), ACCUMOLD(R), ACCUMOLD ELITE(TM), RANGER(TM) and
PEACEKEEPER(R). Our Products Division's security products are marketed through
an extensive network of approximately 260 domestic distributors and 200
international distributors, and through a sales force of approximately 40
representatives and specialists under brand names that are well established in
the military and law enforcement communities. Our Products Division's extensive
distribution capabilities and commitment to customer service and training have
enabled us to become a leading provider of security equipment to law enforcement
agencies.

Mobile Security. Our Mobile Security Division manufactures and installs armoring
systems for commercial vehicles to protect against varying degrees of ballistic
and blast threats. Under the brand names O'GARA-HESS & EISENHARDT ARMORING
COMPANY(TM), ARMOR MOBILE SECURITY FRANCE, ARMOR MOBILE SECURITY GERMANY and
IMPAK(TM), our Mobile Security Division armors a variety of commercial vehicles,
including limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles. Our Mobile Security Division's customers include U.S.
federal law enforcement and intelligence agencies, foreign heads of state,
multinational corporations, as well as high net worth individuals and
cash-in-transit operators.

DISCONTINUED OPERATIONS

On July 2, 2004, we sold the security consulting division of our litigation
support services subsidiary, New Technologies, Inc. ("NTI"), which was the last
remaining business in discontinued operations. The remaining division in NTI,
consisting primarily of training services, has been included as part of the
Products Division segment, where management now resides. This business
represented the last remaining business in the Services Division. The assets and
liabilities of the Services Division have been classified as assets and
liabilities of discontinued operations on our consolidated balance sheets and
the results of their operations classified as income (loss) from discontinued
operations in the accompanying consolidated statements of operations. In the
second quarter of 2004, we recorded an impairment charge of $1.4 million in
integration and other charges in continuing operations to reduce the carrying
value of remaining portion of NTI to its estimated fair value.

On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33,660,000 in total consideration to a group of
private investors led by Granville Baird Capital Partners of London, England and
management. We received $31,360,000 in cash at closing and a note receivable of
$2,300,000, which we collected in full in the year ended December 31, 2004. We
recorded a loss of $8.8 million on the sale in the fourth quarter of 2003
primarily due to unrealized foreign currency translation loss. In accordance
with generally accepted accounting principles, unrealized foreign currency
translation gains and losses, which are included in equity as accumulated other
comprehensive income or loss, are not recognized until the period in which the
related assets and liabilities are disposed of.

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to Aerwave
Integrated Systems ("AIS"). AIS is a wholly owned subsidiary of Aerwav Holdings,
LLC. As consideration for the integrated systems business, we received a $4.1
million collateralized note due in April 2005, of which we have received
$475,000 through December 31, 2004, and a warrant for approximately 2.5% of AIS.
We recorded a loss of $366,000 on the sale during the second quarter of 2003.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in Item 8 of this Form 10-K. We believe our most
critical accounting policies include revenue recognition; allowance for doubtful
accounts; derivative instruments and hedging activities; goodwill; patents,
licenses, and trademarks; the use of estimates; income taxes; impairment;
discontinued operations; and comprehensive income and foreign currency
translation.

Revenue recognition. We record products revenue at the time of shipment. Returns
are minimal and do not materially affect the financial statements.

We record Aerospace & Defense Group revenue related to government contracts
which results principally from fixed price contracts and is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed and determinable and collectibility is probable. Generally, all of these
conditions are met when the Company ships products to its customers. Up-Armored
HMMWV units sold to the U.S. Government are considered sold when the onsite
Department of Defense officer finishes the inspection of the Up-Armored HMMWV,
approves it for delivery and shipment occurs. Revenues related to nonrefundable
license fees that are payable at the initiation of a licensing agreement are
recognized immediately in income when received or when collectibility is
reasonably assured, provided that there are no future obligations or performance
requirements. Non-refundable license fees that are in essence, a prepayment of
future royalties, are recognized as revenue on a straight-line basis over the
term of the initial license.

We record revenue of the Aerospace & Defense Group and Mobile Security Division
when a vehicle is shipped, except for larger commercial contracts typically
longer than four months in length and the contract for the delivery of
Up-Armored HMMWVs to the U.S. Government, which continues through 2008. Revenue
from large commercial contracts is recognized on the percentage of completion,
units-of-work performed method. Should large commercial contracts be in a loss
position, the entire estimated loss would be recognized for the balance of the
contract at such time. Current contracts are profitable.

We record service revenue as services are provided on a contract-by-contract
basis. Revenues from service contracts are recognized over the term of the
contract.

Allowance for Doubtful Accounts. We encounter risks associated with sales and
the collection of the associated accounts receivable. As such, we review our
accounts receivable aging on a monthly basis and determine a provision for
accounts receivable that is considered to be uncollectible. In order to
calculate the appropriate monthly provision, we primarily review accounts
greater than ninety days past due and estimate the amount that is uncollectible.

Periodically, we compare the identified credit risks with the allowance that has
been established using historical experience and adjusts the allowance
accordingly.

Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" ("SFAS 133") as amended. All derivative instruments are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which we hedge changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. We adopted SFAS 133 in the first quarter of 2001. However, we had no
derivatives to be measured at the time of adoption. We do not hold or issue
interest rate swap agreements or other derivative instruments for trading
purposes.

Changes in the fair value of the interest rate swap agreements offset changes in
the fair value of the fixed rate debt due to changes in the market interest
rate. Accordingly, the other assets on the Condensed Consolidated Balance Sheet
as of December 31, 2004 increased by $195,000, which reflected an increase in
the fair value of the interest rate swap agreements to $6.1 million. The
corresponding increase in the hedge liability was recorded in long-term debt.
The agreements are deemed to be a perfectly effective fair value hedge and
therefore qualify for the short-cut method of accounting under SFAS 133. As a
result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.

Goodwill. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in a purchase business combination. Goodwill
and other intangible assets are stated on the basis of cost. The $209.0 million
in goodwill resulting from acquisitions made by us subsequent to June 30, 2001
was immediately subjected to the non-amortization provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). See also Impairment and Recent Accounting Pronouncements which
follows. The purchase method of accounting for business combinations requires us
to make use of estimates and judgments to allocate the purchase price paid for
acquisitions to the fair value of the net tangible and identifiable intangible
assets. Goodwill is tested for impairment annually, or when a possible
impairment is indicated, using the fair value based test prescribed by SFAS 142.
We performed our annual assessment of goodwill and determined that no impairment
existed as of June 30, 2004.

Patents, licenses and trademarks. Patents, licenses and trademarks were
primarily acquired through acquisitions accounted for by the purchase method of
accounting. Such assets are amortized on a straight-line basis over their useful
lives. See Note 5 which follows for information on our identified intangibles.

Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
accompanying notes. Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include the carrying value of
long-lived assets, valuation allowances for receivables, inventories and
deferred income tax assets, liabilities for potential litigation claims and
settlements, potential liabilities related to tax filings in the ordinary course
of business, and contract contingencies and obligations. Actual results could
differ from those estimates.

Income taxes. We account for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method specified thereunder, deferred taxes are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities. Deferred tax liabilities are offset by deferred tax
assets relating to net operating loss carryforwards, tax credit carryforwards
and deductible temporary differences. At December 31, 2004 and 2003, certain of
our non-U.S. subsidiaries have unremitted earnings of approximately $10.7
million and $4.6 million, respectively, on which we have not recorded a
provision for United States Federal income taxes since these earnings are
considered to be permanently reinvested. Such foreign earnings have been taxed
according to the regulations existing in the countries in which they were
earned.

Impairment. Long-lived assets including certain identifiable intangibles, and
the goodwill related to those assets, are reviewed annually for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable including, but not limited to, a
deterioration of profits for a business segment that has long-lived assets, and
when other changes occur which might impair recovery of long-lived assets.
Management reviewed the Company's long-lived assets and has taken an impairment
charge of $1.4 million in the year ended December 31, 2004, $12.4 million in the
year ended December 31, 2003 and $30.3 million in the year ended December 31,
2002 to reduce the carrying value of the Services Division to estimated
realizable value. The method used to determine the existence of an impairment
would be discounted operating cash flows estimated over the remaining useful
lives of the related long-lived assets for continuing operations in accordance
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Impairment is measured as the difference
between fair value and unamortized cost at the date impairment is determined.

Discontinued Operations. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), a component classified as held for sale is reported in
discontinued operations when the following conditions are met: (a) the
operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
In a period in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement for current and prior periods
reports the results of operations of the component, including any estimated
impairment gain or loss recognized in accordance with SFAS 144 paragraph 37, in
discontinued operations. The results of discontinued operations, less applicable
income taxes (benefit), is reported as a separate component of income before
extraordinary items and the cumulative effect of accounting changes (if
applicable). The assets and liabilities of a disposal group classified as held
for sale are presented separately in the asset and liability sections,
respectively, of the statement of financial position.

Comprehensive income and foreign currency translation. In accordance with
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), assets and liabilities denominated in a foreign currency
are translated into U.S. dollars at the current rate of exchange existing at
year-end and revenues and expenses are translated at the average monthly
exchange rates. The cumulative translation adjustment, net of tax, which
represents the effect of translating assets and liabilities of our foreign
operations is $6,821,000 and $3,936,000 for the years ended December 31, 2004
and 2003, respectively, and is classified as accumulated other comprehensive
loss. The current year change in the accumulated amount, net of tax, is included
as a component of comprehensive income.

Stock options and grants. Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation costs is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. We have elected to continue to
account for its employee stock compensation plans under APB Opinion No. 25 with
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied.
Restricted stock awards are generally recorded as compensation expense over the
vesting periods based on the market value on the date of grant.

If compensation cost for stock option grants had been determined based on the
fair value on the grant dates for fiscal 2004, 2003 and 2002 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:

2004 2003 2002
---------------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss) as reported $ 80,539 $ 10,886 $ (17,689)

Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (6,717) (4,157) (5,053)

Add: Employee compensation expense for
modification of stock option awards included in
report net income, net of income taxes 57 506 --
---------------- --------------- --------------
Pro-forma net income (loss) $ 73,879 $ 7,235 $ (22,742)
================ =============== ==============

Earnings (loss) per share:
Basic - as reported $ 2.56 $ 0.39 $ (0.58)
================ =============== ==============
Basic - pro forma $ 2.35 $ 0.26 $ (0.75)
================ =============== ==============
Diluted - as reported $ 2.44 $ 0.38 $ (0.57)
================ =============== ==============
Diluted - pro forma $ 2.24 $ 0.25 $ (0.74)
================ =============== ==============

RESULTS OF OPERATIONS

Effective June 30, 2002, we decided to sell the ArmorGroup Services Division
(the sale was completed on November 26, 2003) through an organized and formal
auction managed by outside advisors. In accordance with SFAS 144, the assets and
liabilities of the Company's Services Division have been classified as held for
sale, with operating results reported as discontinued operations in the
statement of operations for all periods prior to the sale of this division. Our
U.S. based training subsidiary, Cyconics International Training Services, Inc.
(formerly known as Advanced Training Solutions, Inc., which was formerly known
as USDS, Inc.) previously reported under the Services Division, but not included
for sale, has been reclassified to the Products Division.

The following table sets forth selected statement of operations data as a
percentage of total revenues for the periods indicated:

FISCAL YEAR
2004 2003 2002
---- ---- ----

Revenue from continuing operations
Aerospace & Defense 61.8% 25.1% 19.4%
Products 25.5% 53.1% 59.0%
Mobile Security 12.7% 21.8% 21.6%
Total revenues from continuing operations 100.0% 100.0% 100.0%
Cost of revenues 72.9% 69.4% 69.1%
Cost of warranty revision 0.5% 0.0% 0.0%
Operating expenses 10.2% 17.2% 16.3%
Amortization 0.4% 0.1% 0.1%
Integration and other charges 1.0% 3.4% 1.9%
Operating income 14.9% 9.8% 12.6%
Interest expense, net 0.7% 1.1% 0.3%
Other expense, net 0.2% 0.1% 0.0%
Income from continuing operations before
provision for income taxes 14.0% 8.5% 12.3%
Provision for income taxes 5.8% 3.9% 5.3%
Income from continuing operations 8.2% 4.7% 7.0%
Loss from discontinued operations, net of income 0.0% (1.7)% (12.8)%
tax benefit
Net income (loss) 8.2% 3.0% (5.8)%

FISCAL 2004 AS COMPARED TO FISCAL 2003

Net income. Net income increased $69.6 million, or 639.8%, to net income of
$80.5 million for fiscal 2004 compared to net income of $10.9 million for fiscal
2003. Income from continuing operations and a loss from discontinued operations
were $80.6 million and ($38,000), respectively, for fiscal 2004, compared to
income from continuing operations and a loss from discontinued operations of
$17.0 million and $(6.1) million, respectively, for fiscal 2003.

CONTINUING OPERATIONS

Aerospace & Defense Group revenues. Our Aerospace & Defense Group revenues
increased $513.7 million, or 560.4%, to $605.4 million in fiscal 2004 compared
to $91.7 million in fiscal 2003. The Aerospace & Defense Group was created when
Simula, which was acquired on December 9, 2003, was combined with the SAPI
business generated by our Protech subsidiary, and military business of the
Mobile Security Division, which includes armor and blast protection systems for
Up-Armored HMMWVs. The historical results of these businesses have been
reclassified to the Aerospace & Defense Group. The Aerospace & Defense Group
also includes our November 18, 2004, acquisition of Specialty Defense. For
fiscal 2004, Aerospace & Defense Group revenue increased 243.4% internally,
including year-over-year changes in acquired businesses. Internal growth was
primarily due to: (1) strong demand for the Up-Armored HMMWV, including spare
part revenues; (2) increased supplemental armor for other military vehicles; and
(3) increased SAPI plate volume. Acquired growth was a function of the
acquisitions of Simula and Specialty Defense.

Products Division revenues. Our Products Division revenues increased $55.8
million, or 28.8%, to $249.8 million in fiscal 2004, compared to $194.0 million
in fiscal 2003. For fiscal 2004, Products Division revenue increased 19.7%
internally, including year-over-year changes in acquired businesses, with the
remainder due to the acquisitions of Hatch Imports, Inc., which was completed in
the fourth quarter of 2003, and Vector Associates, Inc. (dba ODV, Inc.) and
Kleen-Bore, Inc., both of which were completed subsequent to 2003. The
acquisition of Bianchi on December 30, 2004, had no effect on the revenues of
the Products Division. The historical results of the SAPI business of the
Products Division have been reclassified to the Aerospace & Defense Group.
Internal growth was due to strong sales of international body armor, and other
soft armor and hard armor sectors, providing protection to troops and private
sector employees within Iraq, strong military and international sales within
duty gear and the sales of ballistic reinforced enclosures within the energy
sector.

Mobile Security Division revenues. Our Mobile Security Division revenues
increased $45.0 million, or 56.6%, to $124.5 million in fiscal 2004, compared to
$79.5 million in fiscal 2003. The historical results of the military business of
the Mobile Security Division have been reclassified to the Aerospace & Defense
Group. All of the revenue growth for the Mobile Security Division was generated
internally, primarily as a result of the increasing threat of terrorism, and, to
a less extent, the impact of a weakened U.S. dollar versus the euro. The threat
of terrorism was the cause of our European revenue growth.

Cost of revenues. Cost of revenues increased $460.6 million, or 181.6%, to
$714.2 million for fiscal 2004 compared to $253.6 million for fiscal 2003. As a
percentage of total revenues, cost of revenues increased to 72.9% of total
revenues for fiscal 2004 from 69.4% for fiscal 2003.

Gross margin in the Aerospace & Defense Group is 25.7% for fiscal 2004 compared
to 31.3% for fiscal 2003. The decrease in the Aerospace & Defense Group gross
margins was primarily due to reduced selling prices for the Up-Armored HMMWV and
significant changes in our product mix as we have diversified beyond the
Up-Armored HMMWV.

Gross margin in the Products Division is 33.6% for fiscal 2004 compared to 34.8%
for fiscal 2003. The decline in Product Division's gross margin resulted
primarily from product mix, certain large lower margin international and
governmental orders and additional inventory provisions. Excluding our Products
training division subsidiary, the Products Division gross margin was 35.2%,
compared to 37.1% in 2003.

Gross margin in the Mobile Security Division is 20.9% in fiscal 2004, compared
to 19.4% for fiscal 2003. The increase in the Mobile Security Divisions gross
margins resulted primarily from improved fixed-cost absorption benefits
associated with increased manufacturing volumes, and a richer sales mix of
high-end, higher margin vehicles.

Cost of warranty revision. In April 2004, two class action lawsuits were filed
against us in Florida state court by police organizations and individual police
officers, alleging, among other things, that our bullet-resistant soft body
armor (vests) manufactured and sold under the American Body Armor, Safariland
and ProTechTM brands, do not have the qualities and performance characteristics
as warranted, thereby breaching express warranty, implied warranty of
merchantability, implied warranty of fitness for a particular purpose and duty
to warn. On August 12, 2004, we reached a preliminary settlement with respect to
the class action lawsuit filed in Duval County, Florida by the Southern States
Police Benevolent Association ("Southern States PBA"). After fairness hearings
were held, the Florida Circuit Court gave final approval to that settlement on
November 5, 2004. The other class action lawsuit filed against us by the
National Association of Police Organizations, Inc. ("NAPO"), in Lee County,
Florida, was voluntarily dismissed with prejudice on November 16, 2004.

Pursuant to the terms of the class action settlement with the Southern States
PBA, the warranty on the American Body Armor Xtreme ZX(R) vest (both NIJ threat
level II and IIIA) has been reduced from 5 years to 2 1/2 years. In addition,
every purchaser of an Xtreme ZX(R) vest has the option to exchange their vest
for either a new ZX(R) vest or any other vest of their choosing from the
American Body Armor, Safariland and ProTech(TM) product lines plus a $100.00
transferable rebate coupon applicable towards their next purchase of a vest. We
have also made available on the American Body Armor website testing data,
protocols and results relating to the testing of our vests. We also continue to
test all of our Zylon(R)-containing vests, and if such testing demonstrates that
the tested vests fail to perform in accordance with their warranties, we will
implement an exchange program for those models on a reasonably comparable basis
to the American Body Armor Xtreme ZX(R) exchange program outlined above.
Zylon(R) fiber is made by Toyobo, a Japanese corporation, and is a ballistic
fiber widely used in the entire body armor industry. A final report to the Duval
County Court regarding implementation of the settlement, exchange of vests and
on-going testing, will be filed on or before April 15, 2005. We are also
voluntarily cooperating with a request received in December 2004 from the
Department of Justice who is reviewing the entire industry's use of Zylon(R)
fiber in bullet resistant vests.

As a result of our recently announced warranty revision and product exchange
program relating to our Zylon(R)-containing vests, we have recorded a pre-tax
charge of $5.0 million, which is net of $4.0 million of cost reimbursements from
our suppliers and includes all the legal costs associated with the class action
lawsuits. This liability has been classified in accrued expenses and other
current liabilities on the condensed consolidated balance sheet and will be
funded through cash provided by operating activities.

Operating expenses. Operating expenses increased $37.5 million, or 59.7%, to
$100.3 million (10.2% of total revenues) for fiscal 2004 compared to $62.8
million (17.2% of total revenues) for fiscal 2003.

Aerospace & Defense Group operating expenses increased $17.5 million, or 309.0%,
to $23.1 million (3.8% of Aerospace & Defense Group revenues) for fiscal 2004
compared to $5.6 million (6.2% of Aerospace & Defense revenues) for fiscal 2003
primarily due to the acquisition of Simula on December 9, 2003 and Specialty
Defense on November 18, 2004, as well as additional operating expenses
associated with increased production of the Up-Armored HMMWV and supplemental
armor for other military vehicles. The decrease in operating expense as a
percentage of revenue was due to leveraging of the operating expenses over a
much larger revenue base.

Products Division operating expenses increased $11.8 million, or 35.5%, to $44.9
million (18.0% of Products Division revenues) for fiscal 2004 compared to $33.1
million (17.1% of Products Division revenues) for fiscal 2003. This increase is
due primarily to acquisitions, a one time settlement charge related to the early
cancellation of an exclusive distribution agreement, increased research and
development spending, higher sales expenses as related to increased sales
volumes, higher insurance costs, increased bad debt provisions, and bonus
expenses that in the prior year were allocated to corporate operating expenses.

Mobile Security Division operating expenses increased $2.5 million, or 20.8%, to
$14.8 million (11.9% of Mobile Security Division revenues) for fiscal 2004
compared to $12.3 million (15.4% of Mobile Security Division revenues) for
fiscal 2003. The increase in operating expense was primarily due to the large
increase in production and revenues, and, to a lesser extent, the impact of a
weaker U.S. dollar versus the euro. The decrease in operating expense as a
percentage of revenue was due to leveraging of the operating expenses over a
much larger revenue base.

Corporate operating expenses increased $5.7 million, or 48.6%, to $17.5 million
(1.8% of total revenues) in fiscal 2004 compared to $11.8 million in fiscal 2003
(3.2% of total revenues). This increase in administrative expenses is associated
with the overall growth of the Company, increased travel expenses, bonus
provision, and Sarbanes-Oxley requirements. The decrease in operating expense as
a percentage of revenue was due to leveraging of the operating expenses over a
much larger revenue base.

Amortization. Amortization expense increased $3.8 million, or 770.1%, to $4.3
million for fiscal 2004 compared to $489,000 for fiscal 2003 primarily due to
the acquisitions of Simula and Hatch Imports in December 2003 and ODV,
Kleen-bore, and Specialty Defense in fiscal 2004. SFAS 142, which we adopted on
January 1, 2002, eliminated amortization of intangible assets with indefinite
lives and goodwill for all acquisitions completed after July 1, 2001, as well as
for all fiscal years ending after January 1, 2002. Remaining amortization
expense is related to patents and trademarks with finite lives, and acquired
identifiable intangible amortizable assets that meet the criteria for
recognition as an asset apart from goodwill under Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141").

Integration and other charges. Integration and other charges decreased $2.3
million, or 18.4%, to $10.3 million for fiscal 2004 compared to $12.6 million in
fiscal 2003. Included in integration and other charges in fiscal 2004 were
charges for (1) the integration of Simula and Hatch Imports, which were acquired
in December 2003, (2) the integration of ODV, Kleen Bore, and Specialty Defense,
which were acquired subsequent to fiscal 2003, (3) a non-cash charge of $6.3
million related to the acceleration of performanced-based, long-term restricted
stock awards granted to certain executives in 2002, and (4) an impairment charge
of $1.4 million to reduce the carrying value of the remaining portion of NTI to
its estimated fair value. Included in integration and other charges in fiscal
2003 is non-cash charge of $7.3 million for stock-based compensation for a
performance plan for certain key executives and a $3.3 million severance charge
(including a $2.1 million non-cash charge) related to the 2003 departure of our
former Chief Executive Officer.

Operating income. Operating income from continuing operations increased $110.0
million, or 307.8%, to $145.7 million in fiscal 2004 compared to $35.7 million
in fiscal 2003 due to the factors discussed above.

Interest expense, net. Interest expense, net increased $2.8 million, or 68.9% to
$6.8 million for fiscal 2004 compared to $4.0 million for fiscal 2003. This
increase was due primarily to interest expense associated with the $300 million
aggregate principal amount of 2% Convertible Notes, which were issued on October
29, 2004, and $150 million aggregate principal amount of 8.25% Notes, which were
issued on August 12, 2003. On November 5, 2004, Goldman, Sachs & Co. exercised
its option to purchase an additional $45 million principal amount of the 2%
Convertible Notes also contributing to the increase in interest expense. On
September 2, 2003, we entered into interest rate swap agreements that
effectively exchanged the 8.25% fixed rate on the 8.25% Notes for a variable
rate of six month LIBOR, set in arrears, plus a spread of 2.735% to 2.75%. At
December 31, 2004, the six month LIBOR rate was 2.78%.

Other expense, net. Other expense, net, increased $1.4 million, or 282.9% to
$1.9 million for fiscal 2004, compared to $508,000 for fiscal 2003. The increase
related primarily to a non-cash asset impairment, foreign exchange currency
losses and a loss on disposal of certain fixed assets partially offset by the
realization of a gain on the sale of certain equity investments in fiscal 2004.
In fiscal 2003, other expense net related primarily to foreign exchange currency
losses.

Income from continuing operations before provision for income taxes. Income from
continuing operations before provision for income taxes increased $105.8
million, or 339.0%, to $137.0 million for fiscal 2004 compared to $31.2 million
for fiscal 2003 due to the reasons discussed above.

