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.

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

Documents incorporated by reference: None

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the cost, timing and success of product upgrades and new product introductions, expected pricing levels, the timing and cost of planned capital expenditures and expected synergies relating to acquisitions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. Such factors include, but are not limited to the risks set forth under the caption “Risk Factors” in Item 7 of this Annual Report.

Aearo Company I (hereafter referred to collectively with its subsidiaries as “Aearo”, “we”, “our”, or the “Company”) is a global leader in the hearing, eye, face, head and respiratory protection segments of the $12.7 billion global personal protection equipment, or PPE, market. We manufacture hearing protection devices, communication headsets, prescription and non-prescription safety eyewear, face shields, reusable and disposable respirators, fall protection equipment, hard hats and first aid kits which are sold in more than 70 countries. Our products are manufactured and marketed under the brand names AOSafety^®, E-A-R^®, Peltor^® and SafeWaze^™, which are well known in the PPE market. We also manufacture a wide array of energy-absorbing materials that are incorporated into other manufacturers’ products to control noise, vibration and shock. These products are marketed under our brand name E-A-R^® Specialty Composites. We believe that the strength of our brand names, our reputation for developing and providing high-quality, innovative products, our intensive coverage of multiple distribution channels targeting a wide array of end-users, our broad product offering, and our commitment to providing a high level of customer service have enabled us to achieve leading positions in market segments in which we compete. For the fiscal year ended September 30, 2004, our net sales were $362.8 million.

We operate three business segments:

Through these three segments we sell a wide range of products to industrial distributors, as well as into the consumer, construction and military channels and directly to industrial companies. We place a strong emphasis on new product development, innovation and protection of intellectual property. We manufacture approximately 75% of the products that we sell.

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

The Safety Prescription Eyewear segment manufactures and sells products under the AOSafety^® brand name that are designed to protect the eyes of workers who require corrective lenses from the typical hazards encountered in the industrial and other work environments. We purchase component parts (lenses and the majority of our frames) from various suppliers, grind and shape the lenses to the end-user’s prescription, and then assemble the glasses using the end-user’s choice of frame. The Safety Prescription Eyewear segment accounted for approximately 11% of our net sales in fiscal 2004, approximately 13% of our net sales in fiscal 2003 and approximately 14% in fiscal 2002.

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

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

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

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

In the reusable earplug segment of the market, we offer our patented E-A-R^® UltraFit^® and E-A-R^® Express^® products. The E-A-R^® Express^® product features a polyurethane pod and a short plastic stem to facilitate sanitary and easy insertion of the plug into the ear. We also offer the “Flex”^™ line of “semi-aural” banded products. These products feature articulating arms that allow for use in multiple positions and for easy storage around the neck. We manufacture, assemble and sell a broad line of passive earmuffs and communication headsets under our Peltor^® brand. We are a leader in providing noise attenuating headsets and wireless and hardwire communication headsets. These products provide protection from harmful high and low frequency noise and allow for easy communication in noisy or remote environments. We also offer auditory systems products, which are sold to audiologists and are used in the testing of hearing.

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

Eye Protection. Non-prescription eye protection is used in work environments where a number of hazards present a danger to the eyes, including dust, flying particles, metal fragments, chemicals, extreme glare and optical radiation. We offer a large number of task-specific non-prescription safety eyewear products under the AOSafety^® brand. The basic categories of eyewear protection products are non-prescription, or “plano” eyewear and goggles.

Plano (Non-prescription) Eyewear. Plano eyewear accounts for the majority of our sales in this category and encompasses a full range of protective needs, including visitor spectacles, over-the-glass, single lens and dual lens products. Within these categories are a variety of styles, frame colors and lens options that include a number of adjustability and comfort features. Many of these AOSafety^® products feature our proprietary DX® coating, combining the benefits of chemical and scratch resistance with anti-fog properties. Flywear®, Maxim™, X-Series™, Metaliks^®, Fuel™, X-Factor^® and X.Sport™ eyewear offer modern sport styling with numerous comfort features. Nuvo™ eyewear has the classic dual lens look redesigned for today’s worker. Our Lexa^® eyewear blends a wrapping, single lens with a lightweight, frameless design. Virtua™ offers stylish eyewear at an economical price. Visitor spectacles and over-the-glass products are represented by our Seepro^® and Tourguard^® models.