Provision for income taxes. Provision for income taxes on continuing operations
was $56.4 million for fiscal 2004 compared to $14.2 million for fiscal 2003. The
effective income tax rate was 41.2% for fiscal 2004 compared to 45.5% for fiscal
2003 based on our annual income amounts and jurisdictions in which such amounts
were taxable. The decreased tax rate relates primarily to the prior year income
tax charges associated with, among other things, (1) the non-tax deductible
nature of the non-cash, non-recurring stock based compensation that was provided
to certain key executives that had less of an impact on our effective tax rate
in 2004 as compared to 2003, and (2) a taxable gain that was realized in the
second half of 2003 when certain intellectual property utilized in our
discontinued operations was revalued to comply with U.S. Internal Revenue Code
provisions that did not occur in 2004. The impact of the incremental income tax
associated with the revalued intellectual property in 2003 was recorded in
continuing operations as required by generally accepted accounting principles,
and resulted in incremental non-cash income tax expense, for which foreign tax
credits were available to offset the income tax otherwise payable.

Income from continuing operations. Income from continuing operations increased
$63.6 million, or 373.8%, to $80.6 million for fiscal 2004 compared to $17.0
million for fiscal 2003 due to the factors discussed above.

DISCONTINUED OPERATIONS

As previously discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations, we had no discontinued operations at
December 31, 2004. Note 2 of the consolidated financial statements contains
comparative information for our discontinued operations.

Services revenues. Services Division revenue decreased $93.4 million to $1.7
million for fiscal 2004, compared to $95.1 million for fiscal 2003. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, and ArmorGroup,
which we sold on November 26, 2003, revenue decreased $1.1 million, or 38.2%, to
$1.7 million for fiscal 2004 compared to $2.8 million for fiscal 2003 primarily
due to the sale of the security consulting business of NTI on July 2, 2004.

Cost of revenues. Cost of revenues decreased $66.1 million to $697,000 for
fiscal 2004, compared to $66.8 million for fiscal 2003. Exclusive of ArmorGroup
Integrated Systems and ArmorGroup, cost of revenues decreased $356,000, or
33.8%, to $697,000 for fiscal 2004, compared to $1.1 million for fiscal 2003.
This decrease was primarily due to the sale of the security consulting business
of NTI on July 2, 2004.

Operating expenses. Operating expenses decreased $19.1 million to $821,000
(47.4% of Services revenues) for fiscal 2004, compared to $19.9 million (20.9%
of Services revenues) for fiscal 2003. Exclusive of ArmorGroup Integrated
Systems and ArmorGroup, operating expenses decreased $4.1 million, or 83.1%, to
$821,000 for fiscal 2004, compared to $4.9 million for fiscal 2003. This
decrease was primarily due to the sale of the security consulting business of
NTI on July 2, 2004. In accordance with generally accepted accounting
principles, we did not record depreciation or amortization of long-lived assets
that were held-for-sale in discontinued operations.

Charge for impairment of long-lived assets. Charge for impairment of long-lived
assets was zero for fiscal 2004, compared to $21.5 million for fiscal 2003. The
charge in the prior year related to reduction in the carrying value of the
Services division to its estimate realizable value.

Integration and other charges. Integration and other charges decreased to zero
for fiscal 2004, compared to $776,000 for fiscal 2003. Excluding ArmorGroup
Integrated Systems and ArmorGroup, there were no integration and other charges
for fiscal 2003.

Operating income (loss). Operating income was $215,000 for fiscal 2004, compared
to an operating loss of $13.9 million for fiscal 2003, due to the factors
discussed above. Excluding the ArmorGroup Integrated Systems and ArmorGroup, the
balance of the assets held for sale generated operating income of $215,000 for
fiscal 2004, compared to an operating loss of $1.0 million for fiscal 2003, due
to the reasons discussed above.

Interest expense, net. Interest expense, net, decreased $14,000 to $2,000 for
fiscal 2004, compared to $16,000 for fiscal 2003, primarily due to the sale of
ArmorGroup Integrated Systems and ArmorGroup. All interest bearing liabilities
in discontinued operations have been repaid.

Other expense, net. Other expense, net, decreased $206,000 to $273,000 for
fiscal 2004, compared to $479,000 for fiscal 2003. Excluding the ArmorGroup
Integrated Systems and ArmorGroup, the balance of the assets held for sale
generated other expense, net, from discontinued operations of $273,000 for
fiscal 2004, compared to other (income), net, of ($34,000) for fiscal 2003, due
to additional accounting fees incurred in connection with the sale of
ArmorGroup.

Loss from discontinued operations before income tax benefit. Loss from
discontinued operations before income tax benefit was $60,000 for fiscal 2004,
compared to a loss of $14.4 million for fiscal 2003, due to the reasons
discussed above. Excluding the ArmorGroup Integrated Systems and ArmorGroup, the
balance of the assets held for sale generated a loss from discontinued
operations before provision for income taxes of $60,000 for fiscal 2004,
compared to a loss of $957,000 for fiscal 2003, due to the reasons discussed
above.

Income tax benefit. Income tax benefit was $22,000 for the fiscal 2004 compared
to an income tax benefit of $8.3 million for fiscal 2003. The effective tax rate
for fiscal 2004 was a benefit of 36.7% compared to a benefit of 57.4% for fiscal
2003. Excluding the ArmorGroup Integrated Systems and ArmorGroup, the balance of
the assets held for sale benefit was $22,000 for fiscal 2004, compared to a
benefit of $40,000 for fiscal 2003.

Loss from discontinued operations. Loss from discontinued operations was $38,000
for fiscal 2004, compared to $6.1 million for fiscal 2003, due to the factors
discussed above. Excluding the ArmorGroup Integrated Systems and ArmorGroup, the
balance of the assets held for sale generated a loss from discontinued
operations $38,000 for fiscal 2004, compared to a loss of $957,000 for fiscal
2003, due to the reasons discussed above.

FISCAL 2003 AS COMPARED TO FISCAL 2002

Net income (loss). Net income (loss) increased $28.6 million, or 161.5%, to net
income of $10.9 million for the year ended December 31, 2003 ("fiscal 2003")
compared to a net loss of $(17.7) million for the year ended December 31, 2002
("fiscal 2002"). Income from continuing operations and a loss from discontinued
operations were $17.0 million and $(6.1) million, respectively, for fiscal 2003,
compared to income from continuing operations and a loss from discontinued
operations of $21.3 million and $(39.0) million, respectively, for fiscal 2002.
The decrease in income from continuing operations relates primarily to a $7.3
million non-cash, non-recurring charge for stock based compensation in the
fourth quarter of 2003, a $3.3 million (including a $2.1 million non-cash
charge) severance charge related to the termination of our former Chief
Executive Officer in the second quarter of 2003, an increase in interest expense
relating to our $150.0 million subordinated debenture issued on August 12, 2003,
and increases in bonus expense, legal and accounting fees, insurance and
internal audit expenses.

CONTINUING OPERATIONS

Aerospace & Defense Group revenues. Our Aerospace & Defense Group revenues
increased $32.4 million, or 54.5%, to $91.7 million in fiscal 2003 compared to
$59.3 million in fiscal 2002. The Aerospace & Defense Group was created with the
acquisition of Simula on December 9, 2003. The Aerospace & Defense Group also
includes the military business of the Mobile Security Division, including armor
and blast protection systems for Up-Armored HMMWVs, and the SAPI business
generated from our Protech subsidiary. The historical results of these
businesses have been reclassified to the Aerospace & Defense Group. For fiscal
2003, Aerospace & Defense Group revenue increased 47.2% internally, including
year-over-year changes in acquired businesses, while acquired growth was a
function of the acquisitions of Simula on December 9, 2003 and Specialty Defense
on November 18, 2004.

Products Division revenues. Our Products Division revenues increased $14.0
million, or 7.8%, to $194.0 million in fiscal 2003, compared to $179.9 million
in fiscal 2002. For fiscal 2003, Products Division revenue increased 4.9%
internally, including year-over-year changes in acquired businesses, and 2.9%
due to the acquisitions of Speedfeed, Inc., the Foldable Products Group,
Evi-Paq, Inc., B-Square, Inc. and 911 Emergency Products, Inc., all of which
were completed during 2002 and Hatch Imports, Inc., which was completed in the
fourth quarter of 2003. Products Division revenues include $20.7 million and
$16.8 million from Cyconics International Training Services, Inc., our US based
training company, for the years ended fiscal 2003 and fiscal 2002, respectively.
In our filings prior to June 30, 2002, we reported Cyconics International
Training Services, Inc. as a part of our Services Division. The historical
results of the SAPI business of the Products Division have been reclassified to
the Aerospace & Defense Group.

Mobile Security Division revenues. Our Mobile Security Division revenues
increased $13.7 million, or 20.8%, to $79.6 million in fiscal 2003, compared to
$65.9 million in fiscal 2002. Mobile Security Division revenues for 2003
increased by $19.2 million due to the acquisition of substantially all of the
assets of Trasco-Bremen on September 24, 2002. Excluding the $19.2 million of
2003 revenue increase relating to Trasco-Bremen, Mobile Security Division
revenue decreased $5.5 million, or 8.7%, in fiscal 2003 compared to fiscal 2002.
The historical results of the military business of the Mobile Security Division
have been reclassified to the Aerospace & Defense Group.

Cost of revenues. Cost of revenues increased $42.8 million, or 20.3%, to $253.6
million for fiscal 2003 compared to $210.7 million for fiscal 2002. As a
percentage of total revenues, cost of revenues increased to 69.4% of total
revenues for fiscal 2003 from 69.1% for fiscal 2002.

Gross margins in the Aerospace & Defense Group were 31.3% for fiscal 2003
compared to 28.3% for fiscal 2002. The increase in the Aerospace & Defense Group
gross margins was primarily attributable to: (1) favorable manufacturing
overhead cost absorption relating to increased manufacturing volumes at our
Cincinnati manufacturing facility, and (2) operational efficiencies at our
Cincinnati manufacturing facility. These improvements were slightly offset by
purchase accounting from the Simula acquisition, and the wrap up of a low margin
contract at Simula, which was acquired on December 9, 2003.

Gross margins in the Products Division were 34.8% for fiscal 2003 compared to
36.4% for fiscal 2002. The decline in Product Division's gross margins resulted
primarily from: (1) an increase in low margin gas mask sales; (2) an increase in
lower margin international body armor sales produced overseas at Armor Products
International; (3) lower production volumes within our less-lethal, automotive
and hard armor product lines, which resulted in reduced fixed cost absorption
and certain labor inefficiencies; and (4) moving costs and labor inefficiencies
at Protech associated with the relocation of its manufacturing facility.
Excluding our Products training division subsidiary, the Products Division gross
margins were 37.1%, compared to 38.7% in 2002.

Gross margins in the Mobile Security Division were 19.4% in fiscal 2003,
compared to 18.3% for fiscal 2002. The increase in the Mobile Security gross
margins was primarily attributable to: (1) favorable manufacturing overhead cost
absorption relating to increased manufacturing volumes at our Cincinnati
manufacturing facility, and (2) operational efficiencies at our Cincinnati
manufacturing facility.

Operating expenses. Operating expenses increased $13.0 million, or 26.0%, to
$62.8 million (17.2% of total revenues) for fiscal 2003 compared to $49.8
million (16.3% of total revenues) for fiscal 2002.

Aerospace & Defense Group operating expenses increased $1.9 million, or 51.9%,
to $5.6 million (6.2% of Aerospace & Defense Group revenues) compared to $3.7
million (6.3% of Aerospace & Defense Group revenues) for fiscal 2002 primarily
due to incremental operating expenses associated with the acquisition of Simula
on December 9, 2003.

Products Division operating expenses increased $1.8 million, or 5.7%, to $33.1
million (16.6% of Products Division revenues) compared to $31.4 million (17.4%
of Products Division revenues) for fiscal 2002. This increase is primarily due
to the incremental operating expenses associated with acquired businesses
completed during or subsequent to 2002.

Mobile Security Division operating expenses increased $3.7 million, or 43.1%, to
$12.3 million (15.4% of Mobile Security Division revenues) for fiscal 2003
compared to $8.6 million (13.0% of Mobile Security Division revenues) for fiscal
2002. Excluding the increase in 2003 operating expenses resulting from the
acquisition of substantially all of the assets of Trasco-Bremen on September 24,
2002, the operating expenses for fiscal 2003 increased $1.9 million versus
fiscal 2002. Aside from the Trasco-Bremen acquisition, the increase in operating
expenses was primarily due to: (1) increased expenses associated with the
start-up of operations in Caracas, Venezuela; (2) increased insurance costs; (3)
the net effect of a weaker U.S. dollar against foreign currencies, and (4)
normal wage inflation.

Corporate operating expenses increased $5.6 million, or 89.9%, to $11.8 million
(3.2% of total revenues) in fiscal 2003 compared to $6.2 million in fiscal 2002
(2.0% of total revenues). This increase is due primarily to increased bonus
expense, legal and accounting fees, insurance and internal audit expenses.

Amortization. Amortization expense increased $244,000, or 99.6%, to $489,000 for
fiscal 2003 compared to $245,000 for fiscal 2002. SFAS 142, which we adopted on
January 1, 2002, eliminated amortization of intangible assets with indefinite
lives and goodwill for all acquisitions completed after July 1, 2001, as well as
for all fiscal years ending after January 1, 2002. Remaining amortization
expense is related to patents and trademarks with finite lives and to
amortization on intangible assets, other than goodwill, associated with the
Simula and Hatch Imports acquisitions in 2003.

Integration and other charges. Integration and other charges increased $6.7
million, or 112.2%, to $12.6 million for fiscal 2003 compared to $5.9 million in
fiscal 2002. The increase in integration and other charges is primarily related
to a $7.3 million non-cash charge for stock-based compensation for a performance
plan for certain key executives and a $3.3 million severance charge (including a
$2.1 million non-cash charge) related to the recent departure of our former
Chief Executive Officer. Excluding these charges, integration and other charges
were $2.0 million for fiscal 2003, a decrease of $3.9 million from fiscal 2002.
This decrease was primarily due to the elimination of expense associated with
the 2001 acquisitions of O'Gara-Hess & Eisenhardt and Identicator.

Operating income. Operating income from continuing operations decreased $2.7
million, or 6.9%, to $35.7 million in fiscal 2003 compared to $38.4 million in
fiscal 2002 due to the factors discussed above.

Interest expense, net. Interest expense, net increased $3.1 million, or 334.7%,
to $4.0 million for fiscal 2003 compared to $923,000 for fiscal 2002. This
increase was due primarily to interest expense associated with the $150 million
aggregate principal amount of 8.25% senior subordinated notes due 2013, which
were issued on August 12, 2003. On September 2, 2003, we entered into interest
rate swap agreements that effectively exchanged the 8.25% fixed rate for a
variable rate of six month LIBOR, set in arrears, plus a spread of 2.735% to
2.75%. At December 31, 2003, the six-month LIBOR rate was 1.22%.

Other expense, net. Other expense, net, was $508,000 for fiscal 2003, compared
to $51,000 for fiscal 2002. The increase related primarily to foreign exchange
currency losses and a write-down of certain fixed assets.

Income from continuing operations before provision for income taxes. Income from
continuing operations before provision for income taxes decreased $6.2 million,
or 16.5%, to $31.2 million for fiscal 2003 compared to $37.4 million for fiscal
2002 due to the reasons discussed above.

Provision for income taxes. Provision for income taxes on continuing operations
was $14.2 million for fiscal 2003 compared to $16.1 million for fiscal 2002. The
effective income tax rate was 45.5% for fiscal 2003 compared to 42.9% for fiscal
2002 based on our annual income amounts and jurisdictions in which such amounts
were taxable. The 2003 effective income tax rate of 45.5% is higher than the
37.4% estimated effective income tax rate that was utilized in the first half of
2003 due to, among other things: (1) the non-tax deductible nature of the
non-cash, non-recurring stock based compensation that was provided to certain
key executives, and (2) a taxable gain that was realized in the second half of
2003 when certain intellectual property utilized in our discontinued operations
was revalued in order to comply with tax code provisions. The impact of the
incremental tax associated with the revalued intellectual property is recorded
in continuing operations as required by generally accepted accounting
principles, and resulted in an incremental non-cash tax expense, for which
foreign tax credits are available to offset the tax otherwise payable. The
previously mentioned negative impacts on the 2003 tax rate were partially offset
by some state level tax strategies, which lowered the effective tax rate.

Income from continuing operations. Income from continuing operations decreased
$4.3 million to $17.0 million for fiscal 2003 compared to $21.3 million for
fiscal 2002 due to the factors discussed above.

DISCONTINUED OPERATIONS

Many of the items listed below involve accounting estimates. The loss and
amounts below will be re-evaluated in the future for any changes which might be
appropriate.

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to AIS. AIS
is a wholly owned subsidiary of Aerwav Holdings, LLC. As consideration for the
integrated systems business, we received a $4.1 million collateralized note due
in April 2005 two years and a warrant for approximately 2.5% of AIS. We have
recorded a loss of $366,000 on the sale.

On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33.7 million in consideration to a group of
private investors led by Granville Baird Capital Partners of London, England and
management. We received $31.4 million in cash at closing and are scheduled to
receive another $2.3 million by the end of 2004. We have recorded a loss of $8.8
million on the sale. In accordance with generally accepted accounting
principles, unrealized gains and losses, which were included in equity as
accumulated other comprehensive income or loss, were not recognized until the
period of disposition of the related assets and liabilities (which was a large
component of the loss).

At December 31, 2003, our litigation support services subsidiary, remained our
only operating subsidiary in discontinued operations.

Note 2 of the consolidated financial statements contains comparative information
for our discontinued operations.

Services revenues. Services Division revenues decreased $3.1 million, or 3.2%,
to $95.1 million for fiscal 2003 compared to $98.3 million for fiscal 2002 as
fiscal 2003 reflects revenues from ArmorGroup only through November 26, 2003,
and revenues from ArmorGroup Integrated Systems only through April 17, 2003,
their respective dates of sale as opposed to a full year in 2002. Exclusive of
ArmorGroup Integrated Systems, revenue increased $8.5 million, or 10.3%, to
$90.4 million for fiscal 2003 compared to $82.0 million for fiscal 2002. This
increase was due to strong performance primarily in the Middle East with strong
growth coming from Iraq along with ongoing strong training revenues from the
Athens Olympics build up. The increase was tempered by weak revenues in mine
action business, investigations business and the Latin American business and the
lack of a full year's revenues in fiscal 2003.

Cost of revenues. Cost of revenues decreased $9.0 million, or 11.9%, to $66.8
million for fiscal 2003 compared to $75.8 million for fiscal 2002 as fiscal 2003
reflects cost of revenues from ArmorGroup only through November 26, 2003, and
cost of revenues from ArmorGroup Integrated Systems only through April 17, 2003,
their respective dates of sale. As a percentage of total revenue from
discontinued operations, cost of revenues decreased to 70.2% of total revenues
from discontinued operations for fiscal 2003 from 77.1% for fiscal 2002. This
decrease is a result of the sale of the ArmorGroup Integrated Systems business
in April 2003, which has a comparatively low gross margin.

Exclusive of ArmorGroup Integrated Systems, cost of revenues increased $3.9
million, or 6.8%, to $61.6 million for fiscal 2003 compared to $57.7 million for
fiscal 2002. Exclusive of ArmorGroup Integrated Systems, cost of revenues as a
percentage of total revenue from discontinued operations decreased to 68.2% of
total revenues from discontinued operations for fiscal 2003 from 70.4% for
fiscal 2002. This decrease in cost of revenues as a percentage of total revenue
from discontinued operations was primarily a result of the proportion of the
revenue growth coming from expatriate intensive security contracts in Iraq and
continued high margin training contracts.

Operating expenses. Operating expenses decreased $10.7 million, or 34.9%, to
$19.9 million (20.9% of total revenues from discontinued operations) for fiscal
2003 compared to $30.6 million (31.1% of total revenues from discontinued
operations) for fiscal 2002 as fiscal 2003 reflects operating expenses from
ArmorGroup only through November 26, 2003, and operating expenses from
ArmorGroup Integrated Systems only through April 17, 2003, their respective
dates of sale. Exclusive of ArmorGroup Integrated Systems, operating expenses
decreased $7.6 million, or 28.1%, to $19.4 million for fiscal 2003 compared to
$26.9 million for fiscal 2002. This decrease was due to reduced foreign currency
expenses, a reduction in salary costs as a result of the 2002 restructuring and
the sale of ArmorGroup on November 26, 2003. In accordance with generally
accepted accounting principles, we did not record depreciation or amortization
of long-lived assets that were held-for-sale in discontinued operations.

Charge for impairment of long-lived assets. Charge for impairment of long-lived
assets was $21.5 million for fiscal 2003 compared to $30.3 million for fiscal
2002. The fiscal 2003 charge related to a $12.4 million reduction in the
carrying value of the Services division to its estimated realizable value, the
$8.8 million loss on the sale of ArmorGroup and the $366,000 loss on the sale of
ArmorGroup Integrated Systems. The 2002 charge was the result of $6.1 million in
estimated disposal costs and a $24.2 million reduction in carrying value of the
Services Division to the estimated realizable value as required by SFAS 144.

Integration and other charges. Integration and other charges decreased $1.8
million, or 70.4%, to $776,000 for fiscal 2003 compared to $2.6 million for
fiscal 2002. This decrease is primarily due to severance payments to certain
personnel in the prior year.

Operating loss. Operating losses were $(13.9) million for fiscal 2003, compared
to an operating loss of $(41.0) million for fiscal 2002 due to the factors
discussed above. Operating loss from the ArmorGroup Integrated Systems business
was $(15.0) million for fiscal 2002 primarily due to the $11.9 million charge
for impairment of long-lived assets. Excluding the ArmorGroup Integrated Systems
business, the balance of the assets held for sale generated an operating loss of
$(3.7) million for fiscal 2003 compared to an operating loss of $(26.9) million
for fiscal 2002.

Interest expense, net. Interest expense, net decreased $330,000 or 95.4%, to
$16,000 for fiscal 2003 compared to $346,000 for fiscal 2002. This decrease was
due to decreased utilization of the Services Division's line of credit.

Other expense, net. Other expense, net, was $479,000 for fiscal 2003 compared to
$99,000 for fiscal 2002 due primarily to an increase in foreign currency
fluctuation losses in fiscal 2003.

Loss from discontinued operations before benefit for income taxes. Loss from
discontinued operations before benefit for income taxes was $(14.4) million for
fiscal 2003 and $(41.5) million for fiscal 2002 due to the reasons discussed
above.

Benefit for income taxes. Income tax benefit was $8.3 million for fiscal 2003
compared to $2.4 million for fiscal 2002. The effective tax rate for fiscal 2003
was a benefit of 57.4% compared to a benefit of 5.9% for fiscal 2002. The income
tax benefit of 57.4% for fiscal 2003 was primarily due to a taxable loss
realized on the sale of ArmorGroup.

Loss from discontinued operations. Loss from discontinued operations was $(6.1)
million for fiscal 2003 compared to a loss from discontinued operations of
$(39.0) million for fiscal 2002 due to the factors discussed above.

QUARTERLY RESULTS

Set forth below are certain unaudited quarterly financial data for each of our
last eight quarters and certain such data expressed as a percentage of our
revenue for the respective quarters. The information has been derived from
unaudited financial statements that, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present such quarterly information in accordance with generally accepted
accounting principles. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.

QUARTER ENDED

(IN THOUSANDS, EXCEPT PER SHARE DATA)
Dec 31, Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
2004 2004 2004 2004 2003 2003 2003 2003
------- ------- -------- -------- -------- ------ ------ ---------

Revenues:
Aerospace & Defense $234,379 $160,238 $129,773 $ 81,008 $ 38,834 $21,136 $15,793 $ 15,910
Products 65,523 64,659 65,743 53,840 50,802 49,804 49,347 44,007
Mobile Security 37,646 31,906 28,188 26,780 22,521 19,942 16,519 20,557
-------- -------- -------- -------- -------- ------- ------- ---------
Total Revenue 337,548 256,803 223,704 161,628 112,157 90,882 81,659 80,474
Operating income 47,356 41,735 33,976 22,648 8,381 12,512 6,010 8,826
Interest expense, net 1,591 1,400 2,057 1,728 1,721 1,475 437 379
Other expense (income), net 2,066 154 (390) 115 327 96 16 69
-------- -------- -------- -------- -------- ------- ------- ---------
Income from continuing 43,699 40,181 32,309 20,805 6,333 10,941 5,557 8,378
operations before taxes
Provision for income taxes 17,345 16,307 14,588 8,177 4,159 4,832 2,079 3,133
-------- -------- -------- -------- -------- ------- ------- ---------
Income from continuing 26,354 23,874 17,721 12,628 2,174 6,109 3,478 5,245
operations
-------- -------- -------- -------- -------- ------- ------- ---------
Income (loss) from
discontinued operations, net
of provision (benefit) for
income taxes -- -- 100 (138) (7,103) 6 1,135 (158)
-------- -------- -------- -------- -------- ------- ------- ---------
Net income (loss) $26,354 $23,874 $ 17,821 $ 12,490 $ (4,929) $6,115 $4,613 $ 5,087
======== ======== ======== ======== ======== ======= ======= =========

Net income (loss) per common
share - Basic
Income from continuing $ 0.78 $ 0.73 $ 0.60 $ 0.44 $ 0.08 $ 0.22 $ 0.13 $ 0.18
operations
(Loss) gain from discontinued 0.00 0.00 0.00 0.00 (0.25) 0.00 0.04 (0.01)
operations
-------- -------- -------- -------- -------- ------- ------- ---------
Basic earnings (loss) per share $ 0.78 $ 0.73 $ 0.60 $ 0.44 $ (0.17) $ 0.22 $ 0.17 $ 0.17
======== ======== ======== ======== ======== ======= ======= =========
Net income (loss) per common
share - Diluted
Income from continuing $ 0.74 $ 0.70 $ 0.57 $ 0.42 $ 0.07 $ 0.22 $ 0.13 $ 0.18
operations
(Loss) gain from discontinued 0.00 0.00 0.00 0.00 (0.24) 0.00 0.04 (0.01)
operations
-------- -------- -------- -------- -------- ------- ------- ---------
Diluted earnings (loss) per $ 0.74 $ 0.70 $ 0.57 $ 0.42 $ (0.17) $ 0.22 $ 0.17 $ 0.17
share
======== ======== ======== ======== ======== ======= ======= =========

Weighted average common shares
outstanding
Basic 33,946 32,861 29,670 28,472 28,195 27,811 27,555 28,964
Diluted 35,555 34,198 31,008 29,934 29,364 28,249 27,836 29,111

Revenues:
Aerospace & Defense 69.4% 62.4% 58.0% 50.1% 34.6% 23.3% 19.4% 19.8%
Products 19.4% 25.2% 29.4% 33.3% 45.3% 54.8% 60.4% 54.7%
Mobile Security 11.2% 12.4% 12.6% 16.6% 20.1% 21.9% 20.2% 25.5%
-------- -------- -------- -------- -------- ------- ------- ---------
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income 14.0% 16.3% 15.2% 14.0% 7.5% 13.7% 7.3% 11.0%
Interest expense, net 0.5% 0.5% 0.9% 1.1% 1.5% 1.6% 0.5% 0.5%
Other expense (income), net 0.6% 0.1% (0.2)% 0.1% 0.3% 0.1% 0.0% 0.1%
-------- -------- -------- -------- -------- ------- ------- ---------
Income from continuing 12.9% 15.6% 14.4% 12.9% 5.6% 12.0% 6.8% 10.4%
operations before taxes
Provision for income taxes 5.1% 6.4% 6.5% 5.1% 3.7% 5.3% 2.5% 3.9%
-------- -------- -------- -------- -------- ------- ------- ---------
Income from continuing 7.8% 9.3% 7.9% 7.8% 1.9% 6.7% 4.3% 6.5%
operations
Income (loss) from
discontinued operations, net
of provision (benefit) for
income taxes 0.0% 0.0% 0.1% (0.1)% (6.3)% 0.0% 1.4% (0.2)%
-------- -------- -------- -------- -------- ------- ------- ---------
Net income (loss) 7.8% 9.3% 8.0% 7.7% (4.4)% 6.7% 5.7% 6.3%
======== ======== ======== ======== ======== ======= ======= =========

LIQUIDITY AND CAPITAL RESOURCES

On October 29, 2004, we completed the placement of $300 million aggregate
principal amount of the 2.00% Senior Subordinated Convertible Notes due November
1, 2024 (the "2% Convertible Notes"). On November 5, 2004, Goldman, Sachs & Co.
exercised its option to purchase an additional $45 million principal amount of
the 2% Convertible Notes. The 2% Convertible Notes are guaranteed by most of our
domestic subsidiaries on a senior subordinated basis (see Note 21). The 2%
Convertible Notes were initially rated B1/B+ by Moody's Investors' Service and
Standard & Poor's Rating Services, respectively. The 2% Convertible Notes will
bear interest at a rate of 2.00% per year, payable on November 1 and May 1 of
each year beginning on May 1, 2005 and ending on November 1, 2011. The 2%
Convertible Notes will be subject to accretion of the principal amount beginning
on November 1, 2011, at a rate that provides holders with an aggregate annual
yield to maturity of 2.00%, as defined in the agreement. The 2% Convertible
Notes will bear contingent interest during any six-month period beginning
November 1, 2011, of 15 basis points paid in cash if the average trading price
of the notes is above certain levels. The 2% Convertible Notes will be
convertible, at the bond holder's option, initially at a conversion rate of
18.5151 shares of our common stock per $1,000 principal amount of notes, which
is the equivalent conversion price of approximately $54.01 per share, subject to
adjustment. Upon conversion, we will satisfy our conversion obligation with
respect to the accreted principal amount of the notes to be converted in cash,
with any remaining amount to be satisfied in shares of our common stock. In
accordance with generally accepted accounting principles, the 2% Convertible
Notes are classified as short term debt. We intend to use the proceeds of the
offering to fund acquisitions and for general corporate and working capital
purposes, including the funding of capital expenditures. Funds that are not
immediately used are invested in money market funds and other investment grade
securities until needed.

On June 22, 2004, our stockholders approved an amendment to our Certificate of
Incorporation, as amended, that increased the number of shares of our authorized
capital stock to 80,000,000, of which 75,000,000 shares are designated as common
stock and 5,000,000 shares are designated as preferred stock.

On June 15, 2004, we sold 4,000,000 primary shares of common stock at a price of
$37.50 per share, raising $142.5 million of net proceeds after deducting the
underwriter discounts and commissions. In addition, certain of our directors and
officers granted the underwriters a 30-day option to purchase up to 600,000
shares. The 30-day option expired unexercised on July 15, 2004. We intend to use
the net proceeds from the offering to fund future acquisitions, to take
advantage of business development opportunities, and for general corporate and
working capital purposes, including the funding of capital expenditures.

On September 2, 2003, we entered into interest rate swap agreements, which have
been designated as fair value hedges as defined under SFAS 133 with a notional
amount totaling $150 million. The agreements were entered into to exchange the
fixed interest rate on our 8.25% Notes for a variable interest rate equal to
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth day of February and August. The agreements
are subject to other terms and conditions common to transactions of this type.
In accordance with SFAS 133, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the fixed rate debt due to
changes in the market interest rate. Accordingly, other assets on the
Consolidated Balance Sheet as of December 31, 2004 increased by $195,000 to $6.1
million at December 31, 2004, from $5.9 million at December 31, 2003, which
reflected an increase in the fair value of the interest rate swap agreements.
The corresponding increase in the hedge liability was recorded in long-term
debt. The agreements are deemed to be a perfectly effective fair value hedge,
and, therefore, qualify for the short-cut method of accounting under SFAS 133.
As a result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.

On August 12, 2003, we completed a private placement of $150 million aggregate
principal amount of the 8.25% Notes. The 8.25% Notes are guaranteed by almost
all of our domestic subsidiaries, on a senior subordinated basis. The 8.25%
Notes have been sold to qualified institutional investors in reliance on Rule
144A of the Securities Act of 1933, as amended, and to non-U.S. persons in
reliance on Regulation S under the Securities Act of 1933, as amended. The 8.25%
Notes were initially rated B1/B+ by Moody's Investors' Service and Standard &
Poor's Rating Services, respectively. We used a portion of the funds to repay
debt, acquire Simula, Inc., Hatch Imports, Inc., ODV, Inc., and Kleen-Bore,
Inc., and we intend to use the remaining proceeds of the offering to fund
acquisitions and for general corporate and working capital purposes, including
the funding of capital expenditures. On March 29, 2004, we completed a
registered exchange offer for the 8.25% Notes and exchanged the 8.25% Notes for
new 8.25% Notes that were registered under the Securities Act of 1933, as
amended.

On August 12, 2003, in concert with our 8.25% Note offering, we entered into a
new secured revolving credit facility (the "Credit Facility") with Bank of
America, N.A., Wachovia Bank, National Association and a syndicate of other
financial institutions arranged by Bank of America Securities, LLC. The Credit
Facility consists of a five-year revolving credit facility, and, among other
things, provides for (i) total maximum borrowings of $60 million, (ii) a $25
million sub-limit for the issuances of standby and commercial letters of credit,
(iii) a $5 million sub-limit for swing-line loans, and (iv) a $5 million
sub-limit for multi-currency borrowings. All borrowings under the Credit
Facility will bear interest at either (i) a rate equal to LIBOR, plus an
applicable margin ranging from 1.125% to 1.625%, (ii) an alternate base rate
which will be the higher of (a) the Bank of America prime rate and (b) the
Federal Funds rate plus 0.50%, or (iii) with respect to foreign currency loans,
a fronted offshore currency rate, plus an applicable margin ranging from 1.125%
to 1.625%, depending on certain conditions. The Credit Facility is guaranteed by
certain of our direct and indirect domestic subsidiaries and is collateralized
by, among other things, (i) a pledge of all of the issued and outstanding shares
of stock or other equity interests of certain of our domestic subsidiaries, (ii)
a pledge of 65% of the issued and outstanding voting shares of stock or other
voting equity interests of certain of our direct and indirect foreign
subsidiaries, (iii) a pledge of 100% of the issued and outstanding nonvoting
shares of stock or other nonvoting equity interests of certain of our direct and
indirect foreign subsidiaries, and (iv) a first priority perfected security
interest on certain of our domestic assets and certain domestic assets of
certain of our direct and indirect subsidiaries that will become guarantors of
our obligations under the Credit Facility, including, among other things,
accounts receivable, inventory, machinery, equipment, certain contract rights,
intellectual property rights and general intangibles. On January 9, 2004, we
amended our Credit Facility to broaden our ability to make additional
open-market purchases of publicly-traded securities subject to certain
limitations. On March 29, 2004, we amended our Credit Facility to allow us to
pay dividends subject to certain limitations.

As of December 31, 2004, we were in compliance with all of our negative and
affirmative covenants contained in the Credit Facility and the indentures
governing the 8.25% Notes and the 2% Convertible Notes.

In March 2002, our Board of Directors approved a stock repurchase program
authorizing the repurchase of up to a maximum 3.2 million shares of our common
stock. In February 2003, the Board of Directors increased this stock repurchase
program to authorize the repurchase, from time to time depending upon market
conditions and other factors, of up to an additional 4.4 million shares. Through
February 10, 2005, we repurchased 3.8 million shares of our common stock under
the stock repurchase program at an average price of $12.49 per share, leaving us
with the ability to repurchase up to an additional 3.8 million shares of our
common stock. Repurchases may be made in the open market, in privately
negotiated transactions utilizing various hedging mechanisms including, among
others, the sale to third parties of put options for the Company's common stock,
or otherwise. At December 31, 2004, we had 34.1 million shares of common stock
outstanding.

We expect to continue our policy of repurchasing our common stock from time to
time, subject to the restrictions contained in our Credit Facility, the
indenture governing the 8.25% Notes and the indenture governing the 2%
Convertible Notes. Our Credit Facility permits us to repurchase shares of our
common stock with no limitation if our ratio of Consolidated Senior Indebtedness
to Consolidated EBITDA (as such terms are defined in the Credit Facility) for
any rolling twelve-month period is less than 1.00 to 1. When such ratio is
greater than 1.00 to 1, our Credit Facility limits our ability to repurchase
shares at $15.0 million. This basket resets to $0 each time the ratio is less
than 1.00 to 1. As of December 31, 2004, such ratio was 0.06 to 1. Our
indentures governing the 8.25% Notes and the 2% Convertible Notes also permit us
to repurchase shares of our common stock, subject to certain limitations, as
long as we satisfy the conditions to such repurchase contained therein.

Working capital for continuing operations was $289.6 million and $168.5 million
as of December 31, 2004, and December 31, 2003, respectively. The increase in
working capital is largely a function of increases in cash from our October 2004
2% Convertible Note offering, our June 2004 $150 equity offering, and increases
in inventory of $73.1 million and accounts receivable of $90.5 million to
support the growth in revenues from demand for the Up-Armored HMMWV,
supplemental armor for other military vehicles, and SAPI plates.

Our fiscal 2004 capital expenditures for continuing operations were $19.4
million. Such expenditures included additional manufacturing and office space,
and manufacturing machinery and equipment, leasehold improvements, information
technology and communications infrastructure equipment.

We anticipate that the cash on hand, cash generated from operations, and
available borrowings under the Credit Facility will enable us to meet liquidity,
working capital and capital expenditure requirements during the next 12 months.
We may, however, require additional financing to pursue our strategy of growth
through acquisitions and we are continuously exploring alternatives. If such
financing is required, there are no assurances that it will be available, or if
available, that it can be obtained on terms favorable to us or on a basis that
is not dilutive to our stockholders.

RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 129-1, Disclosure Requirements under FASB Statement No. 129,
"Disclosure of Information about Capital Structure," relating to contingently
convertible securities ("FSP 129-1"). The purpose of FSP 129-1 is to interpret
how the disclosure provisions of FASB Statement No. 129 apply to contingently
convertible securities and to their potentially dilutive effects on earnings per
share. The guidance in FSP 129-1 is effective April 2004 and applies to all
existing and newly created securities. This pronouncement has no effect on us.

On December 16, 2004, the FASB issued FASB Statement No. 123(R), Share-Based
Payment (FAS 123(R)). FAS 123(R) revises FASB Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123) and requires companies to expense the fair
value of employee stock options and other forms of stock-based compensation. In
addition to revising FAS 123, FAS 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and
amends FASB Statement No. 95, "Statement of Cash Flows." FAS 123(R) must be
adopted no later than periods beginning after June 15, 2005. We expect to incur
approximately $3 million of expense in the second half of 2005 as a result of
the adoption of FASB Statement No. 123(R).

In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into
law. In December 2004, the FASB issued Staff Position No. 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 and Staff Position No. 109-2 ("FSP 109"), Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. FSP 1009-1 clarifies that the manufacturer's
tax deduction provided for under the AJCA should be accounted for as a special
deduction in accordance with SFAS No. 109 and not as a tax rate reduction. FSP
109-2 provides accounting and disclosure guidance for the repatriation of
certain foreign earnings to a U.S. taxpayer as provided for in the AJCA.
Currently, uncertainty remains as to how to interpret numerous provisions of the
AJCA. As such, we are not yet in a position to decide on whether, and to what
extent, we might repatriate foreign earnings that have not yet been remitted to
the U.S. We expect to be in a position to make a decision on implementation, if
any, later in 2005.

In November 2004, the FASB issued SFAS No. 151 ("SFAS 151"), Inventory Costs -
an amendment of ARB No. 43, Chapter 4. SFAS 151 amends the guidance in
Accounting Research Bulleting No. 43, Chapter 4, Inventory Pricing, to clarify
that abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) are to be recognized as current-period charges. SFAS
151 is effective for fiscal years beginning after June 15, 2005. SFAS 151 is not
expected to have a material impact on our financial statements.

INFLATION

We believe that the relatively moderate rates of inflation in recent years have
not had a significant impact on our revenue or profitability. Historically, we
have been able to offset any inflationary effects by either increasing prices or
improving cost efficiencies.

OFF BALANCE SHEET ARRANGEMENTS

On September 24, 2004, we entered into an off-balance sheet leasing arrangement
for an aircraft for company use. Upon expiration of this lease on September 24,
2009, a subsidiary of the Company has the option to renew the lease at fair
market value subject to approval by the lessor, or, buy the aircraft for
approximately $10.0 million, or return the aircraft to the lessor and, under a
guarantee, pay any shortfall in sales proceeds from a third party in an amount
not to exceed $8.2 million. Annual rental expense related to this agreement is
approximately $1.0 million. Excluding this leasing arrangement, we do not have
any off balance sheet arrangements.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table presents our contractual obligations as of December 31,
2004:

PAYMENT DUE BY PERIOD
CONTRACTUAL OBLIGATIONS ---------------------
(IN THOUSANDS)
Less than 1 - 3 3 - 5 More than
Total 1 year years years 5 years
-------- ---------- -------- -------- --------

Long-term debt obligations $157,372 $ 621 $ 927 $ 794 $155,030
Operating lease obligations 34,239 6,711 9,490 5,625 12,413
Other long-term liabilities 1,951 -- 1,951 -- --
-------- -------- -------- -------- --------
Total $193,562 $ 7,332 $ 12,368 $ 6,419 $167,443
======== ======== ======== ======== ========

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our global operating and financial activities, we are exposed to
changes in raw material prices, interest rates and foreign currency exchange
rates, which may adversely affect our results of operations and financial
position. In seeking to minimize the risks and/or costs associated with such
activities, we manage exposure to changes in raw material prices, interest
rates, and foreign currency exchange rates through our regular operating and
financing activities. We have entered into interest rate swap agreements to
reduce our overall interest expense. We do not utilize financial instruments for
trading purposes.

MARKET RATE RISK

The following discussion about our market rate risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates, foreign currency exchange rates, and equity security price risk.

Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relate primarily to borrowings under our 8.25% Notes, our credit
facilities and our short-term monetary investments. To the extent that, from
time to time, we hold short-term money market instruments, there is a market
rate risk for changes in interest rates on such instruments. To that extent,
there is inherent rollover risk in the short-term money market instruments as
they mature and are renewed at current market rates. The extent of this risk is
not quantifiable or predictable because of the variability of future interest
rates and business financing requirements. However, there is no risk of loss of
principal in the short-term money market instruments, only a risk related to a
potential reduction in future interest income.

On September 2, 2003, we entered into interest rate swap agreements in which we
effectively exchanged the $150 million fixed rate 8.25% interest rate on the
senior subordinated notes for variable rates in the notional amount of $80
million, $50 million and $20 million at six-month LIBOR, set in arrears, plus
2.75%, 2.75%, and 2.735%, respectively. The agreement involves receipt of fixed
rate amounts in exchange for floating rate interest payments over the lives of
the agreements without an exchange of the underlying principal amount. The
variable interest rates are fixed semi-annually on the fifteenth day of February
and August. The six-month LIBOR rate was 3.08% on February 21, 2005. The
maturity dates of the interest rate swap agreements match those of the
underlying debt. Our objective for entering into these interest rate swaps was
to reduce our exposure to changes in the fair value of the senior subordinated
notes and to obtain variable rate financing at an attractive cost. Changes in
the six-month LIBOR would affect our earnings either positively or negatively.
An assumed 100 basis point increase in the six-month LIBOR would increase our
interest obligations under the interest rate swaps by approximately $750,000 for
a six-month period.

In accordance with SFAS 133, we designated the interest rate swap agreements as
perfectly effective fair value hedges and, accordingly, use the short-cut method
of evaluating effectiveness. As permitted by the short-cut method, the change in
the fair value of the interest rate swaps will be reflected in earnings and an
equivalent amount will be reflected as a change in the carrying value of the
swaps, with an offset to earnings. There is no ineffectiveness to be recorded.
On December 31, 2004, we recorded the fair value of the interest rate swap
agreements of $6.0 million and recorded the corresponding fair value adjustment
to the 8.25% Notes in the other assets and long-term debt sections of the
Consolidated Balance Sheets, respectively.

We are exposed to credit-related losses in the event of nonperformance by
counterparties to these financial instruments. However, counterparties to these
agreements are major financial institutions and the risk of loss due to
nonperformance is considered by management to be minimal. We do not hold or
issue interest rate swap agreements or other derivative instruments for trading
purposes.

Foreign Currency Exchange Rate Risk. The majority of our business is denominated
in U.S. dollars. There are costs associated with our operations in foreign
countries that require payments in the local currency. Where appropriate and to
partially manage our foreign currency risk related to those payments we receive
payment from customers in local currencies in amounts sufficient to meet our
local currency obligations. We do not use derivatives or other financial
instruments to hedge foreign currency risk.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

We have invested substantial resources outside of the United States and plan to
continue to do so in the future. The Armor Mobile Security division has invested
substantial resources in Europe and South America. These operations are subject
to the risk of new and different legal and regulatory requirements in local
jurisdictions, tariffs and trade barriers, potential difficulties in staffing
and managing local operations, currency risks, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions.
Governments of many developing countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. Government
actions in the future could have a significant adverse effect on economic
conditions in a developing country or may otherwise have a material adverse
effect on us and our operating companies. We do not have political risk
insurance in the countries in which we currently conduct business. Moreover,
applicable agreements relating to our interests in our operating companies are
frequently governed by foreign law. As a result, in the event of a dispute, it
may be difficult for us to enforce our rights. Accordingly, we may have little
or no recourse upon the occurrence of any of these developments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is incorporated by reference from our consolidated
financial statements and notes thereto which are included in this report
beginning on page F-2. Certain selected quarterly financial data is included
under Item 7 of this Report.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Armor Holdings, Inc., together with its consolidated subsidiaries
(the "Company"), is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal control over
financial reporting is a process designed under the supervision of the Company's
principal executive and principal financial officers to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the firm's financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles.

As of the end of the Company's 2004 fiscal year, management conducted an
assessment of the effectiveness of the Company's internal control over financial
reporting based on the framework established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the
Company's internal control over financial reporting as of December 31, 2004, is
effective.

Management has excluded The Specialty Group, Inc. and Bianchi International from
our assessment of internal control over financial reporting as of December 31,
2004 because they were acquired by the Company in purchase business combinations
during 2004. The Specialty Group, Inc. is a wholly-owned subsidiary whose total
assets and total revenues represent 9% and 1%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2004. Bianchi International is a wholly-owned subsidiary whose total assets
and total revenues represent 6% and 0%, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2004.

Our internal control over financial reporting includes policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets of the
Company; (2) provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of management and the
directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on our financial
statements.

ATTESTATION REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP, our independent registered certified public
accounting firm that audited the Company's Consolidated Financial Statements for
the fiscal year ended December 31, 2004, has audited our assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004 as stated in their report which appears on page F-2.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with accountants on accounting or
financial disclosure matters during the periods covered by this Annual Report on
Form 10-K.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES AND CHANGES IN INTERNAL
CONTROLS OVER FINANCIAL REPORTING

Our management, including Warren B. Kanders, Chairman and Chief Executive
Officer, and Glenn J. Heiar, Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this annual report. Based on that evaluation, the Chairman and
Chief Executive Officer and Chief Financial Officer have concluded that
as of the end of the period covered by this annual report, our disclosure
controls and procedures, which are designed to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in applicable Securities and Exchange Commission rules and forms,
were effective.

Our management, including our Chairman and Chief Executive Officer and Chief
Financial Officer, has also evaluated our internal control over financial
reporting to determine whether any changes occurred during the fourth fiscal
quarter covered by this annual report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Based on that evaluation, there has been no such change during the
fourth fiscal quarter covered by this annual report.

Management's annual report on internal control over financial reporting and the
attestation report of our independent auditors are contained in Part II, Item 8
of this annual report.

PART III

The information called for pursuant to this Part III, Items 10, 11, 12, 13 and
14 is incorporated by reference from our definitive proxy statement, which we
intend to file with the Securities and Exchange Commission no later than April
30, 2005.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

(a) The following financial statements (which appear sequentially beginning at
page number F-1) are included in this report on Form 10-K. Financial
statement schedules have been omitted since they are either not required,
not applicable, or the information is otherwise included.

Report of Independent Registered Certified Public Accountants

Consolidated Balance Sheets

Consolidated Income Statements

Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(b) Exhibits

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

EXHIBIT NO. DESCRIPTION

+2.1 Stock Purchase Agreement, dated as of April 20, 2001, by and among
Armor Holdings, Inc., Bengal Acquisition Corp., The Kroll-O'Gara
Company, O'Gara-Hess & Eisenhardt Armoring Company, The O'Gara
Company, and O'Gara Security Associates, Inc. (filed as Exhibit 2.1 to
our Current Report on Form 8-K dated April 20, 2001).

+2.2 Amendment dated as of August 20, 2001 to the Stock Purchase Agreement,
dated as of April 20, 2001, by and among Armor Holdings, Inc., Bengal
Acquisition Corp., The Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt
Armoring Company, The O'Gara Company, and O'Gara Security Associates,
Inc. (filed as Exhibit 2.2 to our Current Report on Form 8-K dated
August 22, 2001).

+2.3 Amendment dated as of August 21, 2001 to the Stock Purchase Agreement,
dated as of April 20, 2001, by and among Armor Holdings, Inc., Bengal
Acquisition Corp., The Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt
Armoring Company, The O'Gara Company, and O'Gara Security Associates,
Inc. (filed as Exhibit 2.3 to our Current Report on Form 8-K dated
August 23, 2001).

+2.4 Agreement and Plan of Merger dated as of August 29, 2003 by and among
Armor Holdings, Inc., AHI Bulletproof Acquisition Corp., and Simula,
Inc. (filed as Appendix A to our Registration Statement on Form S-4
filed with the Commission on September 23, 2003).

+2.7 Agreement and Plan of Merger, dated as of September 28, 2004, by and
among Armor Holdings, Inc., Specialty Acquisition Corp., The Specialty
Group, Inc., and Joseph F. Murray, Jr. and John P. Sweeney, as the
Shareholders' Agent (filed as Exhibit 2.1 to our Current Report on
Form 8-K filed on October 4, 2004).