Goggles. We manufacture and sell a broad line of goggles, which are typically required in work environments where a higher degree of impact protection is required, where increased protection against dust, mist or chemical splash is needed and/or for use in welding operations. To meet these requirements, we offer a variety of vented and non-vented goggles with varying fields of view including Dust GoggleGear^™ for Lexa®, Splash GoggleGear^™ for Lexa^® and Centurion^®, all under the AOSafety^® brand.

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

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

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

Respiratory Protection. Respiratory protection products are used to protect against the harmful effects of contamination and pollution caused by dust, gases, fumes, sprays and other contaminants. We offer a broad line of disposable dust and mist masks, cartridge-equipped quarter, half and full-face respirators, and “escape” respirators (a single-use respirator for emergencies) under the AOSafety^® brand. Pleats Plus^™ offers the latest design in particulate respirators. QuickLatch^® half mask respirators offer an innovative, patented on-and-off latching system that can be accomplished with just one hand.

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

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

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

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

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

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

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

North American Industrial Distribution. This is the largest channel for Safety Products and includes approximately 1,000 North American distributors and dealers, of which approximately 270 qualify for Dialog^™ program. The Dialog^™ program is a sales rebate and reward program that encourages North American Industrial Distributors to partner with Aearo. Participation in Dialog^™ requires minimum annual purchase levels and offers growth and volume rebates. The program also offers customers cooperative advertising and marketing incentives for developing marketing programs that promote the Company’s products.

Consumer. Under the AOSafety^® brand name, we are North America’s leading supplier of personal safety products in the categories in which we compete. Within the Consumer/DIY marketplace, AOSafety^® is the primary personal safety products brand carried by The Home Depot, Ace Hardware, Lowe’s Home Improvement Warehouse and other retailers. AOSafety^® is also a supplier in the sporting goods safety marketplace and in the lawn and garden, paint, drug and mass merchandise channels.

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

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

Our SRx segment employs its own sales force to sell our products throughout North America. Approximately 85% of our safety prescription eyewear are sold directly to more than 10,000 end-users, including a majority of the industrial companies in the Fortune 500. The remainder of our SRx products are sold through the industrial distribution channel and directly to eye-care professionals.

We utilize an inside sales and marketing team, independent manufacturers representatives and select distributors to identify global sales opportunities in target markets for Specialty Composites’ products and technologies. Once such applications have been identified, our marketing, sales and technical staffs work closely with customer product development teams to provide the customer with cost-effective, integrated solutions for noise, vibration, shock, cushioning and/or comfort management problems. Specialty Composites’ marketing efforts are aimed at four key strategic segments worldwide: aircraft, precision electronic equipment, heavy-duty trucks and industrial original equipment manufacturing, or OEM.

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

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

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

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

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

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

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

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

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

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

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

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

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

All of our manufacturing sites have implemented a number of initiatives including lean manufacturing concepts and an extensive Kaizen event schedule, resulting in significant improvements in the areas of safety, quality, cost, and customer service.

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

Our products are generally shipped within several days from the receipt of a purchase order. As a result, backlog is not material to our business.

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

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

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

Safety Prescription Eyewear Segment

Our SRx manufacturing facilities generally possess lens surfacing, edging, grinding and coating machinery capable of handling glass, plastic and polycarbonate lenses. The lenses are then fitted into frames and the finished product is shipped to customers, primarily by U.S. Postal Service for the U.S. market and similar express delivery providers elsewhere.