+2.8 Stock Purchase Agreement, dated as of November 5, 2004, by and among
Armor Holdings Products, L.L.C., Jack B. Corwin, as Trustee of the
Jack B. Corwin Revocable Trust dated June 26, 1992, Gary W. French, as
Trustee of the Gary W. and Carol D. French Revocable Trust dated
December 31, 1999, Gary W. French, as Trustee of the French Family
Irrevocable Trust dated December 31, 1999, Bianchi International,
AccuCase, LLC, Bianchi Gunleather and Leather Products Co., Inc.,
Armor Holdings, Inc., Jack B. Corwin and Gary W. French (filed as
Exhibit 2.1 to our Current Report on Form 8-K filed on November 12,
2004).

+3.1 Certificate of Incorporation of Armor Holdings, Inc. (filed as Exhibit
3.1 to our Current Report on Form 8-K, dated September 3, 1996).

+3.2 Certificate of Merger of American Body Armor & Equipment, Inc., a
Florida corporation, and Armor Holdings, Inc. (filed as Exhibit 3.2 to
our Current Report on Form 8-K dated September 3, 1996).

+3.3 Certificate of Amendment of the Certificate of Incorporation of Armor
Holdings, Inc., as amended (filed as Exhibit 3.1 to our Form 10-Q
Quarterly Report for the fiscal quarter ended June 30, 2004).

+3.4 Amended and Restated Bylaws of Armor Holdings, Inc. (filed as Exhibit
3.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended
March 31, 2004).

+4.1 Indenture, dated as of August 12, 2003, among Armor Holdings, the
subsidiary guarantors listed as signatories thereto and Wachovia Bank,
National Association, as trustee, and form of Old Note attached as
Exhibit A thereto (filed as Exhibit 10.2 to our Form 10-Q Quarterly
Report for the fiscal quarter ended June 30, 2003).

+4.2 First Supplemental Indenture, dated as of September 30, 2003, among
Armor Holdings, Inc., the subsidiary guarantors listed as signatories
to the Indenture, the subsidiaries listed in Schedule I to the First
Supplemental Indenture and Wachovia Bank, National Association, as
trustee (filed as Exhibit 4.2 to our Registration Statement on Form
S-4 filed with the Commission on January 7, 2004).

+4.3 Second Supplemental Indenture, dated as of December 9, 2003, among
Armor Holdings, Inc., the subsidiary guarantors listed as signatories
thereto and Wachovia Bank, National Association, as trustee (filed as
Exhibit 4.3 to our Registration Statement on Form S-4 filed with the
Commission on January 7, 2004).

+4.4 Third Supplemental Indenture, dated as of December 24, 2003, among
Armor Holdings, Inc., the subsidiary guarantors listed as signatories
thereto and Wachovia Bank, National Association, as trustee (filed as
Exhibit 4.4 to our Registration Statement on Form S-4 filed with the
Commission on January 7, 2004).

+4.5 Fourth Supplemental Indenture, dated as of March 24, 2004, among Armor
Holdings, Inc., the subsidiary guarantors listed as signatories
thereto, ODV Holdings Corp., and Wachovia Bank, National Association,
as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for
the fiscal quarter ended March 31, 2004).

+4.6 Fifth Supplemental Indenture, dated as of August 16, 2004, among Armor
Holdings, Inc., the subsidiary guarantors listed as signatories
thereto, Kleen Bore, Inc., and Wachovia Bank, National Association, as
trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for
the fiscal quarter ended September 30, 2004).

+4.7 Sixth Supplemental Indenture, dated as of September 24, 2004, among
Armor Holdings, Inc., the subsidiary guarantors listed as signatories
thereto, Armor Holdings Aircraft, LLC, and Wachovia Bank, National
Association, as trustee (filed as Exhibit 4.2 to our Form 10-Q
Quarterly Report for the fiscal quarter ended September 30, 2004).

*4.8 Seventh Supplemental Indenture, dated as of December 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors listed as signaturies
thereto, and Wachovia Bank, National Association, as trustee.

+4.9 Registration Rights Agreement, dated August 12, 2003, among Armor
Holdings, Inc., the subsidiary guarantors listed as signatories
thereto and Wachovia Capital Markets, LLC (filed as Exhibit 10.3 to
our Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2003).

+4.10 Form of the new 8 1/4% Senior Subordinated Notes Due 2013 (filed as
Exhibit 4.6 to our Registration Statement on Form S-4 filed with the
Commission on January 7, 2004).

+4.11 Indenture, dated as of October 29, 2004, among Armor Holdings, Inc.
and Wachovia Bank, National Association, as trustee (filed as Exhibit
4.1 to our Current Report on Form 8-K filed on November 1, 2004).

+4.12 First Supplemental Indenture, dated as of October 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee, together with the
form of Note attached thereto (filed as Exhibit 4.2 to our Current
Report on Form 8-K filed on November 1, 2004).

*4.13 Second Supplemental Indenture, dated as of December 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee.

+10.1 Purchase Agreement, dated August 6, 2003, among Armor Holdings, Inc.,
the subsidiary guarantors listed as signatories thereto and Wachovia
Capital Markets, LLC (filed as Exhibit 10.1 to our Form 10-Q Quarterly
Report for the fiscal quarter ended June 30, 2003).

+10.2 Credit Agreement, dated as of August 12, 2003, among Armor Holdings,
Inc., each lender from time to time party thereto, Bank of America,
N.A., as Administrative Agent, Swing Line Lender and L/C Issuer,
Wachovia Bank, National Association, as Syndication Agent, and Key
Bank National Association, as Documentation Agent (filed as Exhibit
10.4 to our Form 10-Q Quarterly Report for the fiscal quarter ended
June 30, 2003).

+10.3 Subsidiary Guaranty Agreement, dated as of August 12, 2003, by certain
Subsidiaries of Armor Holdings, Inc. as identified on the signature
pages thereto and any Additional Guarantor who may become party to
this Guaranty, in favor of Bank of America, N.A., as Administrative
Agent (filed as Exhibit 10.5 to our Form 10-Q Quarterly Report for the
fiscal quarter ended June 30, 2003).

+10.4 Collateral Agreement, dated as of August 12, 2003, by and among Armor
Holdings and certain of its Subsidiaries as identified on the
signature pages thereto and any Additional Grantor who may become
party to this Agreement, in favor of Bank of America, N.A., as
Administrative Agent (filed as Exhibit 10.6 to our Form 10-Q Quarterly
Report for the fiscal quarter ended June 30, 2003).

+10.5 Trademark Security Agreement, dated as of August 12, 2003, by the
entities listed on the signature pages thereto, in favor of Bank of
America, N.A., as Administrative Agent (filed as Exhibit 10.7 to our
Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2003).

+10.6 Patent Security Agreement, dated as of August 12, 2003, by the
entities listed on the signature pages attached thereto, in favor of
Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.8
to our Form 10-Q Quarterly Report for the fiscal quarter ended June
30, 2003).

+10.7 Promissory Note dated August 12, 2003 in the principal amount of up to
$15,000,000 made by Armor Holdings, Inc. in favor of Keybank National
Association (filed as Exhibit 10.9 to our Form 10-Q Quarterly Report
for the fiscal quarter ended June 30, 2003).

+10.8 Promissory Note dated August 12, 2003 in the principal amount of up to
$22,500,000 made by Armor Holdings, Inc. in favor of Wachovia Bank,
National Association (filed as Exhibit 10.10 to our Form 10-Q
Quarterly Report for the fiscal quarter ended June 30, 2003).

+10.9 First Amendment to Credit Agreement, dated as of January 9, 2004, by
and among Armor Holdings, Inc., the lenders from time to time party
thereto, Bank of America, N.A., as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, and Keybank National
Association, as Documentation Agent (filed as Exhibit 10.1 to our Form
10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).

+10.10 Second Amendment to Credit Agreement, dated as of March 29, 2004, by
and among Armor Holdings, Inc., the lenders from time to time party
thereto, Bank of America, N.A., as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, and Keybank National
Association, as Documentation Agent (filed as Exhibit 10.2 to our Form
10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).

+10.11 Third Amendment to Credit Agreement, dated as of October 19, 2004, by
and among Armor Holdings, Inc., the lenders from time to time party
thereto, Bank of America, N.A., as

Administrative Agent, Wachovia Bank, National Association, as
Syndication Agent, and Keybank National Association, as Documentation
Agent (filed as Exhibit 10.1 to our Current Report on Form 8-K filed
on November 1, 2004).

@+10.12 Employment Agreement between Warren B. Kanders and Armor Holdings,
Inc., dated as of January 1, 2002 (filed as Exhibit 10.4 to our Form
10-Q Quarterly Report for the fiscal quarter ended March 31, 2002).

@+10.13 Letter agreement dated as of July 26, 2003 between Armor Holdings,
Inc. and Warren B. Kanders (filed as Exhibit 99.1 to our Current
Report on Form 8-K dated July 26, 2003).

@+10.14 Amendment No. 2 dated November 4, 2003 to the Employment Agreement
between Armor Holdings, Inc. and Warren B. Kanders (filed as Exhibit
10.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended
September 30, 2003).

@+10.15 Employment Agreement between Armor Holdings, Inc. and Robert R.
Schiller, dated as of January 1, 2002 (filed as Exhibit 10.2 to our
Form 10-Q Quarterly Report for the fiscal quarter ended March 31,
2002).

@+10.16 Amendment dated November 4, 2003 to the Employment Agreement between
Armor Holdings, Inc. and Robert R. Schiller (filed as Exhibit 10.2 to
our Form 10-Q Quarterly Report for the fiscal quarter ended September
30, 2003).

+10.17 Form of Indemnification Agreement for Directors and Officers of Armor
Holdings, Inc., (filed as Exhibit 10.4 to our Form 10-Q Quarterly
Report for the fiscal quarter ended March 31, 2004).

**+10.18 American Body Armor & Equipment, Inc. 1994 Incentive Stock Plan
(incorporated by reference from Form S-8 filed on October 10, 1994,
Reg. No. 33-018863).

**+10.19 American Body Armor & Equipment, Inc. 1994 Directors Stock Plan
(incorporated by reference from Form S-8 filed on October 31, 1994,
Reg. No. 33-018863).

**+10.20 Armor Holdings, Inc. Amended and Restated 1996 Stock Option Plan
(incorporated by reference from our 1997 Definitive Proxy Statement
with respect to our 1997 Annual Meeting of Stockholders, held June 12,
1997, as filed with the Commission on May 27, 1997).

**+10.21 Armor Holdings Inc. Amended and Restated 1996 Non-Employee Directors
Stock Option Plan (incorporated by reference from our 1997 Definitive
Proxy Statement with respect to our 1997 Annual Meeting of
Stockholders, held June 12, 1997, as filed with the Commission on May
27, 1997).

**+10.22 Armor Holdings, Inc. 1998 Stock Option Plan (filed as Exhibit 10.19 to
our Form 10-K Annual Report for the fiscal year ended December 31,
1998).

**+10.23 Armor Holdings, Inc. 1999 Stock Incentive Plan (filed as Appendix A to
our 1999 Definitive Proxy Statement with respect to our 1999 Annual
Meeting of Stockholders, as filed with the Commission on May 21,
1999).

*10.24 Armor Holdings, Inc. Amended and Restated 2002 Stock Incentive Plan.

**+10.25 Armor Holdings, Inc. 2002 Executive Stock Plan (filed as Exhibit 10.6
to our Form 10-Q Quarterly Report for the fiscal quarter ended March
31, 2002).

+10.26 Transportation Services Agreement, dated as of December 10, 2003, by
and between Kanders Aviation, LLC and Armor Holdings, Inc. (filed as
Exhibit 10.3 to our Form 10-Q Quarterly Report for the fiscal quarter
ended March 31, 2004).

*21.1 Subsidiaries of the Registrant

*23.1 Consent of PricewaterhouseCoopers LLP.

*31.1 Certification of Principal Executive Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.

*31.2 Certification of Principal Financial Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.

*32.1 Certification of Principal Executive Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.

*32.2 Certification of Principal Financial Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.

- --------------------------
* Filed herewith.
+ Incorporated herein by reference.
@ This Exhibit represents a management contract.
** This Exhibit represents a compensatory plan.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ARMOR HOLDINGS, INC.

Report of Independent Registered Certified Public Accounting Firm F-2

Consolidated Balance Sheets F-4

Consolidated Statements Of Operations F-5

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) F-6

Consolidated Statements of Cash Flow F-7

Notes to Consolidated Financial Statements F-8 - F-53

F-1

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Armor Holdings, Inc.:

We have completed an integrated audit of Armor Holdings, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements
- ---------------------------------

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Armor
Holdings, Inc. and its subsidiaries (the "Company") at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
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 of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting
- -----------------------------------------

Also, in our opinion, management's assessment, included in Management's Annual
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the 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 effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

F-2

As described in Management's Annual Report on Internal Control Over Financial
Reporting, management has excluded The Specialty Group, Inc. and Bianchi
International from its assessment of internal control over financial
reporting as of December 31, 2004 because they were acquired by the Company in
purchase business combinations during 2004. We have excluded The Specialty
Group, Inc. from our audit of internal control over financial reporting. The
Specialty Group, Inc. is a wholly-owned subsidiary whose total assets and total
revenues represent 9% and 1%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2004. We
have also excluded Bianchi International from our audit of internal
control over financial reporting. Bianchi International is a wholly-owned
subsidiary whose total assets and total revenues represent 6% and 0%,
respectively, of the related consolidated financial statement amounts as of and
for the year ended December 31, 2004.

PricewaterhouseCoopers LLP
Jacksonville, Florida
March 6, 2005

F-3

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------

ASSETS
Current assets:
Cash and cash equivalents $ 421,209 $ 111,850
Restricted cash -- 2,600
Accounts receivable (net of allowance for doubtful accounts of $3,077
and $1,673) 174,559 72,635
Costs and earned gross profit in excess of billings 893 --
Inventories 176,208 80,527
Prepaid expenses and other current assets 46,935 22,032
Current assets of discontinued operations (Note 2) -- 753
----------- -----------
Total current assets 819,804 290,397

Property and equipment (net of accumulated depreciation of $27,917
and $19,046) 77,307 57,576
Goodwill (net of accumulated amortization of $4,024 and $4,024) 262,013 175,707
Patents, licenses and trademarks (net of accumulated amortization of $6,830
and $2,627) 112,459 44,174
Long-term assets of discontinued operations (Note 2) -- 1,603
Other assets 20,768 16,169
----------- -----------
Total assets $ 1,292,351 $ 585,626
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 621 $ 32,107
Short-term debt 343,756 498
Accounts payable 69,601 30,304
Accrued expenses and other current liabilities 107,247 58,218
Income taxes payable 9,001 --
Current liabilities of discontinued operations (Note 2) -- 626
----------- -----------
Total current liabilities 530,226 121,753

Long-term debt, less current portion 156,751 158,300
Other long-term liabilities 1,951 8,970
Deferred income taxes 38,227 1,238
----------- -----------
Total liabilities 727,155 290,261

Commitments and contingencies (Note 12)

Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $.01 par value; 75,000,000 shares authorized;
40,133,870 and 34,337,034 issued; 34,073,648 and 28,276,812
outstanding at December 31, 2004 and December 31, 2003, respectively 402 344
Additional paid-in capital 504,809 318,460
Retained earnings 125,481 44,942
Accumulated other comprehensive income 6,821 3,936
Treasury stock (72,317) (72,317)
----------- -----------
Total stockholders' equity 565,196 295,365
----------- -----------
Total liabilities and stockholders' equity $ 1,292,351 $ 585,626
=========== ===========

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

F-4

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------

REVENUES:

Aerospace & Defense $ 605,398 $ 91,673 $ 59,318
Products 249,765 193,960 179,946
Mobile Security 124,520 79,539 65,853
--------- --------- ---------
Total Revenues 979,683 365,172 305,117
--------- --------- ---------

COSTS AND EXPENSES:
Cost of revenues 714,192 253,586 210,745
Cost of warranty revision 5,000 -- --
Operating expenses 100,261 62,795 49,836
Amortization 4,255 489 245
Integration and other charges 10,260 12,573 5,926
--------- --------- ---------

OPERATING INCOME 145,715 35,729 38,365

Interest expense, net 6,776 4,012 923
Other expense, net 1,945 508 51
--------- --------- ---------

INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES 136,994 31,209 37,391

PROVISION FOR INCOME TAXES 56,417 14,203 16,054
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 80,577 17,006 21,337

DISCONTINUED OPERATIONS (NOTE 2):
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT (38) (6,120) (39,026)
--------- --------- ---------
NET INCOME (LOSS) $ 80,539 $ 10,886 $ (17,689)
========= ========= =========

NET INCOME (LOSS) PER COMMON SHARE - BASIC

INCOME FROM CONTINUING OPERATIONS $ 2.56 $ 0.61 $ 0.70

LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.22) (1.28)
--------- --------- ---------

BASIC INCOME (LOSS) PER SHARE $ 2.56 $ 0.39 $ (0.58)
========= ========= =========

NET INCOME (LOSS) PER COMMON SHARE - DILUTED

INCOME FROM CONTINUING OPERATIONS $ 2.44 $ 0.59 $ 0.69

LOSS FROM DISCONTINUED OPERATIONS 0.00 (0.21) (1.26)
--------- --------- ---------

DILUTED INCOME (LOSS) PER SHARE $ 2.44 $ 0.38 $ (0.57)
========= ========= =========

WEIGHTED AVERAGE SHARES - BASIC 31,419 28,175 30,341
========= ========= =========

WEIGHTED AVERAGE SHARES - DILUTED 33,025 28,954 30,957
========= ========= =========

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

F-5

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)

COMMON STOCK
-------------------- ACCUMULATED
ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES VALUE CAPITAL EARNINGS (LOSS) INCOME STOCK TOTAL
--------- ---------- ------------ ------------ ---------------- ------------- -------------

Balance, December 31, 2001 30,857 $ 331 $301,995 $ 51,745 $ (4,473) $ (23,579) $ 326,019
Exercise of stock options and
distribution of stock awards 528 5 4,135 4,140
Tax benefit from exercises of
options 832 832
Sale of put options 525 525
Repurchase of stock (1,928) (26,054) (26,054)
-------------
Comprehensive loss:
Net loss (17,689) (17,689)
Foreign currency translation
adjustments, net of taxes of $364 304 304
-------------
Total comprehensive loss (17,385)
--------- ---------- ------------ ------------ ---------------- ------------- -------------
Balance, December 31, 2002 29,457 336 307,487 34,056 (4,169) (49,633) 288,077
Exercise of stock options and
distribution of stock awards 743 8 9,028 9,036
Tax benefit from exercises of
options 1,136 1,136
Extension of stock options related
to termination of former
Chief Executive Officer 809 809
Repurchase of stock (1,923) (22,684) (22,684)
-------------
Comprehensive income:
Net income 10,886 10,886
Sale of ArmorGroup 3,231 3,231
Foreign currency translation
adjustments 4,874 4,874
-------------
Total comprehensive income 18,991
--------- ---------- ------------ ------------ ---------------- ------------- -------------
Balance, December 31, 2003 28,277 344 318,460 44,942 3,936 (72,317) 295,365
Exercise of stock options and
distribution of stock awards 1,797 18 40,582 40,600
Tax benefit from exercises of
stock options 4,646 4,646
Issuance of common stock 4,000 40 141,121 141,161
-------------
Comprehensive income:
Net income 80,539 80,539
Foreign currency translation
Adjustments, net of taxes
of $642 2,885 2,885
-------------
Total comprehensive income 83,424
--------- ---------- ------------ ------------ ---------------- ------------- -------------
Balance, December 31, 2004 34,074 $ 402 $504,809 $125,481 $ 6,821 $ (72,317) $ 565,196
========= ========== ============ ============ ================ ============= =============

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

F-6

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)

YEAR ENDED
-------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 80,577 $ 17,006 $ 21,337
Adjustments to reconcile income from continuing operations to cash
provided by operating activities:
Depreciation and amortization 15,051 7,608 5,580
Loss on disposal of fixed assets 864 327 200
Deferred income taxes 4,006 5,025 359
Non-cash termination charge 1,408 2,093 --
Non-cash restricted charges 6,294 7,266 --
Changes in operating assets and liabilities, net of
acquisitions:
Increase in accounts receivable (90,496) (995) (2,554)
Increase in inventories (73,106) (2,501) (9,381)
(Increase) decrease in prepaid expenses and
other assets (22,075) (2,381) (2,246)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities 74,833 17,043 (3,754)
Increase in income taxes payable 17,324 361 6,745
------------------ ------------------ ------------------
Net cash provided by operating activities 14,680 50,852 16,286
------------------ ------------------ ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (19,419) (8,684) (5,902)
Purchase of patents and trademarks (112) (185) (69)
Purchase of equity investment (5,275) -- --
Proceeds from sale of equity investment 5,823 -- --
Purchase of short-term investment securities (286,430) (143,400) (4,000)
Proceeds from sales of short-term investment securities 286,430 143,400 4,000
Collection of note receivable 2,175 -- --
Decrease (increase) in restricted cash 2,600 (2,600) --
Sale of business, net of cash disposed 125 31,361 --
Additional consideration for purchased businesses (33,943) (1,026) (9,375)
Purchase of businesses, net of cash acquired (158,442) (90,512) (8,818)
------------------ ------------------ ------------------
Net cash used in investing activities (206,468) (71,646) (24,164)
------------------ ------------------ ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 25,192 8,471 4,227
Proceeds from the issuance of common stock 142,500 -- --
Cash paid for common stock offering costs (1,339) -- --
Repurchases of treasury stock -- (22,684) (26,054)
Proceeds from the sale of put options -- -- 525
Cash paid for financing costs (6,156) (4,599) (326)
Borrowings of short-term debt 341,550 -- --
Borrowings of long-term debt -- 148,278 --
Repayments of long-term debt (3,381) (1,688) (730)
Borrowings under line of credit 24,588 31,830 32,372
Repayments under line of credit (23,049) (32,098) (32,447)
------------------ ------------------ ------------------

Net cash provided by (used in) financing activities 499,905 127,510 (22,433)

Effect of exchange rate changes on cash and
cash equivalents 1,959 833 (126)
Net cash used in discontinued operations (717) (8,612) (4,139)
------------------ ------------------ ------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 309,359 98,937 (34,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 111,850 12,913 47,489
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 421,209 $ 111,850 $12,913
================== ================== ==================

CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 421,209 $ 111,850 $12,913
DISCONTINUED OPERATIONS - 76 3,638
------------------ ------------------ ------------------
$ 421,209 $ 111,926 $16,551
================== ================== ==================

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

F-7

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company and nature of business. Armor Holdings, Inc. and its wholly-owned
subsidiaries (the "Company", "we", "our", "us") is a leading manufacturer and
provider of specialized security products; training and support services related
to these products; vehicle armor systems; military helicopter seating systems,
aircraft armor and land vehicle armor systems; protective equipment for military
personnel; and other technologies used to protect humans in a variety of
life-threatening or catastrophic situations. Our products, vehicle armor systems
and human safety and survival systems are used domestically and internationally
by military, law enforcement, security and corrections personnel, as well as
governmental agencies, multinational corporations and individuals.

Effective in the first quarter 2004, we instituted a new segment reporting
format to include three reportable business divisions: Aerospace & Defense
Group, the Products Division and the Mobile Security Division. The Aerospace &
Defense Group was formed upon the completion of our acquisition of Simula, Inc.
on December 9, 2003. The Aerospace & Defense Group also includes the military
business, including armor and blast protection systems ("up-armoring") for their
High Mobility Multi-purpose Wheeled Vehicles ("Up-Armored HMMWV," commonly known
as the Humvee), and other military vehicle armor programs, which previously were
included in our Mobile Security Division. The Aerospace & Defense Group also
includes the small arms protection insert ("SAPI") plate produced by our Protech
subsidiary in Pittsfield, Massachusetts, which was previously reported as part
of the Products Division. The historical results of these businesses have been
reclassified as part of the Aerospace & Defense Group. This reporting change was
made to better reflect management's approach to operating and directing the
businesses, and, in certain instances, to align financial reporting with our
market and customer segments. Prior period segment data has been restated to
conform to the 2004 presentation. ArmorGroup Services has been classified as
discontinued operations. The amounts disclosed in the footnotes are related to
continuing operations unless otherwise indicated.

CONTINUING OPERATIONS

Aerospace & Defense. Our Aerospace & Defense Group supplies human safety and
survival systems to the U.S. military, and major Aerospace & Defense prime
contractors. Our core markets are military aviation safety, military personnel
safety, and land and marine safety. Under the brand name O'Gara-Hess &
Eisenhardt, we are the sole-source provider to the U.S. military of the armor
and blast protection systems for Up-Armored HMMWVs. We are also under contract
with the U.S. Army to provide spare parts, logistics and ongoing field support
services for the currently installed base of approximately 8,350 Up-Armored
HMMWVs. Additionally, we provide blast and ballistic protection kits for the
standard HMMWVs, which are installed on existing equipment in the field. Our
Aerospace & Defense Group was subcontracted to develop a ballistic and blast
protected armored and sealed truck cab for the High Mobility Artillery Rocket
System ("HIMARS"), a program recently transitioned by the U.S. Army and U.S.
Marine Corps from developmental to a low rate of initial production, deliveries
of which commenced in 2003 and continued in 2004. We also supply armor
sub-systems for other tactical wheeled vehicles.

Through Simula, we provide military helicopter seating systems, helicopter
cockpit airbag systems, aircraft armor and land vehicle armor kits for the
HMMWV, Heavy Expanded Mobility Tactical Truck ("HEMTT"), Paletized Load System
("PLS"), Heavy Equipment Transporter ("HET"), M915 and Armored Security Vehicle
("ASV"), body armor and other protective equipment for military personnel,
emergency bailout parachutes and survival ensembles worn by military aircrew.
The primary customers for our products are the U.S. Army, U.S. Marine Corps,
Boeing, and Sikorsky Aircraft. Most of Simula's aviation safety products are
provided on a sole source basis. The U.S. armed forces have adopted ceramic body
armor as a key element of the protective ensemble worn by our troops in Iraq and
Afghanistan. Simula was the developer of this specialized product called SAPI,
and one of the largest suppliers to U.S. forces. We also provide ceramic body
armor from our Protech subsidiary based in Pittsfield, Massachusetts.

The Specialty Group, Inc. ("Specialty Defense"), with operations in
Pennsylvania, Tennessee, and Kentucky, is a supplier to military and law
enforcement customers in the United States and overseas. Specialty Defense
manufactures, among other things, Modular Lightweight Load-Carrying Equipment
("MOLLE") systems, Outer Tactical Vests ("OTVs") and Warrior Helmets. Specialty
Defense's core products are made of Kevlar(R) and heavy-duty nylon fabric and
webbing and require special cutting and sewing techniques. Specialty Defense is
currently the largest supplier of MOLLE systems for the U.S.

F-8

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Army. The MOLLE system consists of a modular rucksack with removable
compartments and components and a fighting load vest with removable pockets for
the Rifleman, Pistol, Squad Automatic Weapon Gunner, Medic and Grenadier
configurations. Specialty Defense manufactures OTVs, which, when used with SAPI
plates, provide enhanced armor protection for U.S. armed forces against mines,
grenades, mortar shells, artillery fire and rifle projectiles. Specialty Defense
is one of the three largest suppliers of Warrior Helmets for the U.S. Army.
Specialty Defense also manufactures NATO PASGT helmets, the Advanced Combat
Vehicle Crewman helmet and the Warrior Helmet (the U.S. Army's next generation
helmet), along with related liners and accessories.

Products. Our Products Division manufactures and sells a broad range of high
quality security products, equipment and related consumable items, such as
concealable and tactical body armor, hard armor, duty gear, less-lethal
munitions, anti-riot products, police batons, emergency lighting products,
forensic products, firearms accessories, weapon maintenance products, foldable
ladders, backpacks and specialty gloves. Our Products Division's products are
marketed under brand names that are well established in the military and law
enforcement communities such as AMERICAN BODY ARMOR(TM), XTREME(R), MATRIX(R),
B-SQUARE(R), BREAK FREE(R), CLP(R), DEFENSE TECHNOLOGY/FEDERAL LABORATORIES(R),
DEF-TEC PRODUCTS(TM), DISTRACTION DEVICE(R), FEDERAL LABORATORIES(R), FERRET(R),
FIRST DEFENSE(R), IDENTICATOR(R), IDENTIDRUG(R), LIGHTNING POWDER(R),
MONADNOCK(R), NIK(R), PROTECH(TM), QUIKSTEP LADDERS(TM), PORTAL LADDERS(TM),
QUICKSHIELD(TM), SAFARILAND(R), SPEEDFEED(R), 911EP(R), DESIGN(R), ODV(TM),
KLEEN-BORE(TM), GREGORY(R), BIANCHI(R), NYLOK(R), ACCUMOLD(R), ACCUMOLD
ELITE(TM), RANGER(TM) and PEACEKEEPER(R). Our Products Division's security
products are marketed through an extensive network of approximately 260 domestic
distributors and 200 international distributors, and through a sales force of
approximately 40 representatives and specialists under brand names that are well
established in the military and law enforcement communities.

Mobile Security. Our Mobile Security Division manufactures and installs armoring
systems for commercial vehicles to protect against varying degrees of ballistic
and blast threats. Under the brand name O'GARA-HESS & EISENHARDT ARMORING
COMPANY(TM), ARMOR MOBILE SECURITY FRANCE, ARMOR MOBILE SECURITY GERMANY and
IMPAK(TM), our Mobile Security Division armors a variety of commercial vehicles,
including limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles. Our Mobile Security Division's customers include U.S.
federal law enforcement and intelligence agencies, foreign heads of state,
multinational corporations, as well as high net worth individuals and
cash-in-transit operators.

DISCONTINUED OPERATIONS

On July 2, 2004, we sold the security consulting division of our litigation
support services subsidiary, New Technologies Armor, Inc. ("NTI"), which was the
last remaining business in discontinued operations. The remaining division in
NTI, consisting primarily of training services, has been included as part of the
Products Division segment, where management now resides. This business
represented the last remaining business in the Services Division. The assets and
liabilities of the Services Division have been classified as assets and
liabilities of discontinued operations on our consolidated balance sheets and
the results of their operations classified as income (loss) from discontinued
operations in the accompanying consolidated statements of operations. In the
second quarter of 2004, we recorded an impairment charge of $1.4 million in
integration and other charges in continuing operations to reduce the carrying
value of remaining portion of NTI to its estimated fair value.

F-9

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to Aerwav
Integration Services, Inc. ("AIS"). AIS is a wholly owned subsidiary of Aerwav
Holdings, LLC. As consideration for the integrated systems business, we received
a $4.1 million collateralized note due in April 2005, of which we have received
$475,000 through December 31, 2004, and a warrant for approximately 2.5% of AIS.
We recorded a loss of $366,000 on the sale in the second quarter of 2003.

ACCOUNTING POLICIES

Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. In consolidation, all
material inter-company balances and transactions have been eliminated. Results
of operations of companies acquired in transactions accounted for under the
purchase method of accounting are included in the financial statements from the
date of the acquisition.

Cash and cash equivalents. We consider all highly liquid investments purchased
with maturities of three months or less, at date of purchase, to be cash
equivalents.

Restricted cash. Restricted cash at December 31, 2003 includes $2.6 million held
in trust for the benefit of the Ontario Industrial Development Authority
Variable Rate Demand Industrial Development Revenue Bonds, Series 1989
bondholders. On January 2, 2004, the restrictions were released and the funds
were used to pay off the bonds in full.

Concentration of credit risk. Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of cash and cash equivalents
and trade accounts receivable. We maintain our cash and cash equivalents with
what we believe to be various high quality banks and in AAA rated securities.
Amounts held in individual banks may periodically exceed, for brief time
periods, federally insured amounts. Our accounts receivable consist of amounts
due from customers and distributors located throughout the world. International
product sales generally require cash in advance or confirmed letters of credit
on U.S. banks. We maintain reserves for potential credit losses. As of December
31, 2004 and 2003, management believes that we have no significant
concentrations of credit risk excluding the U.S. military.

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

Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable, other receivables and accounts payable
approximates fair value at December 31, 2004 and 2003. The fair value of debt
was estimated based on quoted market prices. See the table below for the
carrying amount and fair value of our public debt as at December 31, 2004 and
2003, respectively.

DECEMBER 31, 2004 DECEMBER 31, 2003
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN THOUSANDS)

8.25% Senior Subordinated Notes due 2013 $147,850 $168,000 $147,600 $161,250
2.00% Senior Subordinated Convertible
Notes due November 1, 2004 341,579 396,384 -- --
-------- -------- -------- --------
$489,429 $564,384 $147,600 $161,250
======== ======== ======== ========

F-10

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" ("SFAS 133") as amended. All derivative instruments are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which we hedge changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the incme statement by changes in the hedged item's
fair value. We do not hold or issue interest rate swap agreements or other
derivative instruments for trading purposes.

Changes in the fair value of the interest rate swap agreements offset changes in
the fair value of the fixed rate debt due to changes in the market interest
rate. Accordingly, non-current other assets on the Consolidated Balance Sheet as
of December 31, 2004 increased by $195,000, which reflected an increase in the
fair value of the interest rate swap agreements to $6.1 million. The
corresponding increase in the hedge liability was recorded in long-term debt.
The agreements are deemed to be a perfectly effective fair value hedge and
therefore qualify for the short-cut method of accounting under SFAS 133. As a
result, no ineffectiveness is expected to be recognized in our earnings
associated with the interest rate swap agreements.

Property and equipment. Property and equipment are carried at cost less
accumulated depreciation. Upon disposal of property and equipment, the
appropriate accounts are reduced by the related cost and accumulated
depreciation. The resulting gains and losses are reflected in consolidated
earnings. Depreciation is computed using the straight-line method over the
estimated lives of the related assets as follows:

Buildings and improvements 5 - 39 years
Machinery and equipment 3 - 7 years

Goodwill. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in a purchase business combination. Goodwill
and other intangible assets are stated on the basis of cost. The $209.0 million
in goodwill resulting from acquisitions made by the Company subsequent to June
30, 2001 was immediately subjected to the non-amortization provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). See also Impairment and Recent Accounting
Pronouncements which follows. The purchase method of accounting for business
combinations requires us to make use of estimates and judgments to allocate the
purchase price paid for acquisitions to the fair value of the net tangible and
identifiable intangible assets. Goodwill is tested for impairment annually, or
when a possible impairment is indicated, using the fair value based test
prescribed by SFAS 142. We performed our annual assessment of goodwill and
determined that no impairment existed as of June 30, 2004.

Deferred charges. Deferred charges consist of costs related to the issuance of
certain financing arrangements. Amortization of deferred charges is charged to
interest expense over the respective lives of the applicable financing
arrangement. Deferred charges are included in other assets on the Consolidated
Balance Sheets.

Impairment. Long-lived assets, including certain identifiable intangibles and
goodwill, are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset in question may not
be recoverable including, but not limited to, a deterioration of profits for a
business segment that has long-lived assets, and when other changes occur which
might impair recovery of long-lived assets. Management has reviewed our
long-lived assets and has taken impairment charges of $1.4 million in fiscal
2004, $12.4 million in fiscal 2003 and $30.3 million in fiscal 2002 to reduce
the

F-11

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

carrying value of the Services Division to estimated realizable value. The
method used to determine the existence of an impairment would be generally by
undiscounted operating cash flows estimated over the remaining useful lives of
the related long-lived assets or estimated realizable amounts on assets of
discontinued operations. Impairment is measured as the difference between fair
value and unamortized cost at the date impairment is determined.

Research and development. We view our research and development efforts as
critical to maintaining a leadership position in the security products and
vehicle armoring markets. The continuously evolving threats of today demand the
advancement and application of state-of-the-art technology to ensure proper
protection of our customers. Our research and development occurs primarily under
fixed-price or cost-plus, government funded contracts as well as
Company-sponsored efforts. We seek to offer superior quality and advanced
products and systems to our customers at competitive prices. To achieve this
objective, we engage in ongoing engineering, research and development activities
to improve the reliability, performance and cost-effectiveness of our existing
products. We also design and develop new products in an ongoing effort to
anticipate and meet our customers' evolving needs.

We employ scientific, engineering and other personnel to improve our existing
product lines and to develop new products and technologies in the same or
related fields. To maximize efficiency, we utilize important relationships with
outside testing laboratories, companies and often times our key clients.
Research and development costs include salaries and benefits of research and
development personnel, testing and certification, and other research and
development related costs. Research and development costs are included in
operating expenses as incurred and for fiscal 2004, 2003 and 2002, approximated
$8,866,000, $4,015,000 and $2,968,000, respectively.

Revenue recognition. We record products revenue at the time of shipment. Returns
are minimal and do not materially affect the financial statements.

We record revenue of the Aerospace & Defense Group and Mobile Security Division
when a vehicle is shipped, except for larger commercial contracts typically
longer than four months in length and the

F-12

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

contract for the delivery of Up-Armored HMMWVs to the U.S. Government, which
continues through 2008. Revenue from large commercial contracts is recognized on
the percentage of completion, units-of-work performed method. Should large
commercial contracts be in a loss position, the entire estimated loss would be
recognized for the balance of the contract at such time. Current contracts are
profitable.

We record service revenue as services are provided on a contract-by-contract
basis. Revenues from service contracts are recognized over the term of the
contract.

Periodically, we compare the identified credit risks with the allowance that has
been established using historical experience and adjust the allowance
accordingly.

Warranty. Warranty costs are generally recorded as a component of cost of sales
and accrued expenses in our consolidated financial statements. The amount
recognized is based on historical claims cost experience. See Note 22 regarding
our recently announced warranty revision and product exchange program to our
Zylon(R)-containing vests.

Advertising. We expense advertising costs as expense in the period in which they
are incurred.

Earnings per share. Basic earnings per share is computed by dividing net income
by the weighted-average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted-average number of
common shares outstanding compounding the effects of all potentially dilutive
common stock equivalents, principally options, except in cases where the effect
would be anti-dilutive.

Stock options and grants. Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. We have elected to continue to
account for employee stock compensation plans under APB Opinion No. 25 with pro
forma disclosures of net earnings and earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied. Restricted
stock awards are generally recorded as compensation expense over the vesting
periods based on the market value on the date of grant.

F-13

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss) as reported $ 80,539 $ 10,886 $ (17,689)

Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (6,717) (4,157) (5,053)

Add: Employee compensation expense for
modification of stock option awards included in
report net income, net of income taxes 57 506 --
---------- ---------- ----------
Pro-forma net income (loss) $ 73,879 $ 7,235 $ (22,742)
========== ========== ==========

Earnings (loss) per share:
Basic - as reported $ 2.56 $ 0.39 $ (0.58)
========== ========== ==========
Basic - pro forma $ 2.35 $ 0.26 $ (0.75)
========== ========== ==========
Diluted - as reported $ 2.44 $ 0.38 $ (0.57)
========== ========== ==========
Diluted - pro forma $ 2.24 $ 0.25 $ (0.74)
========== ========== ==========

Reclassifications. Certain reclassifications have been made to the 2003 and 2002
financial statements in order to conform to the presentation adopted for 2004.
These reclassifications had no effect on net income or retained earnings.

Recent accounting pronouncements.

F-14

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

numerous provisions of the AJCA. As such, we are not yet in a position to decide
on whether, and to what extent, we might repatriate foreign earnings that have
not yet been remitted to the U.S. We expect to be in a position to make a
decision on implementation, if any, later in 2005.

2. DISCONTINUED OPERATIONS

On July 2, 2004, we sold the security consulting division of our litigation
support services subsidiary, NTI, which was the last remaining business in
discontinued operations. The remaining division in NTI, consisting primarily of
training services, has been included as part of the Products Division segment,
where management now resides. This business represented the last remaining
business in our ArmorGroup Services Division (the "Services Division"). The
assets and liabilities of the Services Division have been classified as assets
and liabilities of discontinued operations on our consolidated balance sheets
and the results of their operations classified as income (loss) from
discontinued operations in the accompanying consolidated statements of
operations. In the second quarter of 2004, we recorded an impairment charge of
$1.4 million in integration and other charges in continuing operations to reduce
the carrying value of remaining portion of NTI to its estimated fair value. We
had no discontinued operations at December 31, 2004.

On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33,660,000 in total consideration to a group of
private investors led by Granville Baird Capital Partners of London, England and
management. We received $31,360,000 in cash at closing and a note receivable of
$2,300,000, which we collected in full in fiscal 2004. We recorded a loss of
$8.8 million on the sale in the fourth quarter of 2003. In accordance with
generally accepted accounting principles, unrealized gains and losses, which are
included in equity as accumulated other comprehensive income or loss, are not
recognized until the period in which the related assets and liabilities are
disposed of.

Based upon our analysis and discussions with our advisors regarding the
estimated realizable value, net of selling costs, of the Services Division, we
reduced its carrying value and recorded net impairment charges of $1.4 million,
$12.4 million and $30.3 million in fiscal 2004, 2003 and 2002, respectively. The
2003 impairment charges consisted of a non-cash goodwill reduction. The fiscal
2002 impairment charges consisted of approximately $6.1 million in estimated
disposal costs and a $24.2 million non-cash goodwill reduction. The benefit for
income taxes for discontinued operations was $8.3 million and $2.4 million for
fiscal 2003 and 2002, respectively. The reductions in the carrying value of the
Services Division were management's best estimate based upon the information
currently available, including discussions with our investment bankers.

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to AIS. AIS
is a wholly owned subsidiary of Aerwav Holdings, LLC. As consideration for the
integrated systems business, we received a $4.1 million collateralized note due
in April 2005 and a warrant for approximately 2.5% of AIS. $475,000 of the
balance due was paid in advance through fiscal 2004. In accordance with SFAS
144, we recorded a loss of $366,000 on the sale in fiscal 2003.

On July 15, 2002, we announced plans to sell the Services division and the
retention of Merrill Lynch & Company to assist in the sale. In accordance with
Statement of Financial Accounting Standards No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets ("SFAS 144"), the assets and liabilities of the
Services division have been classified as held for sale, with its operating
results in the current and prior periods reported in discontinued operations for
fiscal 2004, 2003 and 2002. Cyconics International Training Services, Inc., a
subsidiary providing certain training services, formerly reported as a part of
the Services Division is not included in the amounts classified as assets held
for sale. The assets and

F-15

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

liabilities as well as the operating results of Cyconics International Training
Services, Inc. have been reclassified to the Products Division where management
oversight currently resides.

In January 2001, our management approved a restructuring plan to close its U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities and reduce overhead in its businesses worldwide. In connection with
this restructuring plan, the division performed a review of its long-lived
assets to identify potential impairments. Pursuant to this restructuring plan,
ArmorGroup i) eliminated 26 employees, primarily from its investigative
businesses, ii) eliminated an additional 24 employees from its security
business, iii) incurred lease and other exit costs as a result of the closure of
its investigative businesses, and iv) wrote-down the value of both tangible and
intangible assets as a result of the impairment review. All of the significant
actions contemplated by the restructuring plan have been completed.

As a result of the 2001 restructuring plan, we recorded a pre-tax charge of
$10.3 million in 2001. As of December 31, 2004, we had no remaining liability
after fiscal 2004 utilization of $140,000 relating to lease termination costs.

The following is a summary of the operating results of the discontinued
operations for the years ended December 31, 2004, 2003 and 2002.

DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
(IN THOUSANDS)

Revenue $ 1,733 $ 95,124 $ 98,263
Cost of revenues 697 66,780 75,779
Gross profit 1,036 28,344 22,484
Operating expenses 821 19,910 30,588
Charge for impairment of long-lived assets -- 21,535 30,296
Integration and other charges -- 776 2,623
-------- -------- --------
Operating income (loss) 215 (13,877) (41,023)
Interest expense, net 2 16 346
Other expense, net 273 479 99
-------- -------- --------
Loss from discontinued operations before
income tax benefit (60) (14,372) (41,468)
Income tax benefit (a) (22) (8,252) (2,442)
-------- -------- --------
Loss from discontinued operations $ (38) $ (6,120) $(39,026)
======== ======== ========

a) Fiscal 2002 income taxes exclude additional expense of $1,475,000 per
paragraphs 26 and 27 of SFAS No. 109 included in income from continuing
operations on a consolidated basis.

F-16

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following is a summary of the assets and liabilities of our discontinued
operations:

DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
(IN THOUSANDS)

Assets
Cash and cash equivalents $ -- $ 76
Accounts receivable, net -- 549
Other current assets -- 128
------ ------
Total current assets -- 753
Property and equipment, net -- 1,206
Goodwill, net -- 356

Other assets -- 41
------ ------
Total assets of discontinued operations $ -- $2,356
====== ======

Liabilities
Current portion of long-term debt $ -- $ 125
Accounts payable -- 5
Accrued expenses and other current liabilities -- 496
------ ------
Total current liabilities -- 626
------ ------
Total liabilities of discontinued operations $ -- $ 626
====== ======

F-17

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3. COMPREHENSIVE INCOME

The components of comprehensive income (loss), net of tax expense (benefit) of
$642,000, zero and ($364,000) for the years ended December 31, 2004, 2003 and
2002, respectively, are listed below:

DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------- -----------------
(IN THOUSANDS)

Net income (loss) $ 80,539 $ 10,886 $(17,689)
Other comprehensive income (loss):
Sale of ArmorGroup -- 3,231 --
Foreign currency translations, net of tax 2,885 4,874 304
-------- -------- --------
Comprehensive income (loss) $ 83,424 $ 18,991 $(17,385)
======== ======== ========

In accordance with generally accepted accounting principles, unrealized gains
and losses, which are included in equity as accumulated other comprehensive
income or loss, are not recognized until the period in which the related assets
and liabilities are disposed of.

4. BUSINESS COMBINATIONS

We have completed numerous purchase business combinations for cash and/or shares
of our common stock and assumption of liabilities in certain cases. In the three
years ended December 31, 2004, the following acquisitions were completed:

TOTAL SHARES VALUE OF
CONSIDERATION ISSUED SHARES
-------------------------------------------
(IN THOUSANDS, EXCEPT SHARES ISSUED)
2004
- ----

Aggregate 2004 acquisitions, net of cash (1) $158,442 -- --

Additional purchase price paid/issued for
deferred consideration/repayment of debt (2) 33,943 -- --
-------- ------ --------
$192,385 -- --
======== ====== ========
2003
- ----
Aggregate 2003 acquisitions, net of cash (3) $ 90,512 -- --

Additional purchase price paid/issued for
acquisition earnouts 1,026 -- --
-------- ------ --------
$ 91,538 -- --
======== ====== ========
2002
- ----
Aggregate 2002 acquisitions, net of cash (4) $ 8,818 -- --
Additional purchase price paid/issued for
acquisition earnouts 9,375 -- --
-------- ------ --------
$ 18,193 -- --
======== ====== ========

(1) Includes Vector Associates, Inc. (dba ODV, Inc.), Kleen-Bore, Inc., The
Specialty Group, Inc., and Bianchi International.

(2) Includes the repayment of $31.1 million of Simula bonds, plus accrued
interest thereon, in January 2004.

(3) Includes Simula, Inc. and Hatch Imports, Inc.

(4) Includes Speedfeed, Inc., Foldable Products Group, B-Square, Inc., Evi-Paq,
Inc., Trasco Bremen and 911 Emergency Products.

F-18

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As described in Note 1, on November 18, 2004, we acquired all of the outstanding
stock of Specialty Defense for $92 million in cash, which includes the
assumption of certain outstanding debt. As a result of the Specialty Defense
acquisition, we expect to: (1) strengthen our position as a leading mid-tier
defense and security industry consolidator through increased scale and scope;
(2) increase our relevance to Department of Defense customers and programs; (3)
combine Specialty Defense's high volume manufacturing capacity and their
established reputation as a leader in MOLLE systems, OTVs and Warrior Helmets,
with some of our existing proprietary technology to compete aggressively in
solicitation for vests; (4) achieve cross-selling opportunities by leveraging
our global sales force and relationships; and (5) offer opportunities for cost
reduction through integration savings and rationalization of operations.

On December 30, 2004, we acquired all of the outstanding stock of Bianchi
International ("Bianchi") for $60 million in cash. Bianchi is a manufacturer and
supplier of duty and concealment holsters, belts and accessories under the
Bianchi(R) brand name used primarily by law-enforcement, private security and
military personnel. A supplier of the SPEAR rucksack system for U.S. Special
Operations Forces, Bianchi is also a market leader in medium and large technical
internal frame backpacks and high-end daypacks, satchels and carrying cases
under the Gregory(R) brand name. Bianchi will be included in the Products
Division.

As a result of the Bianchi acquisition, we expect to: (1) strengthen our
position as a leading supplier of holsters, belts and accessories; (2) achieve
cross-selling opportunities by leveraging our global sales force and
relationships; and (3) offer opportunities for cost reduction through
integration savings and rationalization of operations.

On December 9, 2003, we acquired all of the outstanding stock of Simula, for
approximately $84.8 million in cash including transaction costs. Simula is a
safety technology company that supplies human safety and survival systems to all
branches of the United States military, major aerospace and defense prime
contractors. Its core markets are military aviation safety, military personnel
safety, and land and marine safety. Simula is a provider of military helicopter
seating systems, aircraft and land vehicle armor systems, protective equipment
for military personnel and technologies used to protect humans in a variety of
life-threatening or catastrophic situations.

As a result of the Simula acquisition, we expect to: (1) strengthen our position
as a leading mid-tier defense and security industry consolidator through
increased scale and scope; (2) increase our relevance to Department of Defense
customers and programs; (3) diversify our business mix by adding fixed-wing and
rotorcraft crashworthy seating; (4) combine body armor capabilities of Simula
and PROTECH, one of our subsidiaries, supplementing our position in the SAPI
market; (5) achieve cross-selling opportunities by leveraging our global sales
force and relationships; and (6) offer opportunities for cost reduction through
integration savings and rationalization of operations.