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

Specialty Composites Segment

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

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

10

Several manufacturers compete in noise and vibration control, but few if any of our Specialty Composites segment’s competitors offer the complete range of technology and energy-control materials as we do. Thus we are able to differentiate ourselves by bundling our technology, engineering and wide ranges of proprietary products into energy control solutions or systems that add value to customers’ products. In markets where technology is of particular value we are able to command better margins due to our product solution and positioning. There are however market segments in which we compete where price is still a significant factor.

As of September 30, 2004, we had 1,582 employees, of whom 990 were primarily engaged in manufacturing, 401 in sales, marketing and distribution, 60 in research and development and 131 in general and administrative. We believe our employee relations are good. We have one domestic U.S. facility that employs union members. This facility, located in Plymouth, Indiana, employs 70 members of the International Union of Electronic, Electrical, Salaried, Maritime and Furniture Workers (out of a total of 79 employees), and our relations with these union members are fully satisfactory. The union contract expires on June 27, 2007.

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

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

We are subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and wastes. We believe that we are in substantial compliance with all such laws and regulations. We have an active program to ensure environmental compliance and achievement of environmental goals and objectives. We will continue to implement Environmental Management Systems at our manufacturing facilities. In October 2003, our Varnamo, Sweden facility achieved ISO 14001 certification.

11

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

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

12

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

The Company is a defendant in lawsuits by plaintiffs alleging that they suffer from respiratory medical conditions, such as asbestosis or silicosis, relating to exposure to asbestos and silica, and that such conditions result, in part, from the use of respirators that, allegedly, were negligently designed or manufactured. The defendants in these lawsuits are often numerous, and include, in addition to manufacturers and distributors of respirators, manufacturers, distributors and installers of sand (used in sand blasting), asbestos and asbestos-containing products. Most of these claims are covered by the Asset Transfer Agreement entered into on June 13, 1995 by the Company and Aearo Corporation, on the one hand, and Cabot Corporation and certain of its subsidiaries (the “Sellers”), on the other hand (the “1995 Asset Transfer Agreement”). In the 1995 Asset Transfer Agreement, so long as Aearo Corporation makes an annual payment of $400,000 to Cabot, the Sellers agreed to retain, and Cabot and the Sellers agreed to defend and indemnify Aearo Corporation and its subsidiaries against, any liability or obligation relating to or otherwise arising under any proceeding or other claim against Aearo Corporation and its subsidiaries or Cabot or their respective affiliates or other parties with whom any Seller directly or indirectly has a contractual liability sharing arrangement which sounds in product liability or related causes of action arising out of actual or alleged respiratory medical conditions caused or allegedly caused by the use of respirators or similar devices sold by Sellers or their predecessors (including American Optical Corporation and its predecessors) prior to July 11, 1995. To date, Aearo Corporation has elected to pay the annual fee and intends to continue to do so. In addition, under the terms of the merger agreement with AC Safety Acquisition Corp. (the “Merger Agreement”), Aearo Corporation agreed to make the annual payment to Cabot for a minimum of seven years from April 7, 2004 (the “Acquisition Date”). Aearo Corporation and its subsidiaries could potentially be liable for claims currently retained by Sellers if Aearo Corporation elects to cease paying the annual fee or if Cabot and the Sellers no longer are able to perform their obligations under the 1995 Asset Transfer Agreement. Cabot acknowledged in the Stock Purchase Agreement that it and Aearo Corporation entered into on June 27, 2003 (providing for the sale by Cabot to Aearo Corporation of all of the common and preferred stock of Aearo Corporation owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer Agreement remain in effect. The 1995 Asset Transfer Agreement does not apply to claims relating to the business of Eastern Safety Equipment, the stock of which the Company acquired in 1996.