F-19

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The acquisitions were accounted for as purchase business combinations, and
accordingly, the results of operations were included in our financial statements
after the acquisition date. The costs to acquire Specialty Defense, Bianchi and
other businesses acquired during the year ended December 31, 2004, have been
allocated to the assets acquired and liabilities assumed according to their
estimated fair values at the time of the acquisition as follows:

SPECIALTY OTHER
DEFENSE BIANCHI ACQUISITIONS TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)

Working capital, net of cash $ 15,801 $ 5,604 $ (1,213) $ 20,192
Property and equipment 7,860 1,033 15 8,908
Other long-term assets 541 32 -- 573
Assumed notes payable (983) -- -- (983)
Deferred tax liability (14,170) (13,098) -- (27,268)
Customer-related intangibles 12,200 19,671 185 32,056
Technology-related intangibles 1,900 2,777 -- 4,677
Marketing-related intangibles 16,300 15,830 2,084 34,214
Goodwill 50,243 28,528 7,302 86,073
--------- --------- --------- ---------
$ 89,692 $ 60,377 $ 8,373 $ 158,442
========= ========= ========= =========

The customer-related intangible assets relate to acquired customer relationships
and are being amortized over a twelve-year weighted-average useful life on a
straight-line basis. The technology-related intangible asset relates to certain
acquired patents and is being amortized over an eight-year weighted-average
useful life on a straight-line basis. The marketing-related intangible asset
relates to acquired trade names and trademarks and has an indefinite useful
life. The goodwill acquired in the acquisitions of Specialty Defense and Bianchi
is not deductible for tax purposes. The goodwill acquired for other businesses
acquired during the year ended December 31, 2004, is tax deductible.

Unaudited Pro forma Results. Businesses acquired are included in consolidated
results from the date of acquisition. Pro forma results of the 2004 acquisitions
of Vector Associates, Inc. (dba ODV, Inc.), Kleen-Bore, Inc. and the 2003
acquisition of Hatch Imports, Inc. are not presented, as they would not differ
by a material amount from actual results. The following unaudited pro forma
consolidated results are presented to show the results on a pro forma basis as
if the 2004 acquisitions of Specialty Defense and Bianchi and the 2003
acquisition of Simula had been made as of January 1, 2003:

2004 2003
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues from continuing operations $1,073,978 $518,016
Net income from continuing operations $ 86,347 $ 24,353
Basic earnings per share from continuing operations $ 2.60 $ 0.76
Diluted earnings per share from continuing operations $ 2.48 $ 0.74
Weighted average shares - basic 33,244 32,175
Weighted average shares - diluted 34,850 32,954

F-20

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but are tested for impairment at least annually or more often
if indicators of impairment arise. The changes in the carrying amount of
goodwill for the years ended December 31, 2004 and 2003, are as follows:

AEROSPACE & MOBILE
DEFENSE PRODUCTS SECURITY TOTAL
------- -------- -------- -----
(IN THOUSANDS)

Balance at December 31, 2002 $ 32,133 $ 60,143 $ 6,460 $ 98,736
Goodwill acquired during year 72,816 3,976 -- 76,792
Foreign currency translation and
other adjustments -- 286 (107) 179
--------- --------- --------- ---------
Balance at December 31, 2003 104,949 64,405 6,353 175,707

Goodwill acquired during year 50,243 35,830 -- 86,073
Foreign currency translation and (879) 1,057 55 233
other adjustments
--------- --------- --------- ---------
Balance at December 31, 2004 $ 154,313 $ 101,292 $ 6,408 $ 262,013
========= ========= ========= =========

Included in patents, licenses and trademarks in the accompanying consolidated
balance sheets are the following intangible assets as of December 31, 2004:

CUSTOMER
RELATIONSHIPS TECHNOLOGY MARKETING TOTAL
------------- ---------- --------- -----

Gross amount $ 58,454 $ 14,711 $ 46,124 $ 119,289
Accumulated amortization (2,796) (1,461) (2,573) (6,830)
--------- --------- --------- ---------
Net amount $ 55,658 $ 13,250 $ 43,551 $ 112,459
========= ========= ========= =========

Included in marketing are approximately $41.2 million of marketing-related
intangible assets that have indefinite lives.

We anticipate recording amortization expense of the following in future periods:

YEAR (IN THOUSANDS)
------------------ --------------

2005 $ 8,158
2006 8,157
2007 8,157
2008 8,155
2009 7,466
Thereafter 31,117
--------
$ 71,210
========

F-21

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6. INVENTORIES

The components of inventory as of December 31, 2004 and 2003, are as follows:

2004 2003
-------- --------
(IN THOUSANDS)
Raw materials $ 97,528 $ 40,397
Work-in-process 51,137 25,422
Finished goods 27,543 14,708
-------- --------
$176,208 $ 80,527
======== ========

7. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2004 and 2003, are summarized as
follows:

2004 2003
--------- ---------
(IN THOUSANDS)
Land $ 6,096 $ 5,940
Buildings and improvements 39,308 29,776
Machinery and equipment 53,947 40,906
Construction in process 5,873 --
--------- ---------
Total 105,224 76,622
Accumulated depreciation (27,917) (19,046)
--------- ---------
$ 77,307 $ 57,576
========= =========

Depreciation expense for the years ended December 31, 2004, 2003 and 2002, was
approximately $9,645,000, $5,719,000 and $4,953,000, respectively.

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of December 31, 2004 and 2003,
are summarized as follows:

2004 2003
-------- --------
(IN THOUSANDS)
Accrued expenses $ 70,869 $ 40,787
Customer deposits 32,317 14,651
Deferred consideration for acquisitions 4,061 2,780
-------- --------
$107,247 $ 58,218
======== ========

F-22

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

9. SHORT AND LONG TERM DEBT

SHORT TERM DEBT

On October 29, 2004, we completed the placement of $300 million aggregate
principal amount of 2.00% Senior Subordinated Convertible Notes due November 1,
2024 ("2% Convertible Notes"). On November 5, 2004, Goldman, Sachs & Co.
exercised its option to purchase an additional $45 million principal amount of
the 2% Convertible Notes. At December 31, 2004, the carrying amount of the 2%
Convertible Notes was $341.6 million. The 2% Convertible Notes are guaranteed by
most of our domestic subsidiaries on a senior subordinated basis (see Note 21).
The 2% Convertible Notes were initially rated B1/B+ by Moody's Investors'
Service and Standard & Poor's Rating Services, respectively. The 2% Convertible
Notes will bear interest at a rate of 2.00% per year, payable on November 1 and
May 1 of each year beginning on May 1, 2005 and ending on November 1, 2011. The
2% Convertible Notes will be subject to accretion of the principal amount
beginning on November 1, 2011, at a rate that provides holders with an aggregate
annual yield to maturity of 2.00%, as defined in the agreement. The 2%
Convertible Notes will bear contingent interest during any six-month period
beginning November 1, 2011, of 15 basis points paid in cash if the average
trading price of the notes is above certain levels. The 2% Convertible Notes
will be convertible, at the bond holder's option, at any time prior to maturity,
initially at a conversion rate of 18.5151 shares of our common stock per $1,000
principal amount of notes, which is the equivalent conversion price of
approximately $54.01 per share, subject to adjustment. Upon conversion, we will
satisfy our conversion obligation with respect to the accreted principal amount
of the notes to be converted in cash, with any remaining amount to be satisfied
in shares of our common stock. In accordance with generally accepted accounting
principles, the 2% Convertible Notes are classified as short term debt.

On March 12, 2003, we entered into a collateralized revolving credit facility
with Corporacion Financiera to provide for working capital needs for our
Colombia facility. In 2004, we expanded the collateralized revolving credit
facility with five additional Colombian banks. The credit facility is a one-year
revolving credit facility and, among other things, provides for total maximum
borrowings of 5.5 billion Colombian Pesos (US $2.3 million based on the exchange
rate as of December 31, 2004). All borrowings under the credit facility bears
interest at a rate equal to the Colombian Central Bank rate based on averages of
30 day loans, plus an applicable margin ranging from 3.5% to 4.0%. The Credit
Facility is guaranteed by a US $100,000 standby letter of credit and bank
signature notes.

F-23

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

LONG TERM DEBT

2004 2003
--------- ---------
(IN THOUSANDS)

Credit facility (a) $ -- $ --
8.25% Senior Subordinated Notes due 2013 (b) 147,850 147,600
Senior Subordinated Convertible Notes for Simula (c) -- 31,135
Ontario Industrial Development Authority Variable Rate Demand Industrial
Development Revenue Bonds, Series 1989, paid in full in January 2004 -- 2,600
Note payable in annual principal and interest installments of $200 through January
2013, with an interest rate of 5% 1,377 1,508
Note to former officer payable in monthly principal and interest installments of
$7 through December 2009, with an imputed interest rate of 9.25% 310 359
Minimum guaranteed royalty to former officer payable in monthly principal and
interest installments of $4 through August 2005, with an imputed interest rate
of 9.2% 31 73
Minimum guaranteed royalty to former officer payable in monthly principal and
interest installments of $36 through April 2005, with an imputed interest rate
of 7.35% 141 542
Note payable in monthly principal and interest installments of $15 through May
2008, with an interest rate of 3% 642 739
Mortgage payable in monthly principal and interest installments of $12 through
November 2013, with an interest rate of 6.25% 975 --
Plus fair value of interest rate swaps (d) 6,046 5,851
--------- ---------
$ 157,372 $ 190,407
Less current portion (621) (32,107)
--------- ---------
$ 156,751 $ 158,300
========= =========

(a) Credit Facility - On August 12, 2003, we terminated our existing credit
facility and entered into a new collateralized revolving credit facility with
Bank of America, N.A., Wachovia Bank, N.A. and Key Bank, N.A. The new credit
facility is a five-year revolving credit facility and, among other things,
provides for: 1) total maximum borrowings of $60 million; 2) a $25 million
sub-limit for the issuances of standby and commercial letters of credit; 3) a $5
million sub-limit for swing-line loans; and 4) a $5 million sub-limit for
multi-currency borrowings. All borrowings under the new credit facility will
bear interest at either 1) a rate equal to LIBOR, plus an applicable margin
ranging from 1.125% to 1.625%; 2) an alternate base rate which will be the
higher of (a) the Bank of America prime rate and (b) the Federal Funds rate plus
0.50%; or 3) with respect to foreign currency loans, a fronted offshore currency
rate, plus an applicable margin ranging from 1.125% to 1.625%, depending on
certain conditions. The Credit Facility is guaranteed by certain of our direct
and indirect domestic subsidiaries and is collateralized by, among other things,
(i) a pledge of all of the issued and outstanding shares of stock or other
equity interests of certain of our domestic subsidiaries, (ii) a pledge of 65%
of the issued and outstanding voting shares of stock or other voting equity
interests of certain of our direct and indirect foreign subsidiaries, (iii) a
pledge of 100% of the issued and outstanding nonvoting shares of stock or other
nonvoting equity interests of certain of our direct and indirect foreign
subsidiaries, and (iv) a first priority perfected security interest on certain
of our domestic assets and certain domestic assets of certain of our direct and
indirect subsidiaries that will become guarantors of our obligations under the
new credit facility, including, among other things, accounts receivable,
inventory, machinery, equipment, certain contract rights, intellectual property
rights and general intangibles. On January 9, 2004, we amended our Credit
Facility to broaden our ability to make additional open-market purchases of
publicly-traded securities subject to certain limitations. On March 29, 2004, we
amended our Credit Facility to allow us to pay dividends subject to certain
limitations.

(b) 8.25% Senior Subordinated Notes due 2013 - On August 12, 2003, we completed
a private placement of $150 million aggregate principal amount of 8.25% Senior
Subordinated Notes due 2013 (the "8.25% Notes"). The 8.25% Notes are guaranteed
by most of our domestic subsidiaries on a senior subordinated basis (see Note
21). The 8.25% Notes have been sold to qualified institutional buyers in
reliance on Rule 144A of the Securities Act of 1933, as amended, and to non-U.S.
persons in reliance on Regulation S under the Securities Act of 1933, as

F-24

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

amended. The 8.25% Notes were rated B1/B+ by Moody's Investors' Service and
Standard & Poor's Rating Services, respectively. During 2003, we used a portion
of the funds to acquire Simula, Inc. and Hatch Imports, Inc., and we intend to
use the remaining proceeds of the offering to fund acquisitions, repay a portion
of our outstanding debt and for general corporate and working capital purposes,
including the funding of capital expenditures. Interest on the 8.25% Notes is
payable semiannually on the fifteenth of February and August of each year. The
8.25% Notes were issued at a discount of approximately $2.5 million to
investors. The 8.25% Notes may be redeemed at our option in whole or in part on
a pro-rata basis, on and after August 15, 2008, at certain specified redemption
prices plus accrued interest payable to the redemption date.

(c) Senior Subordinated Convertible Notes for Simula - On December 9, 2003, we
purchased Simula. In 1997, Simula completed a public offering of $34.5 million
of 8% Senior Subordinated Convertible Notes. On January 5, 2004, the 8% Senior
Subordinated Convertible Notes were paid-in-full. That balance of these notes in
included in the current portion of long-term debt in 2003.

(d) Fair Value of Interest Rate Swaps - On September 2, 2003, we entered into
interest rate swap agreements, designated as a fair value hedge as defined under
SFAS 133 with an aggregate notional amount totaling $150 million. The agreements
were entered to exchange the fixed interest rate on the 8.25% Notes for a
variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth day of
February and August. At December 31, 2004, the six-month LIBOR was 2.78%. The
agreements are subject to other terms and conditions common to transactions of
this type. In accordance with SFAS 133, changes in the fair value of the
interest rate swap agreements offset changes in the fair value of the fixed rate
debt due to changes in the market interest rate. The fair value of the interest
rate swap agreements was approximately $6.0 million at December 31, 2004. The
agreements are deemed to be a perfectly effective fair value hedge and therefore
qualify for the short-cut method of accounting under SFAS 133. As a result, no
ineffectiveness is expected to be recognized in earnings associated with the
interest rate swap agreements on the 8.25% Notes.

Maturities of long-term debt are as follows:

YEAR (IN THOUSANDS)
------------------------ --------------

2005 $ 621
2006 452
2007 475
2008 454
2009 340
Thereafter 155,030
---------
$157,372
=========

F-25

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. DERIVATIVE FINANCIAL INSTRUMENTS

We account for derivative instruments in accordance with SFAS 133, which
requires all freestanding and embedded derivative instruments to be measured at
fair value and recognized on the balance sheet as either assets or liabilities.
In addition, all derivative instruments used in hedging relationships must be
designated, reassessed and accounted for as either fair value hedges or cash
flow hedges pursuant to the provisions of SFAS 133.

We hedge the fair value of our 8.25% Notes using interest rate swaps. We enter
into these derivative contracts to manage fair value changes that could be
caused by our exposure to interest rate changes. On September 2, 2003, we
entered into interest rate swap agreements, designated as fair value hedges as
defined under SFAS 133, with an aggregate notional amount totaling $150 million.
The interest rate swaps mature on August 15, 2013. The agreements were entered
into to exchange the fixed interest rate of 8.25% on the 8.25% Notes for a
variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth of February
and August. The six-month LIBOR rate at December 31, 2004, was 2.78%. The
agreements are subject to other terms and conditions common to transactions of
this type. These fair value hedges qualify for hedge accounting using the
short-cut method since the swap terms match the critical terms of the 8.25%
Notes. Accordingly, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the 8.25% Notes due to changes in
the market interest rate. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the 8.25% Notes.

The fair values of our interest rate swap agreements are obtained from our
counter-parties and represent the estimated amount we would receive or pay to
terminate the agreement, taking into consideration the difference between the
contract rate of interest and rates currently quoted for agreements of similar
terms and maturities.

11. INTEGRATION AND OTHER CHARGES

We incurred integration and other charges of approximately $10.3 million, $12.6
million and $5.9 million for the years ending December 31, 2004, 2003 and 2002,
respectively. The charges for the year ended December 31, 2004, includes a $6.3
million non-cash charge for the acceleration of performanced-based, long-term
restricted stock awards granted to certain executives in 2002 and an impairment
charge of $1.4 million to reduce the carrying value of the remaining portion of
NTI to its estimated fair value. The charges for the year ended December 31,
2003, includes a $7.3 million non-cash charge for stock-based compensation for a
performance plan for certain key executives and a $3.3 million (including a $2.1
million non-cash charge) severance charge related to the departure of our former
Chief Executive Officer. The remaining charges relate to costs of potential
acquisitions that did not materialize, the relocation of assets and personnel,
severance costs, systems integration, as well as integrating the sales and
marketing functions for acquired companies.

F-26

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. COMMITMENTS AND CONTINGENCIES

Employment contracts. We are party to several employment contracts as of
December 31, 2004 with certain members of management. Such contracts are for
varying periods and include restrictions on competition after termination. These
agreements provide for salaries, bonuses and other benefits and also specify and
delineate the granting of various stock options.

Legal/litigation matters.

Kroll, Inc. Matters
- -------------------

In 1999 and prior to our acquisition of OHEAC in 2001, several of the former
employees of Kroll O'Gara Company de Mexico, S.A. de C.V. ("O'Gara Mexico"), a
subsidiary of OHEAC, commenced labor claims against O'Gara Mexico seeking
damages for unjustified termination. In late 2004, the principal labor claim was
settled by the Company for approximately $1.9 million and two of the remaining
claims were settled for approximately $52,000. We believe that we are entitled
to indemnification from Kroll, Inc. with respect to these settlement payments
and we are currently engaged in discussions with Kroll, Inc. with respect to
this matter.

F-27

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Matters Involving Zylon(R) Fiber
- --------------------------------

Pursuant to the terms of the class action settlement with the Southern States
PBA, the warranty on the American Body Armor(TM) Xtreme(R) ZX vest (both NIJ
threat level II and IIIA) has been reduced from 5 years to 2 1/2 years. In
addition, every purchaser of an Xtreme(R) ZX vest has the option to exchange
their vest for either a new ZX vest or any other vest of their choosing from the
American Body Armor(TM), Safariland(R) and ProTech(TM) product lines plus a
$100.00 transferable rebate coupon applicable towards their next purchase of a
vest. We have also made available on the American Body Armor(TM) website testing
data, protocols and results relating to the testing of our vests. We also
continue to test all of our Zylon(R)-containing vests, and if such testing
demonstrates that the tested vests fail to perform in accordance with their
warranties, we will implement an exchange program for those models on a
reasonably comparable basis to the American Body Armor(TM) Xtreme(R) ZX exchange
program outlined above. Zylon(R) fiber is made by Toyobo, a Japanese
corporation, and is a ballistic fiber widely used in the entire body armor
industry. A final report to the Duval County Court regarding implementation of
the settlement, exchange of vests and on-going testing, will be filed on or
before April 15, 2005. We are also voluntarily cooperating with a request
received in December 2004 from the Department of Justice who is reviewing the
entire industry's use of Zylon(R) fiber in bullet resistant vests.

Other Matters
- -------------

F-28

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

We are a leading manufacturer and provider of specialized security products;
training and support services related to these products; vehicle armor systems;
military helicopter seating systems, aircraft and land vehicle safety systems;
protective equipment for military personnel; and other technologies used to
protect humans in a variety of life-threatening or catastrophic situations. Our
products and systems are used domestically and internationally by military, law
enforcement, security and corrections personnel, as well as governmental
agencies, multinational corporations and individuals. Effective in the first
quarter 2004, we instituted a new segment reporting format to include three
reportable business divisions: Aerospace & Defense Group, the Products Division
and the Mobile Security Division. The Aerospace & Defense Group was formed upon
the completion of our acquisition of Simula, Inc. on December 9, 2003, and
results have been included herein since the acquisition date. The Aerospace &
Defense Group also includes the military business, including armor and blast
protection systems for Up-Armored HMMWVs, and other military vehicle armor
programs, which previously were included in the Mobile Security Division. The
Aerospace & Defense Group also includes the SAPI plate produced by our Protech
subsidiary in Pittsfield, Massachusetts, which was previously reported as part
of the Products Division. The historical results of these businesses have been
reclassified as part of the Aerospace & Defense Group. This reporting change was
made to better reflect management's approach to operating and directing the
businesses, and, in certain instances, to align financial reporting with our
market and customer segments. Our Services division has been classified as
discontinued operations and is no longer included in this presentation (See Note
2).

Aerospace & Defense Group. Our Aerospace & Defense Group supplies human safety
and survival systems to the U.S. military, and major aerospace and defense prime
contractors. Our core markets are military aviation safety, military personnel
safety, and land and marine safety. Under the brand name O'Gara-Hess &
Eisenhardt, we are the sole-source provider to the U.S. military of the armor
and blast protection systems for Up-Armored HMMWVs. We are also under contract
with the U.S. Army to provide spare parts, logistics and ongoing field support
services for the currently installed base of approximately 8,350 Up-Armored
HMMWVs. Additionally, we provide blast and ballistic protection kits for the
standard HMMWVs, which are installed on existing equipment in the field. Our
Aerospace & Defense Group was subcontracted to develop a ballistic and blast
protected armored and sealed truck cab for the HIMARS, a program recently
transitioned by the U.S. Army and U.S. Marine Corps from developmental to a low
rate of initial production, deliveries of which commenced in 2003 and continued
in 2004. We also supply armor sub-systems for other tactical wheeled vehicles.

Through Simula, we provide military helicopter seating systems, helicopter
cockpit airbag systems, aircraft armor and land vehicle armor kits for the
HMMWV, HEMTT, PLS, HET, M915 and ASV, body armor and other protective equipment
for military personnel, emergency bailout parachutes and survival ensembles worn
by military aircrew. The primary customers for our products are the U.S. Army,
U.S. Marine Corps, Boeing, and Sikorsky Aircraft. Most of Simula's aviation
safety products are provided on a sole source basis. The U.S. armed forces have
adopted ceramic body armor as a key element of the protective ensemble worn by
our troops in Iraq and Afghanistan. Simula was the developer of this specialized
product called SAPI, and is one of the largest suppliers to U.S. forces.

Specialty Defense, with operations in Pennsylvania, Tennessee, and Kentucky, is
a supplier to military and law enforcement customers in the United States and
overseas. Specialty Defense manufactures, among other things, MOLLE systems,
OTVs and Warrior Helmets. Specialty Defense's core products are made of
Kevlar(R) and heavy-duty nylon fabric and webbing and require special cutting
and sewing techniques. Specialty Defense is currently the largest supplier of
MOLLE systems for the U.S. Army. The MOLLE system consists of a modular rucksack
with removable compartments and components and a fighting load vest with
removable pockets for the Rifleman, Pistol, Squad Automatic Weapon Gunner, Medic
and Grenadier configurations. Specialty Defense manufactures OTVs, which, when
used with SAPI plates, provide enhanced armor protection for U.S. armed forces
against mines, grenades, mortar shells, artillery fire and rifle projectiles.
Specialty Defense is one of the three largest suppliers of Warrior Helmets for
the U.S. Army. Specialty Defense manufactures NATO PASGT helmets, the Advanced
Combat Vehicle Crewman helmet and the Warrior Helmet (the U.S. Army's next
generation helmet), along with related liners and accessories.

F-29

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Armor Holdings Products. Our Armor Holdings Products division manufactures and
sells a broad range of high quality equipment marketed under brand names that
are well known and respected in the military and law enforcement communities.
Products manufactured by this division include concealable and tactical body
armor, hard armor, duty gear, less-lethal munitions, anti-riot products, police
batons, emergency lighting products, forensic products, firearms accessories,
weapon maintenance products, foldable ladders, backpacks and specialty gloves.
Cyconics International Training Services, Inc., a small subsidiary providing
certain training services formerly reported as a part of the Services Division,
is not included in the amounts classified as assets held for sale or
discontinued operations and has been reclassified to our Armor Holdings Products
division where management oversight currently resides.

Armor Mobile Security. Our Armor Mobile Security division manufactures and
installs armoring systems for commercial vehicles to protect against varying
degrees of ballistic and blast threats. We armor a variety of commercial
vehicles, including limousines, sedans, sport utility vehicles, commercial
trucks and cash-in-transit vehicles. Our customers in this business include U.S.
federal law enforcement and intelligence agencies, foreign heads of state,
multinational corporations, as well as high net worth individuals and
cash-in-transit operators.

Corporate. Our Corporate Division includes the corporate management and expenses
associated with managing the overall company. These expenses include
compensation and benefits of corporate management and staff, legal and
professional fees, and administrative and general expenses, which are not
allocated to the business units.