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

On October 10, 2004, the Company held a special meeting of stockholders. The stockholders approved the selection of Deloitte & Touche LLP as the Company’s independent registered public accountants for the year ending September 30, 2005 with a total of 2,459,403 votes in favor and 58,596 abstention votes. The stockholders voted to elect the following directors for the ensuing year with a total of 2,459,403 votes in favor of each director and 58,596 abstention votes for each director: Michael A. McLain, Douglas R. Korn and John D. Howard.

There is no established trading market for our common stock. As of December 1, 2004, one hundred percent of our stock was held by our parent, Aearo Corporation. As of December 1, 2004, there were outstanding 2,492,618 shares of common stock, par value $0.01 per share, of AC Safety Holding Corp. (“AC Safety Common Stock”) the parent of Aearo Corporation. Substantially all of the AC Safety Common Stock is held, collectively, by Affiliates of Bear Stearns Merchant Capital II, L.P., Vestar Capital Partners, L.P. (together with certain related persons, “Vestar”) and management. As of December 1, 2004 there were 56 shareholders of record of AC Safety Common Stock.

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

On April 7, 2004, the Company’s parent, Aearo Corporation, was acquired by AC Safety Holding Corp. and its subsidiary AC Safety Acquisition Corp. for $409.1 million. AC Safety Acquisition Corp. was merged into Aearo Corporation. The Company continues to be wholly-owned by Aearo Corporation, however, on the acquisition date, 100% of the purchase price paid for Aearo Corporation was pushed down to the Company. Accordingly, the historical consolidated financial information of the predecessor Aearo Company I is not comparable to the consolidated information of the successor Aearo Company I for the period after March 31, 2004.

The selected historical financial data as of and for the periods ended September 30, 2000, 2001, 2002, 2003 and March 31, 2004 are derived from the consolidated financial statements of predecessor Aearo Company I and subsidiaries. The selected historical financial data as of and for the six months ended September 30, 2004 is derived from the consolidated financial statements of successor Aearo Company I and subsidiaries and should be read in conjunction with the consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included herein.

Aearo is a global leader in the hearing, eye, face, head and respiratory protection segments of the $12.7 billion global personal protection equipment, or PPE, market. We manufacture hearing protection devices, communication headsets, prescription and non-prescription safety eyewear, face shields, reusable and disposable respirators, fall protection equipment, hard hats and first aid kits that enhance the health and safety of workers. Our products are manufactured and marketed under the brand names AOSafety^®, E-A-R^®, Peltor^® and SafeWaze^™, which are well known in the PPE market. We also manufacture a wide array of energy-absorbing materials that are incorporated into other manufacturers’ products to control noise, vibration and shock. These products are marketed under our brand name E-A-R^® Specialty Composites.

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

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

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

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

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

On March 10, 2004, Aearo Corporation, the Company’s parent, entered into a Merger Agreement with AC Safety Holding Corp. and its subsidiary, AC Safety Acquisition Corp. that closed on April 7, 2004 (the “Merger”). Pursuant to the terms of the Merger Agreement, AC Safety Acquisition Corp. merged with and into Aearo Corporation with Aearo Corporation surviving the Merger as a wholly-owned subsidiary of AC Safety Holding Corp. The aggregate purchase price was approximately $409.1 million, including estimated fees and expenses. The Merger was financed with approximately $303.7 million of new debt consisting of $175.0 million of 8.25% senior subordinated notes and a $125.0 million senior credit facility, $3.7 million of assumed debt, $4.1 million of cash and $101.3 million of equity. Aearo Corporation accounted for the Merger in accordance with SFAS No. 141, “Business Combinations”, and allocated the purchase price to assets and liabilities based on their fair values. Aearo Corporation’s new basis of accounting was pushed down to the Company, therefore, the historical financial information of the predecessor Aearo Company I is not comparable to the financial information of the successor Aearo Company I for the period after March 31, 2004.

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the use of estimates, judgments, assumptions and subjective interpretations of accounting principles that affect the reported amounts of assets, liabilities, revenues and expenses. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. The Company revises its estimates and assumptions as new information becomes available.

The Company believes the following policies involve a higher degree of judgment and/or complexity.

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

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

Income Taxes – The Company is included in the consolidated tax returns filed by Aearo Corporation. All taxes are recorded as if separate, standalone returns are filed. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the deferred tax asset for net operating losses is dependent on generating sufficient future taxable income in the United States prior to the expiration of the net operating losses and credit carryforwards, which expire over various periods ranging from 2010 to 2021 and are subject to certain limitations on their use after the merger transaction. In its evaluation of the adequacy of the valuation allowance, the Company assesses prudent and feasible tax planning strategies. Due to the uncertainties of realizing these tax benefits, the Company has recorded a full valuation allowance against these net operating losses and credit carryforwards. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.

Product Liabilities – The Company has established reserves for potential product liabilities that arise out of the use of the Company’s products. A significant amount of judgment is required to quantify the Company’s ultimate exposure in these matters and the reserve is estimated based on currently available information and historical claims experience. From time to time, the Company may seek the assistance of an independent consultant to assess the adequacy of the reserve. While the Company believes that the current level of reserve is adequate, changes in the future could impact these determinations.

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Pension Plan – The valuation of the Company’s pension plan requires the use of assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and mortality rates. The actuarial assumptions used in the Company’s pension reporting are reviewed annually and compared with external benchmarks and internal operating trends to assure that they accurately account for future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on the Company’s pension expense and funding requirements. The Company adopted the provisions SFAS No. 132(R), “Employer Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106” effective January 1, 2004.

Revenue Recognition and Allowance for Doubtful Accounts – The Company recognizes revenue when title and risk transfer to the customer, which is generally when the product is shipped to customers. At the time revenue is recognized, certain provisions may also be recorded including pricing discounts and incentives. An allowance for doubtful accounts is generally recorded based on a percentage of aged receivables. However, management judgment is involved with the final determination of the allowance based on several factors including specific analysis of a customer’s credit worthiness, historical bad debt experience, changes in payment history and general economic and market trends.

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

The following discussion provides a comparison of the results of operations for the successor company and that of the predecessor company on a combined basis for the fiscal year ended September 30, 2004 with the historical results of operations of the predecessor company for the fiscal years ended September 30, 2002 and 2003, respectively. The discussion is provided for comparative purposes only, but the value of such comparison may be limited. The combined results of operations for the fiscal year ended September 30, 2004 include the results of operations of the predecessor company for the six months ended March 31, 2004, combined with the results of operations of the successor company for the six months ended September 30, 2004. The combined financial information for the year ended September 30, 2004 is merely additive and does not give proforma effect to the Merger transaction. Our results of operations after March 31, 2004 are not comparable to the results of operations of the predecessor company for the periods prior to April 1, 2004. The information in the section, “Fiscal 2004 Compared to Fiscal 2003,” should be read in conjunction with the consolidated financial statements and related notes thereto.

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

Net sales in the year ended September 30, 2004 increased 14.7% to $362.8 million from $316.4 million in the year ended September 30, 2003. The increase in net sales was primarily driven by organic growth in the Safety Products and Specialty Composites segments, the impact of the SafeWaze acquisition on March 14, 2003 and foreign currency translation. The weakness of the U.S. dollar and the SafeWaze acquisition favorably impacted net sales by $11.6 million and $4.5 million, respectively. The Safety Products segment net sales in the year ended September 30, 2004 increased 13.2% to $274.4 million from $242.3 million in the year ended September 30, 2003. The increase in net sales resulted from a 6.7% increase in organic growth, a 4.6% increase due to foreign currency translation and a 1.9% increase due to the acquisition of SafeWaze. Organic sales growth for the Safety Products segment, defined as net sales less the impact of foreign currency translation and acquisitions, has increased for nine consecutive quarters. The Company attributes this growth to an improved economy and its ability to successfully introduce new products into the markets it serves. The Safety Prescription Eyewear segment net sales in the year ended September 30, 2004 decreased slightly to $39.8 million from $40.0 million in the year ended September 30, 2003. Specialty Composites’ net sales in the year ended September 30, 2004 increased 42.5% to $48.6 million from $34.1 million in the year ended September 30, 2003. The increase was primarily driven by market share gains and an improving economy driving volume increases in the precision electronics, truck, aircraft and industrial markets. The Company tracks measures such as computer and electronic production data and truck build rates to gauge the momentum in the Specialty Composites segment which has been experiencing positive sales trends in the last five quarters.