F-30

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Revenues, operating income and total assets, net for each of our continuing
segments are as follows:

2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Revenues:
Aerospace & Defense $ 605,398 $ 91,673 $ 59,318
Products 249,765 193,960 179,946
Mobile Security 124,520 79,539 65,853
----------- ----------- -----------
Total revenues $ 979,683 $ 365,172 $ 305,117
=========== =========== ===========

Operating income:
Aerospace & Defense $ 127,520 $ 22,775 $ 12,833
Products 32,719 33,054 30,978
Mobile Security 11,168 2,538 1,542
Corporate (25,692) (22,638) (6,988)
----------- ----------- -----------
Total operating income $ 145,715 $ 35,729 $ 38,365
=========== =========== ===========

Total assets:
Aerospace & Defense $ 490,754 $ 209,834 $ 47,746
Products 278,912 183,972 179,367
Mobile Security 103,799 63,161 57,700
Corporate 418,886 126,303 23,830
----------- ----------- -----------
Total assets $ 1,292,351 $ 583,270 $ 308,643
=========== =========== ===========

F-31

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Financial information with respect to revenues based on the geographic location
of the customer, and fixed assets, net to principal geographic areas, based on
the actual location of the principle facility, is as follows:

2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Revenues:
North America $828,666 $275,529 $225,365
South America 16,317 15,007 19,879
Africa 4,693 1,420 1,219
Europe/Asia 130,007 73,216 58,654
-------- -------- --------
$979,683 $365,172 $305,117
======== ======== ========

Total fixed assets, net:
North America $ 54,332 $ 38,337 $ 31,339
South America 1,461 1,392 1,248
Africa -- -- --
Europe/Asia 21,514 17,847 14,549
-------- -------- --------
$ 77,307 $ 57,576 $ 47,136
======== ======== ========

F-32

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

14. INCOME TAXES

Provision for income taxes from continuing operations for the years ended
December 31, 2004, 2003 and 2002 consisted of the following:

2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Current
U.S. Federal $ 42,552 $ 9,347 $ 11,123
State 4,322 1,040 2,183
Foreign 5,537 403 2,389
-------- -------- --------
Total current 52,411 10,790 15,695
-------- -------- --------
Deferred
U.S. Federal 3,328 3,274 (53)
State 989 (1,268) 28
Foreign (311) 1,407 384
-------- -------- --------
Total deferred 4,006 3,413 359
-------- -------- --------
Total provision for income taxes $ 56,417 $ 14,203 $ 16,054
======== ======== ========

Significant components of our net deferred tax liability related to continuing
operations as of December 31, 2004 and 2003, are as follows:

2004 2003
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Reserves not currently deductible $ 8,535 $ 3,527
Capital loss 9,545 11,320
Operating loss carryforwards 3,163 2,811
Patents & Trademarks -- 22
Accrued expenses 1,931 954
Foreign tax credits 1,122 912
Research and development and other credits 1,129 150
-------- --------
25,425 19,696
Deferred tax asset valuation allowance (9,620) (11,395)
-------- --------
Deferred tax asset, net of valuation allowance 15,805 8,301
Deferred tax liability:
Goodwill not amortized for financial
statement purposes under SFAS 142 (5,924) (2,418)
Patents, trademarks and purchased
intangibles (26,416) --
Interest on Convertible Debt (1,141) --
Property and equipment (9,541) (2,970)
Other (642) --
-------- --------
Net deferred tax (liability)/asset $(27,859) $ 2,913
======== ========

Recognition of deferred tax assets is based on management's belief that it is
more likely than not that the tax benefit associated with temporary differences
and operating and capital loss carryforwards will be utilized. A valuation
allowance is recorded for those deferred tax assets for which it is more likely
than not that the realization will not occur.

Our valuation allowance at December 31, 2004, consisted of approximately
$9,545,000 related to capital loss carryforwards and $75,000 related to net
operating loss carryforwards. The decrease in our valuation allowance was
attributable to the finalization of the gains and losses for tax purposes
associated with our 2003 dispositions and certain gains and losses realized in
2004.

F-33

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of December 31, 2004, we have U.S. federal, state, and foreign net operating
losses (NOLs) providing a tax effected benefit of $3,163,000. The NOLs expire in
varying amounts in fiscal years 2006 through 2022. At December 31, 2004, we also
have certain U.S. federal and state income tax credits of approximately
$1,100,000 that are subject to limitations under Internal Revenue Code (IRC)
Section 383. We also have approximately $1,100,000 of foreign tax credits
expiring between 2011 and 2014. In connection with our acquisitions of Specialty
Defense and Bianchi, we recorded net deferred tax liabilities of approximately
$12,300,000 and $13,100,000, respectively, relating primarily to identifiable
intangibles, which are not deductible for U.S. federal income tax purposes.
These net deferred tax liabilities were offset as an increase to goodwill.
Additionally, in 2004, we recorded a net deferred tax liability of approximately
$780,000 related to the finalization of purchase accounting for the December
2003 acquisition of Hatch, which was offset as an increase to goodwill.

We are subject to periodic review by U.S. federal, foreign, state, and local tax
jurisdictions in the ordinary course of business. During 2002, we were notified
by the Internal Revenue Service (IRS) that certain prior year income tax returns
would be examined. On October 18, 2002, we were notified by the Internal Revenue
Service that our tax return for the tax year ended December 31, 2000 had been
selected for examination. Further, on January 30, 2003, we were notified that
our tax return for the tax year ended December 31, 2001 had been selected for
examination. In April 2004, we reached an agreement with the IRS regarding our
tax returns for the years ended December 31, 2001 and 2000 that did not have a
material impact on our financial position, operations or liquidity.

United States income taxes have not been provided on certain undistributed
earnings of non-U.S. subsidiaries of approximately $10,700,000 million from
continuing operations. These earnings are considered to be permanently
reinvested in non-U.S. operations. The determination of the deferred U.S. tax
liability related to these earnings is not practicable. In October 2004, the
American Jobs Creation Act of 2004 (the "AJCA") was signed into law. The AJCA
creates a limited opportunity in 2005 for U.S. corporations to repatriate
unremitted foreign earnings by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations and, as of today, uncertainty
remains as to how to interpret numerous provisions of the AJCA. As such, we are
not yet in a position to decide on whether, and to what extent, we might
repatriate foreign earnings that have not yet been remitted to the U.S. We
expect to be in a position to make a decision on implementation, if any, later
in 2005.

Net deferred tax assets described above have been included in the accompanying
consolidated balance sheets as follows:

2004 2003
-------- --------
(IN THOUSANDS)
Other current assets $ 10,368 $ 4,151
Deferred income taxes (38,227) (1,238)
-------- --------
Total deferred tax (liabilities)/assets $(27,859) $ 2,913
======== ========

The sources of income from continuing operations before income taxes are:

2004 2003 2002
-------- -------- --------
(IN THOUSANDS)
Domestic $123,050 $ 25,681 $ 34,213
Foreign 13,944 5,528 3,178
-------- -------- --------
Total $136,994 $ 31,209 $ 37,391
======== ======== ========

F-34

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following reconciles the provision for income taxes computed at the Federal
statutory income tax rate to the provision for income taxes recorded in the
Consolidated Statements of Operations for the years ended December 31, 2004,
2003 and 2002:

2004 2003 2002
------ ------ ------

Provision for income taxes at statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit 2.5% (0.5)% 3.8%
Compensation subject to IRC Section 162(m) 2.5% 8.6% --
Foreign income taxes 0.3% 2.1% 0.7%
Valuation allowances from discontinued operations -- -- 3.8%
Other permanent items 0.9% 0.3% (0.4)%
------ ------ ------
41.2% 45.5% 42.9%
====== ====== ======

15. STOCKHOLDERS' EQUITY

Preferred stock. On July 16, 1996, our stockholders authorized a series of
preferred stock with such rights, privileges and preferences as the Board of
Directors shall from time to time determine. We have not issued any of this
preferred stock.

Stock options and grants. On June 15, 2004, we sold 4,000,000 primary shares of
common stock at a price of $37.50 per share, raising $142.5 million of net
proceeds after deducting the underwriter discounts and commissions. In addition,
certain of our directors and officers granted the underwriters a 30-day option
to purchase up to 600,000 shares. The 30-day option expired unexercised on July
15, 2004. We intend to use the net proceeds from the offering to fund future
acquisitions, to take advantage of business development opportunities, and for
general corporate and working capital purposes, including the funding of capital
expenditures. Funds that are not immediately used are invested in money market
funds, certificates of deposits, and other investment grade securities until
needed.

On June 22, 2004, our stockholders approved an amendment to our Certificate of
Incorporation, as amended, that increased the number of shares of our authorized
capital stock to 80,000,000, 75,000,000 shares of which are common stock and
5,000,000 shares of which are preferred stock.

During 2002, we implemented two new stock option plans. The 2002 Stock Incentive
Plan authorizes the issuance of up to 2,700,000 shares of our common stock upon
the exercise of stock options or in connection with the issuance of restricted
stock and stock bonuses. On June 22, 2004, our stockholders approved an
amendment to increase, by 2,000,000 shares, the total number of shares of common
stock that may be awarded under the 2002 Stock Incentive Plan. The 2002 Stock
Incentive Plan authorizes the granting of stock options, restricted stock and
stock bonuses to employees, officers, directors and consultants, independent
contractors and advisors of Armor Holdings and its subsidiaries. The 2002
Executive Stock Plan provides for the grant of a total of 470,000 stock options
and stock awards to our key employees. The terms and provisions of the 2002
Executive Stock Plan are substantially the same as the 2002 Stock Incentive
Plan, except that we may only grant non-qualified stock options under the 2002
Executive Stock Plan. The 2002 Executive Stock Plan was adopted on March 13,
2002 and all shares available for grant under the 2002 Executive Stock Plan were
granted to our executive officers on March 13, 2002.

During 1998, we implemented a new non-qualified stock option plan. Pursuant to
the new plan, 725,000 shares of common stock were reserved and made available
for distribution. On January 1, 1999, we distributed all 725,000 shares
allocated under the plan. In 1999, we implemented the 1999 Stock Incentive Plan
(the "1999 Plan"). We reserved 2,000,000 shares of our common stock for the 1999
Plan. The 1999 Plan provides for the granting of options to employees, officers,
directors, consultants, independent contractors and advisors of the Company. The
option prices of stock which may be purchased under the 1999 Plan are not less
than the fair market value of common stock on the dates of the grants.

F-35

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In 1996, we implemented an incentive stock plan and an outside directors' stock
plan. These plans collectively provide for the granting of options to certain
key employees and directors. Pursuant to such plans, as amended, 2,200,000
shares of common stock were reserved and made available for distribution. The
option prices of stock that may be purchased under the incentive stock plan are
not less than the fair market value of common stock on the dates of the grants.

In 1994, we implemented an incentive stock plan and an outside directors' stock
plan. These plans collectively provide for the granting of options to certain
key employees as well as providing for the grant of common stock to outside
directors and to all full time employees. Pursuant to such plans, 1,050,000
shares of common stock were reserved and made available for distribution. The
option prices of stock that may be purchased under the incentive stock plan are
not less than the fair market value of common stock on the dates of the grants.
Effective January 19, 1996, all stock grants awarded under the 1994 incentive
stock plan were accelerated and considered fully vested.

Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2004, 2003 and
2002:

2004 2003 2002
------- ------- -------

Expected life of option 4.7 yrs 4.0 yrs 4.0 yrs
Dividend yield 0% 0% 0%
Volatility 50.0% 49.8% 52.2%
Risk free interest rate 3.36% 2.51% 3.94%

The weighted average fair value of options granted during 2004, 2003 and 2002
are as follows:

2004 2003 2002
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fair value of each option granted $ 15.57 $ 6.21 $ 10.08
Total number of options granted 979 898 1,895
Total fair value of all options granted $15,243 $ 5,576 $19,098

Outstanding options, generally consisting of ten-year incentive and
non-qualified stock options, generally vest and become exercisable over a three
or five year period from the date of grant. The outstanding options generally
expire ten years from the date of grant or upon retirement from the Company, and
are contingent upon continued employment during the applicable ten-year period.

F-36

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A summary of the status of stock option grants as of December 31, 2004 and
changes during the years ending on those dates is presented below:

WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at December 31, 2001 2,984,034 $ 11.60
Granted 1,894,660 $ 22.96
Exercised (507,868) $ 8.41
Forfeited (86,168) $ 16.75
-----------

Outstanding at December 31, 2002 4,284,658 $ 7.81
Granted 898,347 $ 16.62
Exercised (724,934) $ 11.83
Forfeited (567,150) $ 21.52
-----------

Outstanding at December 31, 2003 3,890,921 $ 17.00
Granted 979,000 $ 33.95
Exercised (1,642,195) $ 15.36
Forfeited (69,210) $ 17.26
-----------

Outstanding at December 31, 2004 3,158,516 $ 23.15
===========

Options exercisable at December 31, 2004 1,311,698 $ 18.32
===========

The following table summarizes information about stock options outstanding at
December 31, 2004:

REMAINING
OPTIONS OPTIONS LIFE IN
EXERCISE PRICE RANGE OUTSTANDING EXERCISABLE YEARS
-------------------- ----------- ----------- ---------
3.75 - 7.81 95,182 95,182 1.2
9.69 - 11.19 70,177 70,177 4.4
13.19 - 13.98 89,712 45,708 7.5
14.00 - 14.70 525,205 297,433 8.1
15.05 - 15.90 180,887 127,553 6.9
17.00 - 17.12 283,597 83,597 8.6
21.75 - 23.93 424,756 317,467 7.2
24.07 - 24.48 485,000 231,666 7.5
25.07 - 28.90 380,000 11,665 9.1
33.04 - 36.05 474,000 31,250 9.5
38.99 - 41.85 150,000 -- 9.9
--------- ---------
Total 3,158,516 1,311,698
========= =========

F-37

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Remaining non-exercisable options as of December 31, 2004 become exercisable as
follows:

2005 595,311
2006 615,670
2007 269,830
2008 182,999
Thereafter 183,008

Restricted stock and stock bonuses. We granted the following restricted stock
and stock bonuses during the years ended December 31, 2004, 2003 and 2002:

2004 2003 2002
-------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)

Restricted stock and stock bonus shares granted 70,534 416,500 328,206
Weighted-average fair value per share at grant date $ 38.58 $ 19.89 $ 18.69
Compensation cost recognized $ 9,082 $ 10,157 $ 732

In the year ended December 31, 2004, we recorded a $6.3 million non-cash charge
for the acceleration of performanced-based, long-term restricted stock awards
granted to certain executives in 2002. In the year ended December 31, 2003, we
recorded a $7.3 million non-cash charge for stock-based compensation for a
performance plan for certain key executives and a $1.3 million non-cash charge
severance charge related to the departure of our former Chief Executive Officer.

Earnings per share. The following details the earnings per share computations on
a basic and diluted basis for the years ended December 31, 2004, 2003 and 2002:

2004 2003 2002
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Numerator for basic and diluted earnings per share:
Net income (loss) available to common shareholders $ 80,539 $ 10,886 $(17,689)
-------- -------- --------
Denominator:
Basic earnings per share weighted-average shares outstanding 31,419 28,175 30,341

Effect of dilutive securities:
Effect of shares issuable under stock option and stock
grant plans, based on the treasury stock method 1,606 779 616
-------- -------- --------
Diluted earnings per share
Adjusted weighted-average shares outstanding 33,025 28,954 30,957
-------- -------- --------
Basic earnings (loss) per share $ 2.56 $ 0.39 $ (0.58)
======== ======== ========
Diluted earnings (loss) per share $ 2.44 $ 0.38 $ (0.57)
======== ======== ========

Treasury stock. We had 6,060,222 shares in treasury as of December 31, 2004 and
2003.

F-38

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

16. SUPPLEMENTAL CASH FLOW INFORMATION

2004 2003 2002
--------- --------- ---------

Cash paid during the year for: (IN THOUSANDS)
Interest $ 7,668 $ 1,245 $ 527
========= ========= =========
Income taxes, net of refunds $ 36,772 $ 7,886 $ 5,753
========= ========= =========

2004 2003 2002
--------- --------- ---------

Acquisitions of businesses, net of cash acquired: (IN THOUSANDS)
Fair value of assets acquired $ 118,120 $ 72,132 $ 16,134
Goodwill 86,073 76,802 8,478
Liabilities assumed (45,751) (58,422) (15,794)
Stock issued -- -- --
--------- --------- ---------
Total cash paid, net of cash acquired $ 158,442 $ 90,512 $ 8,818
========= ========= =========

17. QUARTERLY RESULTS (UNAUDITED)

The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal 2004 and 2003. We believe all necessary
adjustments have been included in the amounts stated below to present fairly the
following selected information when read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein. Future
quarterly operating results may fluctuate depending on a number of factors.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or any other quarter.

FISCAL 2004
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue from continuing operations $ 161,628 $ 223,704 $ 256,803 $ 337,548
Gross profit from continuing operations $ 47,560 $ 66,458 $ 71,346 $ 80,127
Net income $ 12,490 $ 17,821 $ 23,874 $ 26,354
Basic earnings per share $ 0.44 $ 0.60 $ 0.73 $ 0.78
Diluted earnings per share $ 0.42 $ 0.57 $ 0.70 $ 0.74

FISCAL 2003
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenue from continuing operations $ 80,474 $ 81,659 $ 90,882 $ 112,157
Gross profit from continuing operations $ 23,312 $ 24,378 $ 28,929 $ 34,967
Net income (loss) $ 5,087 $ 4,613 $ 6,115 $ (4,929)
Basic earnings (loss) per share $ 0.17 $ 0.17 $ 0.22 $ (0.17)
Diluted earnings (loss) per share $ 0.17 $ 0.17 $ 0.22 $ (0.17)

F-39

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

18. EMPLOYEE BENEFITS PLAN

DEFINED CONTRIBUTION PLANS

In October 1997, we formed a 401(k) plan, (the "Plan") which provides for
voluntary contributions by employees and allows for a discretionary contribution
by us in the form of cash. We made contributions of approximately $520,000,
$332,000 and $395,000 to the Plan in 2004, 2003 and 2002, respectively.

On December 9, 2003, we acquired Simula, Inc. and the Simula 401(k) Profit
Sharing Plan, which provides for voluntary contributions by employees and allows
for a discretionary contribution by us in the form of cash. We made
contributions of approximately $81,000 and $5,000 to Simula's 401(k) Profit
Sharing Plan in 2004 and 2003, respectively. On October 25, 2004, Simula's
401(k) Profit Sharing Plan was combined into our Plan.

On November 18, 2004, we acquired Specialty Defense and the Specialty Plastics
Products, Inc. and Affiliated Companies 401(k) Savings Plan, which provides for
voluntary contributions by employees and allows for a discretionary contribution
by us in the form of cash. We made contributions of approximately $ 13,000 to
the Specialty Plastics Products, Inc. and Affiliated Companies 401(k) Savings
Plan in 2004.

On December 30, 2004 we acquired Bianchi International and the Bianchi
International 401(k) Retirement Savings Plan which provides for voluntary
contributions by employees and allows for a discretionary contribution by us in
the form of cash. We made no contributions to the Bianchi International 401(k)
Retirement Savings Plan in 2004.

DEFINED BENEFIT PLAN

We acquired Simula's noncontributory defined benefit pension plan (the "Pension
Plan") for employees on December 9, 2003. The Pension Plan was originally
adopted as of November 1, 1980. Contributions were made to the Pension Plan
based upon actuarially determined amounts. Effective July 1, 1999, Simula froze
the Plan for new participants. Effective December 8, 2003, prior to our
acquisition of the Pension Plan, Simula froze the Pension Plan for future
service for all participants. We have elected to payout the Supplemental
Retirement Plan of Simula, which represents $1,067,000 of the net amount
recognized. This amount was paid out on February 25, 2004.

The Pension Plan's funded status and amounts recognized in our balance sheet at
December 31, 2004 and 2003, are as follows:

2004 2003
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation $ 8,109 $ 8,810
Effect of projected future compensation increases -- --
------- -------
Projected benefit obligation 8,109 8,810
Pension Plan assets at fair value (6,719) (6,169)
Contributions after measurement date (58) (183)
------- -------
Unfunded status 1,332 2,458
Unrecognized prior service cost -- --
Unrecognized loss (324) --
Unrecognized transition liability -- --
------- -------
Accrued benefit cost 1,008 2,458
Additional minimum liability -- --
------- -------
Accrued benefit liability 1,008 2,458
Intangible asset -- --
Accumulated other comprehensive income adjustments -- --
------- -------
Net amount recognized $ 1,008 $ 2,458
======= =======

F-40

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Reconciliation of the Pension Plan's projected benefit obligation is as follows:

2004 2003
------- -------
Projected benefit obligation at beginning of year $ 8,810 $ 8,774
Service Cost -- --
Interest Cost 472 56
Actuarial gain 262 --
Benefits paid (1,435) (20)
------- -------
Projected benefit obligation at end of year $ 8,109 $ 8,810
======= =======

Reconciliation of the fair value of plan assets is as follows:

2004 2003
------- -------
Fair value of plan assets at beginning of year $ 6,169 $ 6,006
Employer contributions 1,570 183
Actual gain 415 --
Benefits paid (1,435) (20)
------- -------
Fair value of plan assets at end of year $ 6,719 $ 6,169
======= =======

Net periodic pension cost includes the following:

2004 2003
------- -------
Service Cost $ -- $ --
Interest Cost 472 56
Expected return on assets (504) --
Transition asset recognition -- --
Prior service cost -- --
Net loss recognition -- --
------- -------
Net periodic pension (income) cost $ (32) $ 56
======= =======

Assumptions at December 31 used in the accounting for the Pension Plan were as
follows:

2004 2003
------- -------
Discount or settlement rate 6.00% 6.00%
Rate of increase in compensation levels 3.25% 3.25%
Expected long-term rate of return on Plan assets 8.00% 8.00%

The Pension Plan's assets consist of money market accounts and investments in
common stocks, bonds and mutual funds.

F-41

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

19. RELATED PARTY TRANSACTIONS

Effective as of January 1, 2002, Kanders & Company, Inc. ("Kanders & Co."), a
corporation controlled by Warren B. Kanders, the Chairman of our Board of
Directors and our Chief Executive Officer, entered into an agreement with us to
provide certain investment banking, financial advisory and related services for
a five year term was to expire on December 31, 2006. Under the terms of the
agreement, Kanders & Co. was to receive a mutually agreed upon fee on a
transaction-by-transaction basis during the term of the agreement. The aggregate
fees under this agreement were not to exceed $1,575,000 during any calendar
year. We also agreed to reimburse Kanders & Co. for reasonable out-of-pocket
expenses including Kanders & Co.'s expenses for office space, an executive
assistant, furniture and equipment, travel and entertainment, reasonable fees
and disbursements of counsel, and consultants retained by Kanders & Co. In April
2003, in connection with Mr. Kanders being appointed Chief Executive Officer of
the Company, the Company and Kanders & Co. agreed to terminate the agreement
pursuant to which Kanders & Co. provided certain services to the Company. We
paid Kanders & Co. $143,000 for investment banking services during fiscal 2003
(through and including April 2003 only). We continue to reimburse Kanders & Co.
for reasonable out-of-pocket expenses. We reimbursed Kanders & Co. for
reasonable out-of-pocket expenses in the aggregate amount of $369,000 and
$184,000 during the fiscal years ended December 31, 2004 and 2003, respectively.

Effective as of January 1, 2003, we entered into a Transportation Services
Agreement with Kanders Aviation, LLC, an entity controlled by Mr. Kanders, our
Chairman of the Board and Chief Executive Officer. Pursuant to the terms of the
Transportation Services Agreement and upon our request, Kanders Aviation may, in
its sole discretion, provide us with airport to airport air transportation
services via certain aircraft. The Transportation Services Agreement will remain
in effect indefinitely until terminated by written notice by either party
thereto to the other party thereto. During the term of the Transportation
Services Agreement, we will reimburse Kanders Aviation in an amount equal to the
fair market value of the air transportation services provided by Kanders
Aviation to us and any additional expenses incurred by Kanders Aviation in
connection with such air transportation services. We reimbursed Kanders Aviation
$332,000 for such expenses during the fiscal year ended December 31, 2004.

Nicholas Sokolow, one of our directors, is a member of the law firm Sokolow,
Dunaud, Mercadier & Carreras located in Paris, France. We did not retain
Sokolow, Dunaud, Mercadier & Carreras during the fiscal year ended December 31,
2004 nor do we expect to in the future. During the fiscal year ended December
31, 2003, we paid Sokolow, Dunaud, Mercadier & Carreras $124,000 for legal
services in connection with various acquisitions.

F-42

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

20. OPERATING LEASES

We are party to certain real estate, equipment and vehicle leases. Several
leases include options for renewal and escalation clauses. In most cases,
management expects that in the normal course of business leases will be renewed
or replaced by other leases. Approximate total future minimum annual lease
payments under all non-cancelable leases of continuing operations are as
follows:

YEAR (IN THOUSANDS)
------------------------ ---------------------
2005 $ 6,711
2006 5,174
2007 4,316
2008 3,074
2009 2,551
Thereafter 12,413
---------------------
$ 34,239
=====================

We incurred rent expense of approximately $5,026,000, $1,467,000 and $1,200,000
during the years ended December 31, 2004, 2003 and 2002, respectively.

F-43

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

21. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS

On August 12, 2003, we sold $150 million of the 8.25% Notes in private
placements pursuant to Rule 144A and Regulation S. The 8.25% Notes are
uncollateralized obligations and rank junior in right of payment to our existing
and future senior debt. On October 29, 2004, we completed the placement of $300
million aggregate principal amount of the 2% Convertible Notes. On November 5,
2004, Goldman, Sachs & Co. exercised its option to purchase an additional $45
million principal amount of the 2% Convertible Notes. The 8.25% Notes and 2%
Convertible Notes are guaranteed, jointly and severally on a senior subordinated
and uncollateralized basis, by most of our domestic subsidiaries.