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

Operating expenses for the year ended September 30, 2004 increased 13.1% to $124.1 million from $109.7 million for the year ended September 30, 2003. The increase in operating expenses was primarily driven by an increase in selling and administrative, research and technical services expenses and amortization expense, partially offset by the restructuring provision adjustment and other charges, net. Selling and administrative expenses included approximately $1.1 million of expenses due to the acquisition of SafeWaze, $3.2 million due to foreign currency translation, $1.7 million due to variable selling expenses, as well as increased marketing expenses to support new product launches and build brand support. Selling and administrative expenses as a percentage of net sales improved to 31.3% in the year ended September 30, 2004 as compared to 32.0% for the year ended September 30, 2003. Depreciation and amortization expense increased approximately $1.7 million due to the fair value allocation of purchase price to tangible assets and finite lived intangible assets required by SFAS No. 141 due to the Merger Agreement. The restructuring provision adjustment of $1.1 million of income was the result of a change in estimate relating to non-cancelable leases. The decrease in other charges, net was attributed to a reduction in foreign currency transaction expenses partially offset by the bond call premium of $1.5 million as a result of the Merger Agreement.

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

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

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

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

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

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

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

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

The provision for income taxes for the year ended September 30, 2003 was $2.6 million compared to $1.8 million for the year ended September 30, 2002. The Company’s effective tax rate was different from the statutory rate due to the mix of income between the Company’s foreign and domestic subsidiaries. The Company’s foreign subsidiaries had taxable income in their foreign jurisdictions while the Company’s domestic subsidiaries have net operating loss carry-forwards for income tax purposes. Due to the uncertainty of realizing these tax benefits, the tax benefits for net operating loss carry-forwards have been partially offset by a valuation allowance.

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

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

On March 10, 2004, Aearo Corporation, the Company’s parent, entered into a Merger Agreement with AC Safety Holding Corp. and its subsidiary, AC Safety Acquisition Corp. that closed on April 7, 2004. Pursuant to the terms of the Merger Agreement, AC Safety Acquisition Corp. merged with and into Aearo Corporation with Aearo Corporation surviving the Merger as a wholly-owned subsidiary of AC Safety Holding Corp. The aggregate purchase price was approximately $409.1 million, including estimated fees and expenses. The Merger was financed with approximately $303.7 million of new debt consisting of $175.0 million of 8.25% senior subordinated notes and a $125.0 million senior credit facility, $3.7 million of assumed debt, $4.1 million of cash and $101.3 million of equity.

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

At September 30, 2003, the Company’s debt structure included: (a) $98.0 million of 12.50% Senior Subordinated Notes due 2005 (the “12.50% Notes”) issued under an indenture dated as of July 11, 1995 (the “Notes Indenture”) and (b) up to an aggregate of $135.0 million under a credit agreement with various banks comprised of (i) a secured term loan facility consisting of loans providing for up to $100.0 million of term loans (collectively the “Term Loans”) with a portion of the Term Loans denominated in foreign currencies and (ii) the Revolving Credit Facility providing for up to $30.0 million of revolving loans for general corporate purposes (collectively the “Senior Bank Facilities”). The amounts outstanding under the Term Loans, Revolving Credit Facility and the 12.50% Notes at September 30, 2003, were approximately $85.1 million, $11.7 million and $98.0 million, respectively.