The following consolidating financial information presents the consolidating
balance sheets as of December 31, 2004 and 2003, and the related statements of
operations and cash flows for each of the three years in the period ended
December 31, 2004 for:

o Armor Holdings, Inc., the parent,

o the guarantor subsidiaries,

o the nonguarantor subsidiaries, and

o Armor Holdings, Inc. on a consolidated basis

The information includes elimination entries necessary to consolidate Armor
Holdings, Inc., the parent, with the guarantor and nonguarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are presented
on a combined basis. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions. Separate financial
statements for the guarantor and nonguarantor subsidiaries are not presented
because management believes such financial statements would not be meaningful to
investors.

F-44

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2004
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------ ------------ ------------ -----------
(IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents $ 388,727 $ 21,173 $ 11,309 $ -- $ 421,209
Accounts receivable, net -- 155,229 19,330 -- 174,559
Costs and earned gross profit in excess
of billings -- 893 -- -- 893
Intercompany receivables 173,735 108,313 7,045 (289,093) --
Inventories -- 142,362 33,846 -- 176,208
Prepaid expenses and other current assets 1,611 42,023 3,301 -- 46,935
----------- ----------- ----------- ----------- -----------
Total current assets 564,073 469,993 74,831 (289,093) 819,804

Property and equipment, net 5,144 47,968 24,195 -- 77,307
Goodwill, net -- 259,773 2,240 -- 262,013
Patents, licenses and trademarks, net -- 112,288 171 -- 112,459
Other assets 18,410 2,209 149 -- 20,768
Investment in subsidiaries 592,437 12,730 -- (605,167) --
----------- ----------- ----------- ----------- -----------
Total assets $ 1,180,064 $ 904,961 $ 101,586 $ (894,260) $ 1,292,351
=========== =========== =========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 457 $ 164 $ -- $ 621
Short-term debt 341,579 -- 2,177 -- 343,756
Accounts payable 640 58,422 10,539 -- 69,601
Accrued expenses and other current
liabilities 11,216 73,314 22,717 -- 107,247
Income taxes payable (6,454) 11,513 3,942 -- 9,001
Intercompany payables 112,741 123,466 52,886 (289,093) --
----------- ----------- ----------- ----------- -----------
Total current liabilities 459,722 267,172 92,425 (289,093) 530,226

Long-term debt, less current portion 153,897 2,377 477 -- 156,751
Other long-term liabilities -- 1,951 -- -- 1,951
Deferred income taxes 1,249 36,077 901 38,227
----------- ----------- ----------- ----------- -----------
Total liabilities 614,868 307,577 93,803 (289,093) 727,155

Stockholders' equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 402 3,792 7,854 (11,646) 402
Additional paid-in capital 504,809 387,229 14,771 (402,000) 504,809
Retained earnings (accumulated deficit) 125,481 204,913 (14,842) (190,071) 125,481
Accumulated other comprehensive income 6,821 -- -- -- 6,821
Treasury stock (72,317) -- -- -- (72,317)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 565,196 597,384 7,783 (605,167) 565,196
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,180,064 $ 904,961 $ 101,586 $ (894,260) $ 1,292,351
=========== =========== =========== =========== ===========

F-45

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2003
-----------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents $ 90,764 $ 11,084 $ 10,002 $ -- $ 111,850
Restricted cash 2,600 -- -- -- 2,600
Accounts receivable, net 1,201 59,470 11,964 -- 72,635
Costs and earned gross profit in excess
of billings -- -- -- -- --
Intercompany receivables 60,974 2,600 38,352 (101,926) --
Inventories -- 61,494 19,033 -- 80,527
Prepaid expenses and other current assets 20,241 1,844 2,600 (2,653) 22,032
Current assets of discontinued operations -- 753 -- 753
--------- --------- --------- --------- ---------
Total current assets 175,780 137,245 81,951 (104,579) 290,397

Property and equipment, net 2,122 34,853 20,601 -- 57,576
Goodwill, net -- 173,640 2,067 -- 175,707
Patents, licenses and trademarks, net -- 43,991 183 -- 44,174
Long-term assets of discontinued operations -- 1,603 -- -- 1,603
Other assets 14,092 1,924 153 -- 16,169
Investment in subsidiaries 320,034 10,038 -- (330,072) --
--------- --------- --------- --------- ---------
Total assets $ 512,028 $ 403,294 $ 104,955 $(434,651) $ 585,626
========= ========= ========= ========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 31,960 $ 147 $ -- $ 32,107
Short-term debt -- -- 498 -- 498
Accounts payable 1,584 20,941 7,779 -- 30,304
Accrued expenses and other current
liabilities 12,403 27,113 18,702 -- 58,218
Intercompany payables 44,251 47,073 9,933 (101,257) --
Current liabilities of discontinued
operations -- (35,714) 37,009 (669) 626
--------- --------- --------- --------- ---------
Total current liabilities 58,238 91,373 74,068 (101,926) 121,753

Long-term debt, less current portion 153,452 4,257 591 -- 158,300
Other long-term liabilities 7,266 1,704 -- -- 8,970
Deferred income taxes (2,293) 2,304 1,227 -- 1,238
Long-term liabilities of discontinued
operations -- 2,653 -- (2,653) --
--------- --------- --------- --------- ---------
Total liabilities 216,663 102,291 75,886 (104,579) 290,261

Stockholders' equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 344 4,143 7,854 (11,997) 344
Additional paid in capital 318,460 191,781 46,095 (237,876) 318,460
Retained earnings (accumulated deficit) 44,942 103,629 (24,880) (78,749) 44,942
Accumulated other comprehensive income 3,936 -- -- -- 3,936
Treasury stock (72,317) -- -- -- (72,317)
--------- --------- --------- --------- ---------
Total stockholders' equity 295,365 301,003 29,069 (330,072) 295,365
--------- --------- --------- --------- ---------

Total liabilities and stockholders' equity $ 512,028 $ 403,294 $ 104,955 $(434,651) $ 585,626
========= ========= ========= ========= =========

F-46

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004
-----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

REVENUES:
Aerospace & Defense $ -- $ 605,398 $ -- $ -- $ 605,398
Products -- 204,122 45,643 -- 249,765
Mobile Security -- 25,531 102,224 (3,235) 124,520
--------- --------- --------- --------- ---------
Total revenues -- 835,051 147,867 (3,235) 979,683
--------- --------- --------- --------- ---------

COSTS AND EXPENSES:
Cost of revenues -- 599,505 117,922 (3,235) 714,192
Cost of warranty revision -- 5,000 -- -- 5,000
Operating expenses 17,455 69,122 13,684 -- 100,261
Amortization -- 4,243 12 -- 4,255
Integration and other charges 8,231 2,029 -- -- 10,260
Related party management fees (income),
net -- (15) 15 -- --
--------- --------- --------- --------- ---------

OPERATING (LOSS) INCOME (25,686) 155,167 16,234 -- 145,715
Interest expense, net 6,511 103 162 -- 6,776
Other expense (income), net 1,917 421 (393) -- 1,945
Equity in losses (earnings) of
subsidiaries (108,631) (2,691) -- 111,322 --
Related party interest expense
(income), net 16 (18) 2 -- --
--------- --------- --------- --------- ---------

(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 74,501 157,352 16,463 (111,322) 136,994
(BENEFIT) PROVISION FOR INCOME TAXES (6,038) 56,030 6,425 -- 56,417
--------- --------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS 80,539 101,322 10,038 (111,322) 80,577

DISCONTINUED OPERATIONS:
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX
BENEFIT -- (38) -- -- (38)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 80,539 $ 101,284 $ 10,038 $(111,322) $ 80,539
========= ========= ========= ========= =========

F-47

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ -----------
(IN THOUSANDS)

REVENUES:
Aerospace & Defense $ -- $ 91,673 $ -- $ -- $ 91,673
Products -- 157,984 35,976 -- 193,960
Mobile Security -- 15,029 62,853 1,657 79,539
--------- --------- --------- --------- ---------
Total revenues -- 264,686 98,829 1,657 365,172
--------- --------- --------- --------- ---------

COSTS AND EXPENSES:
Cost of revenues -- 172,089 79,840 1,657 253,586
Operating expenses 11,602 40,598 10,595 -- 62,795
Amortization -- 478 11 -- 489
Integration and other charges 10,886 1,687 -- -- 12,573
Related party management fees (income),
net 12,823 -- 7,598 (20,421) --
--------- --------- --------- --------- ---------

OPERATING (LOSS) INCOME (35,311) 49,834 785 20,421 35,729
Interest expense, net 3,313 497 202 -- 4,012
Other expense, net -- 117 391 -- 508
Equity in losses (earnings) of
subsidiaries (42,600) 38,790 -- 3,810 --
Related party interest expense
(income), net 16 (255) -- 239 --
--------- --------- --------- --------- ---------

(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 3,960 10,685 192 16,372 31,209
(BENEFIT) PROVISION FOR INCOME TAXES (6,926) 18,399 2,730 -- 14,203
--------- --------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS 10,886 (7,714) (2,538) 16,372 17,006

DISCONTINUED OPERATIONS:
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX BENEFIT -- 34,882 (20,820) (20,182) (6,120)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 10,886 $ 27,168 $ (23,358) $ (3,810) $ 10,886
========= ========= ========= ========= =========

F-48

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

REVENUES:
Aerospace & Defense $ -- $ 59,318 $ -- $ -- $ 59,318
Products -- 154,466 25,480 -- 179,946
Mobile Security -- 15,958 49,895 -- 65,853
--------- --------- --------- --------- ---------
Total revenues -- 229,742 75,375 -- 305,117
--------- --------- --------- --------- ---------

COSTS AND EXPENSES:
Cost of revenues -- 148,208 62,537 -- 210,745
Operating expenses 6,034 36,161 7,641 -- 49,836
Amortization -- 243 2 -- 245
Integration and other charges 800 5,126 -- -- 5,926
Related party management fees (income),
net 2,487 (171) (616) (1,700) --
--------- --------- --------- --------- ---------

OPERATING (LOSS) INCOME (9,321) 40,175 5,811 1,700 38,365
Interest expense, net 450 275 198 -- 923
Other (income) expense, net (2) (22) 75 -- 51
Equity in losses (earnings) of
subsidiaries 8,237 (1,220) -- (7,017) --
Related party interest income, net -- (239) -- 239 --
--------- --------- --------- --------- ---------

(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (18,006) 41,381 5,538 8,478 37,391
(BENEFIT) PROVISION FOR INCOME TAXES (317) 14,313 2,058 -- 16,054
--------- --------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS (17,689) 27,068 3,480 8,478 21,337

DISCONTINUED OPERATIONS:
NET LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX BENEFIT -- (16,894) (20,671) (1,461) (39,026)
--------- --------- --------- --------- ---------
NET (LOSS) INCOME $ (17,689) $ 10,174 $ (17,191) $ 7,017 $ (17,689)
========= ========= ========= ========= =========

F-49

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations: $ 80,539 $ 101,322 $ 10,038 $(111,322) $ 80,577
Adjustments to reconcile income from continuing
operations to cash provided by (used in)
operating activities:
Depreciation and amortization 1,744 10,042 3,265 -- 15,051
Loss on disposal of fixed assets -- 446 418 -- 864
Deferred income taxes 3,025 1,299 (318) -- 4,006
Non-cash termination charge 1,408 -- -- -- 1,408
Non-cash restricted stock unit award 6,294 -- -- -- 6,294
Changes in operating assets and liabilities,
net of acquisitions:
Decrease (increase) in accounts receivable 1,201 (84,331) (7,366) -- (90,496)
Decrease (increase) in intercompany
receivables & payables (10,834) 8,432 2,402 -- --
Decrease (increase) in inventories -- (58,293) (14,813) -- (73,106)
Increase in prepaid expenses and other assets (1,397) (20,321) (357) -- (22,075)
(Decrease) increase in accounts payable,
accrued expenses and other current
liabilities (283) 68,341 6,775 -- 74,833
Increase (decrease) in income taxes payable 17,080 (3,350) 3,594 -- 17,324
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities 98,777 23,587 3,638 (111,322) 14,680
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,615) (10,125) (5,679) -- (19,419)
Purchase of patents and trademarks -- (112) -- -- (112)
Purchase of equity investment -- (5,275) -- -- (5,275)
Proceeds from sale of equity investment -- 5,823 -- -- 5,823
Purchase of short-term investment securities (286,430) -- -- -- (286,430)
Proceeds from sales of short-term investment
securities 286,430 -- -- -- 286,430
Collection of note receivable 2,175 -- -- -- 2,175
Decrease in restricted cash 2,600 -- -- -- 2,600
Sale of business, net of cash disposed -- 125 -- -- 125
Additional consideration for purchased businesses -- (33,943) -- -- (33,943)
Investment in subsidiaries (303,721) 192,399 -- 111,322 --
Purchase of businesses, net of cash acquired -- (158,442) -- -- (158,442)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities: (302,561) (9,550) (5,679) 111,322 (206,468)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 25,192 -- -- -- 25,192
Proceeds from the issuance of common stock 142,500 -- -- -- 142,500
Cash paid for common stock offering costs (1,339) -- -- -- (1,339)
Cash paid for financing costs (6,156) -- -- -- (6,156)
Borrowings of short-term debt 341,550 -- -- -- 341,550
Repayments of long-term debt -- (3,236) (145) -- (3,381)
Borrowings under lines of credit 22,700 5 1,883 -- 24,588
Repayments under lines of credit (22,700) -- (349) -- (23,049)
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities 501,747 (3,231) 1,389 -- 499,905
--------- --------- --------- --------- ---------
Effect of exchange rate on cash and cash
equivalents -- -- 1,959 -- 1,959
Net cash provided by (used in) discontinued
operations -- (717) -- -- (717)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 297,963 10,089 1,307 -- 309,359
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 90,764 11,084 10,002 -- 111,850
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 388,727 $ 21,173 $ 11,309 $ -- $ 421,209
========= ========= ========= ========= =========

F-50

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2003
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations: $ 10,886 $ (7,714) $ (2,538) $ 16,372 $ 17,006
Adjustments to reconcile income from continuing
operations to cash provided by (used in)
operating activities:
Depreciation and amortization 1,326 4,270 2,012 -- 7,608
Deferred income taxes (3,008) 5,389 2,644 -- 5,025
Loss on disposal of fixed assets -- 68 259 -- 327
Non-cash termination charge 2,093 -- -- -- 2,093
Non-cash restricted stock unit award 7,266 -- -- -- 7,266
Changes in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable -- (2,680) 1,685 -- (995)
Decrease (increase) in intercompany
receivables & payables 83,092 (78,887) 15,977 (20,182) --
Decrease (increase) in inventories -- 793 (3,294) -- (2,501)
Decrease (increase) in prepaid expenses and
other assets 12,267 (13,758) (890) -- (2,381)
Increase (Decrease) in accounts payable,
accrued expenses and other current
liabilities 10,775 (1,020) 7,288 -- 17,043
(Decrease) increase in income taxes payable (22,583) 23,826 (882) -- 361
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities 102,114 (69,713) 22,261 (3,810) 50,852
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (200) (5,894) (2,590) -- (8,684)
Purchase of patents and trademarks -- (185) -- -- (185)
Purchase of short-term investment securities (143,400) -- -- -- (143,400)
Proceeds from sales of short-term investment
securities 143,400 -- -- -- 143,400
Increase in restricted cash (2,600) -- -- -- (2,600)
Additional consideration for purchased businesses -- (1,026) -- -- (1,026)
Investment in subsidiaries (85,243) 45,403 36,030 3,810 --
Sale of business, net of cash disposed 31,361 -- -- -- 31,361
Purchase of businesses, net of cash acquired (90,512) -- -- -- (90,512)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing
activities: (147,194) 38,298 33,440 3,810 (71,646)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8,471 -- -- -- 8,471
Cash paid for financing costs (4,599) -- -- -- (4,599)
Repurchase of treasury stock (22,684) -- -- -- (22,684)
Borrowings of long-term debt 147,504 -- 774 -- 148,278
Repayments of long-term debt -- (1,688) -- -- (1,688)
Borrowings under lines of credit 30,406 -- 1,424 -- 31,830
Repayments under lines of credit (30,406) (114) (1,578) -- (32,098)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 128,692 (1,802) 620 -- 127,510
--------- --------- --------- --------- ---------
Effect of exchange rate on cash and cash
equivalents -- 3,890 (3,057) -- 833
Net cash provided by (used in) discontinued
operations -- 36,855 (45,467) -- (8,612)
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 83,612 7,528 7,797 -- 98,937
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,152 3,556 2,205 -- 12,913
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 90,764 $ 11,084 $ 10,002 $ -- $ 111,850
========= ========= ========= ========= =========

F-51

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2002
-------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations: $(17,689) $ 27,068 $ 3,480 $ 8,478 $ 21,337
Adjustments to reconcile (loss) income from
continuing operations to cash (used
in) provided by operating activities:
Depreciation and amortization 854 3,583 1,143 -- 5,580
Deferred income taxes (364) 321 402 -- 359
Loss on disposal of fixed assets -- 66 134 -- 200
Changes in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable -- (3,829) 1,275 -- (2,554)
Decrease (increase) in intercompany
receivables & payables 6,151 (5,266) 576 (1,461) --
Increase in inventories -- (5,125) (4,256) -- (9,381)
Decrease (increase) in prepaid expenses and
other assets 492 (2,459) (279) -- (2,246)
(Decrease) increase in accounts payable,
accrued expenses and other current
liabilities (1,405) 7,215 (9,564) -- (3,754)
Increase (decrease) in income taxes payable 5,663 (148) 1,230 -- 6,745
-------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities (6,298) 21,426 (5,859) 7,017 16,286
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (506) (3,671) (1,725) -- (5,902)
Purchase of patents and trademarks -- (69) -- -- (69)
Purchase of short-term investment securities (4,000) -- -- -- (4,000)
Proceeds from sales of short-term investment
securities 4,000 -- -- -- 4,000
Additional consideration for purchased businesses -- (9,375) -- -- (9,375)
Investment in subsidiaries (3,347) 1,643 8,721 (7,017) --
Purchase of businesses, net of cash acquired -- (8,818) -- -- (8,818)
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities: (3,853) (20,290) 6,996 (7,017) (24,164)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4,227 -- -- -- 4,227
Proceeds from of sale of put options 525 -- -- -- 525
Cash paid for financing costs (326) -- -- -- (326)
Repurchases of treasury stock (26,054) -- -- -- (26,054)
Repayments of long-term debt -- (620) (110) -- (730)
Borrowings under lines of credit 32,372 -- -- -- 32,372
Repayments under lines of credit (32,372) (75) -- -- (32,447)
-------- -------- -------- -------- --------
Net cash used in financing activities (21,628) (695) (110) -- (22,433)
-------- -------- -------- -------- --------
Effect of exchange rate on cash and cash
equivalents 304 342 (772) -- (126)
Net cash used in discontinued operations -- (2,763) (1,376) -- (4,139)
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (31,475) (1,980) (1,121) -- (34,576)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,627 5,536 3,326 -- 47,489
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,152 $ 3,556 $ 2,205 $ -- $ 12,913
======== ======== ======== ======== ========

F-52

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

22. WARRANTY REVISION AND PRODUCT EXCHANGE PROGRAM

As a result of our recently announced warranty revision and product exchange
program relating to our Zylon(R)-containing vests (see Note 12), we have
recorded a pre-tax charge of $5.0 million, which is net of $4.0 million of cost
reimbursements from our suppliers and includes all the legal costs associated
with the class action lawsuits. This liability has been classified in accrued
expenses and other current liabilities on the condensed consolidated balance
sheet and will be funded through cash provided by operating activities. A
summary of the warranty revision and product replacement accrual follows:

WARRANTY REVISION AND
PRODUCT REPLACEMENT
ACCRUAL
-------
(in thousands)
Beginning balance $ 5,000
Incurred costs, net of reimbursements from suppliers (3,625)
-------
Balance at December 31, 2004 $ 1,375
=======

23. CONCENTRATION OF REVENUES

Approximately 65.3% of our revenues were from our ten largest customers for the
year ended December 31, 2004. Approximately 60.7% of our revenues came from U.S.
military contracts. Our Aerospace & Defense Group's ten largest customers
accounted for approximately 93.9% of Aerospace & Defense Group revenues for
Fiscal 2004. The Products Division's ten largest customers accounted for
approximately 26.6% of total revenues of the Products Division for fiscal 2004.
The Mobile Security Division's ten largest customers accounted for approximately
43.6% of total revenues of the Mobile Security Division for fiscal 2004.
Military and governmental contracts generally are awarded on a periodic or
sporadic basis. If the Aerospace & Defense Group were to lose the Up-Armored
HMMWV contract, which continues through June 2008, our financial performance
would experience a material adverse effect.

24. OFF BALANCE SHEET ARRANGEMENTS

F-53

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.

ARMOR HOLDINGS, INC.

/s/ Warren B. Kanders
-----------------------------------------
Warren B. Kanders
Chairman of the Board of Directors and
Chief Executive Officer
Dated: March 7, 2005

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:

/s/ Warren B. Kanders
- ------------------------------------
Warren B. Kanders
Chairman of the Board of Directors
and Chief Executive Officer
March 7, 2005

/s/ Glenn J. Heiar /s/ Nicholas Sokolow
- ----------------------------------- ----------------------------------
Glenn J. Heiar Nicholas Sokolow
Chief Financial Officer Director
(Principal Financial Officer and March 7, 2005
Principal Accounting Officer)
March 7, 2005

/s/ Burtt R. Ehrlich /s/ Thomas W. Strauss
- ----------------------------------- ----------------------------------
Burtt R. Ehrlich Thomas W. Strauss
Director Director
March 7, 2005 March 7, 2005

/s/ David R. Haas /s/ Deborah A. Zoullas
- ----------------------------------- ----------------------------------
David R. Haas Deborah A. Zoullas
Director Director
March 7, 2005 March 7, 2005

INDEX TO EXHIBITS

EXHIBIT NO. DESCRIPTION

+3.1 Certificate of Incorporation of Armor Holdings, Inc. (filed as Exhibit
3.1 to our Current Report on Form 8-K, dated September 3, 1996).

+3.2 Certificate of Merger of American Body Armor & Equipment, Inc., a
Florida corporation, and Armor Holdings, Inc. (filed as Exhibit 3.2 to
our Current Report on Form 8-K dated September 3, 1996).

+3.4 Amended and Restated Bylaws of Armor Holdings, Inc. (filed as Exhibit
3.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended
March 31, 2004).

+4.10 Form of the new 8 1/4% Senior Subordinated Notes Due 2013 (filed as
Exhibit 4.6 to our Registration Statement on Form S-4 filed with the
Commission on January 7, 2004).

*4.13 Second Supplemental Indenture, dated as of December 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee.

+10.11 Third Amendment to Credit Agreement, dated as of October 19, 2004, by
and among Armor Holdings, Inc., the lenders from time to time party
thereto, Bank of America, N.A., as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, and Keybank National
Association, as Documentation Agent (filed as Exhibit 10.1 to our
Current Report on Form 8-K filed on November 1, 2004).

@+10.13 Letter agreement dated as of July 26, 2003 between Armor Holdings,
Inc. and Warren B. Kanders (filed as Exhibit 99.1 to our Current
Report on Form 8-K dated July 26, 2003).

+10.17 Form of Indemnification Agreement for Directors and Officers of Armor
Holdings, Inc., (filed as Exhibit 10.4 to our Form 10-Q Quarterly
Report for the fiscal quarter ended March 31, 2004).

**+10.18 American Body Armor & Equipment, Inc. 1994 Incentive Stock Plan
(incorporated by reference from Form S-8 filed on October 10, 1994,
Reg. No. 33-018863).

**+10.19 American Body Armor & Equipment, Inc. 1994 Directors Stock Plan
(incorporated by reference from Form S-8 filed on October 31, 1994,
Reg. No. 33-018863).

**+10.22 Armor Holdings, Inc. 1998 Stock Option Plan (filed as Exhibit 10.19 to
our Form 10-K Annual Report for the fiscal year ended December 31,
1998).

*10.24 Armor Holdings, Inc. Amended and Restated 2002 Stock Incentive Plan.

**+10.25 Armor Holdings, Inc. 2002 Executive Stock Plan (filed as Exhibit 10.6
to our Form 10-Q Quarterly Report for the fiscal quarter ended March
31, 2002).

*21.1 Subsidiaries of the Registrant

*23.1 Consent of PricewaterhouseCoopers LLP.

*31.1 Certification of Principal Executive Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.

*31.2 Certification of Principal Financial Officer, as required by Rule
13a-14(a) of the Securities Exchange Act of 1934.

*32.1 Certification of Principal Executive Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.

*32.2 Certification of Principal Financial Officer, as required by Rule
13a-14(b) of the Securities Exchange Act of 1934.

- --------------------------
* Filed herewith.
+ Incorporated herein by reference.
@ This Exhibit represents a management contract.
** This Exhibit represents a compensatory plan.