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

The Company typically makes capital expenditures related primarily to new product development and the maintenance and improvement of its manufacturing facilities. The Company’s principal source of cash to fund these capital requirements is cash from operations. The Company spent $9.5 million for capital expenditures for the year ended September 30, 2004. The Company spent $9.9 million, plus an additional $0.4 million under capital leases, for capital expenditures for the year ended September 30, 2003 and spent $8.2 million, plus an additional $1.4 million under capital leases, for capital expenditures for the year ended September 30, 2002. The Company plans to spend approximately $11.5 million for capital expenditures in fiscal year 2005.

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

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

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

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

The variability of asset returns and discount rates may have either a favorable or unfavorable impact on the Company’s pension expense and the funded status of the pension plan. Under minimum funding rules, no additional pension contributions were required to be made in fiscal 2004. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands of dollars):

The Company has a substantial amount of indebtedness. The Company relies on internally generated funds, and to the extent necessary, on borrowings under the Revolving Credit Facility (subject to certain customary drawing conditions) to meet its liquidity needs. The Company anticipates that operating cash flow will be adequate to meet its operating, capital expenditures and debt service requirements for the next several years, although there can be no assurances that existing levels of sales and normalized profitability, and therefore cash flow, will be maintained.

The Company has the following minimum commitments under contractual obligations including purchase obligations, as defined by the U.S. Securities and Exchange Commission as of September 30, 2004:

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

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

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

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

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

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

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

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

The PPE market is highly competitive, with participants ranging in size from small companies focusing on single types of safety products to large multinational corporations that manufacture and supply many types of safety products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as design, style and functional performance), product quality, service, brand-name recognition and, to a lesser extent, price. Some of our competitors have greater financial and other resources than we do and our cash flows from operations could be adversely affected by competitors’ product innovations and pricing changes made by us in response to competition from existing or new competitors. Individual competitors have advantages and strengths in different sectors of the industry, in different products and in different areas, including manufacturing and distribution systems, geographic market presence, customer service and support, breadth of product, delivery time and price. Some of our competitors also have greater access to capital and technological resources and we may not be able to compete successfully with them.

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

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

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

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

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

Our success depends, in part, on our ability to obtain and enforce patents, maintain trade-secret protection and operate without infringing on the proprietary rights of third parties. We face lawsuits from time to time alleging that our products infringe third-party intellectual property, and/or seeking to invalidate or limit our ability to use our intellectual property. Additionally, we may find it necessary to initiate litigation to protect our intellectual property. Litigation can be costly and time consuming. Litigation expenses, or any damage payments, loss of market share, or loss of intellectual property rights resulting from third party claims, could be significant and result in material losses to us. In addition, we may decide to settle legal claims, including certain pending claims, despite our beliefs on the probability of success on the merits, to avoid litigation expenses as well as the diversion of management resources. While we have been issued patents and have registered trademarks with respect to many of our products, our competitors could independently develop similar or superior products or technologies, duplicate any of our designs, trademarks, processes or other intellectual property or design around any processes or designs on which we have or may obtain patents or trademark protection. In addition, it is possible that third parties may have or acquire licenses for other technology or designs that we may use or desire to use, so that we may need to acquire licenses to, or to contest the validity of, such third-party patents or trademarks. Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of such third-party rights.

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

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

We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Although we have not experienced any material uninsured losses due to product liability claims, it is possible that we could experience material losses in the future.

In particular, we are a defendant in lawsuits by plaintiffs alleging that they suffer from respiratory medical conditions, such as asbestosis or silicosis, relating to exposure to asbestos and silica, and that such conditions result, in part, from the use of respirators that, allegedly, were negligently designed or manufactured. The defendants in these lawsuits are often numerous, and include, in addition to manufacturers and distributors of respirators, manufacturers, distributors and installers of sand (used in sand blasting), asbestos and asbestos-containing products. These lawsuits typically allege that these conditions resulted in part from respirators that were negligently designed or manufactured. Cabot Corporation is contractually obligated to indemnify us for any losses, including costs of defending claims resulting from respiratory products manufactured prior to our acquisition of the business in July 1995. Nevertheless, we could potentially be liable for these losses or claims if Cabot Corporation fails to meet its obligations to indemnify us. We could also be liable if the alleged exposure involved the use of products manufactured by us after our July 1995 acquisition of the business. Cabot Corporation is currently handling the defense of all the cases, and to date we have not incurred any material costs with respect to these lawsuits. Consistent with the experience of other companies involved in silica and asbestos-related litigation, there has been an increase in the number of asserted claims that could potentially involve us. We cannot determine our potential liability, if any, for such claims, in part because the defendants in these lawsuits are often numerous and the claims generally do not specify the amount of damages sought. Additionally, bankruptcy filings of companies with asbestos and silica-related litigation could increase our cost over time. If we are found liable in these cases and Cabot Corporation fails to meet its indemnification obligations to us, it would have a material adverse effect on our business.

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

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

We are subject to federal, state and local laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and the maintenance of a safe workplace. These laws impose penalties for noncompliance and liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup pursuant to these environmental laws. Environmental laws have changed rapidly in recent years, and we may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted, these future laws could have a material adverse effect on our results of operations.

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

Our international operations are subject to various political, economic and other uncertainties which could adversely affect our business. A significant reduction of our international business would

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

We expect that international sales will continue to represent a significant percentage of our net sales, which exposes us to currency exchange rate fluctuations. An increase in the value of the U.S. dollar or Swedish Krona could materially and adversely affect our results of operations.

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

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

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

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

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

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

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

Our net sales may be materially and adversely affected by changes in safety regulations and standards covering industrial workers in the United States, Canada and Europe, including those of OSHA, NIOSH and CE. Our net sales could also be adversely affected by a reduction in the level of enforcement of such regulations. Changes in regulations could reduce the demand for our products or require us to reengineer our products, thereby creating opportunities for our competitors. If demand for our products is reduced, our results of operations and net sales could be materially and adversely affected.

The Company is exposed to market risks related to changes in foreign currencies, interest rates and commodity pricing. The Company uses derivatives to mitigate the impact of changes in foreign currencies and interest rates. All derivatives are for purposes other than trading. The Company adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” on October 1, 2000, as amended. The Company has formally documented its hedging relationships, including identification of hedging instruments and the hedge items, as well as its risk management objectives.

The Company’s results of operations are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates. While many of the Company’s selling and distribution costs are denominated in Canadian and European currencies, a large portion of product costs are U.S. Dollar denominated. As a result, a decline in the value of the U.S. Dollar relative to other currencies can have a favorable impact on the profitability of the Company and an increase in the value of the U.S. Dollar relative to these other currencies can have a negative effect on the profitability of the Company. The Company’s Swedish operations are also affected by changes in exchange rates relative to the Swedish Krona. A decline in the value of the Krona relative to other currencies can have a favorable impact on the profitability of the Company and an increase in the value of the Krona relative to other currencies can have a negative impact on the profitability of the Company.

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

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

The Company may also executes forward foreign currency contracts for up to 30-day terms to protect against the adverse effects that exchange rate fluctuations may have on the foreign-currency-denominated trade activities (receivables, payables and cash) of foreign subsidiaries. These contracts have not been designated as hedges under SFAS No. 133 and, accordingly, the gains and losses on both the derivative and foreign-currency-denominated trade activities are recorded as transaction adjustments in results of operations. The impact on results of operations was a loss of approximately $0.2 million, a gain of approximately $1.0 million and a gain of approximately $0.5 million for the years ended September 30, 2004, 2003 and 2002, respectively.

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

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

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

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

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