Edgar Filing: ARMOR HOLDINGS INC

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

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FORM 10-K

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

For the fiscal year ended December 31, 2005

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

For the transition period from _________ to _________

COMMISSION FILE NUMBER 0-18863

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

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

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [x] No [_]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [x]

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

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

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [x] Accelerated filer [_] Non-accelerated filer [_]

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

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The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of June 30, 2005, the last business day of
the Registrant's most recently completed second fiscal quarter (based on the
closing sale price of the Common Stock on the New York Stock Exchange on such
date) was $1,368,761,972.

The number of shares of the Registrant's Common Stock outstanding as of
March 10, 2006 was 35,360,065.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement for our Annual Meeting of Stockholders to be
held on June 22, 2006, are incorporated by reference into Part III hereof.

TABLE OF CONTENTS AND
CROSS REFERENCE SHEET

Page Number
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PART I Forward Looking Statements
Item 1. Description of Business 5
Company Overview 5
Material Developments 6
Industry Overview 6
Information Concerning Business Segments and
Geographical Revenues 8
Business Strengths 8
Growth Strategy 10
Acquisitions 11
Products 12
Customers 15
Marketing and Distribution 16
Product Manufacturing and Raw Materials 18
Backlog 19
Competition 19
Employees 20
Research and Development 20
Patents and Trademarks 20
Government Regulation 21
Environmental Laws and Regulations 21
Available Information 22
Discontinued Operations 22
Item 1 A. Risk Factors 23
Item 1 B. Unresolved Staff Comments 32
Item 2. Properties 33
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security
Holders 36

PART II Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities 37
Item 6. Selected Financial Data 38
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 39
Item 7 A. Quantitative and Qualitative Disclosures
About Market Risk 59
Item 8. Financial Statements and Supplementary Data 60
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 61
Item 9 A. Controls and Procedures 61
Item 9 B. Other Information 61

PART III 62

PART IV Item 15. Exhibits, Financial Statement Schedules 63

PART I

FORWARD LOOKING STATEMENTS

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

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

We are a leading manufacturer and provider of armored military and commercial
vehicles, armor kits for the retrofit of military vehicles, protective and
security products for military and law enforcement personnel, aircraft armor,
aircraft safety products, survivability equipment used by military aviators and
other personnel protection technologies. Our customers include domestic and
international military, law enforcement, security and corrections personnel and
government agencies, multinational corporations and individuals. We believe our
strengths result from focusing on several core competencies including
engineering, manufacturing and distributing vehicle armoring systems,
high-quality security products and human safety and survival systems. Our
business is comprised of three reportable business segments: the Aerospace &
Defense Group, the Products Group and the Mobile Security Division.

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

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

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

Products Group. Our Products Group, previously referred to as the Armor Holdings
Products Division, manufactures and sells a broad range of high quality
equipment marketed under brand names that are known in the military and law
enforcement communities. Products manufactured by this group include concealable
and tactical body armor, hard armor, duty gear, less-lethal munitions, anti-riot
products, police batons, emergency lighting products, forensic products,
firearms accessories, weapon maintenance products, foldable ladders, backpacks
and specialty gloves.

Mobile Security Division. Our Mobile Security Division, operating under the
brand name CENTIGON(TM), manufactures, services, and integrates certified
armoring systems into commercial vehicles that are designed to protect against
varying degrees of ballistic and blast threats on a global basis. We armor a
variety of platforms that are available commercially, including custom
limousines, sedans, sport utility vehicles, commercial trucks and
cash-in-transit vehicles. Our customers in this business include U.S. federal
law enforcement, intelligence and diplomatic agencies, foreign heads of state,
multinational corporations, as well as high net worth individuals and
cash-in-transit operators.

MATERIAL DEVELOPMENTS

On February 27, 2006, we announced that we signed a definitive agreement to
acquire all of the outstanding stock of Stewart & Stevenson Services, Inc.
("SVC"), a leading manufacturer of military tactical wheeled vehicles including
the Family of Medium Tactical Vehicles ("FMTV"), the U.S. Army's primary
transport platform, for $35 per share in a cash merger transaction. The total
value of the transaction is expected to be approximately $755 million after
deducting SVC's net cash balance which was $312 million as of January 31, 2006.
The transaction is subject to SVC shareholder approval, the expiration or
termination of the Hart-Scott-Rodino waiting period and other customary
conditions. The transaction is expected to close mid-2006. We expect to finance
the transaction through available cash and with proceeds from new senior credit
facilities.

Zylon(R) Investigation

In April, 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging that
ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured
and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to
meet the warranties provided with the vests. On November 5, 2004, the
Jacksonville, Florida (Duval County) Circuit Court gave final approval to a
settlement reached with the Southern States Police Benevolent Association
("SSPBA") which provided that (i) purchasers of certain Zylon(R)-containing vest
models could exchange their vests for other vests manufactured by the Company
and (ii) the Company would continue its internal used-vest testing program
(VestCheck(TM)). The other class action suit, which was filed by the National
Association of Police Organizations, Inc. ("NAPO"), in Ft. Myers, Florida (Lee
County), was voluntarily dismissed with prejudice on November 16, 2004.

On August 24, 2005, the United States Department of Justice, National Institute
of Justice ("NIJ"), released its Third Status Report to the Attorney General on
Body Armor Safety Initiative Testing and Activities (the "Third NIJ Report").
The Third NIJ Report contained, among other items, information and testing data
on Zylon(R) and Zylon(R)-containing vests, and substantially modified compliance
standards for all ballistic-resistant vests with the implementation of the NIJ
2005 Interim Requirements for Ballistic-Resistant Body Armor. As a result of the
actions of the NIJ, the Company halted all sales or shipment of any
Zylon(R)-containing vest models effective August 25, 2005, and immediately
established a Supplemental Relief (renamed the Zylon(R) Vest Exchange ("ZVE"))
Program that provides either a cash or voucher option to those who purchased any
Zylon(R)-containing vests from us through August 29, 2005. The ZVE Program, with
the consent of the SSPBA, was given final approval by the Jacksonville, Florida
Court on October 27, 2005.

We are also voluntarily cooperating with a request for documents and data
received from the Department of Justice, which is reviewing the body armor
industry's use of Zylon(R), and a subpoena served by the General Services
Administration for information relating to Zylon(R).

INDUSTRY OVERVIEW

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

The U.S. government has placed a high priority on fighting terrorism overseas
and securing the homeland from future terrorist attacks. This effort has led
many institutions within the government and private sector to redefine their
strategies to protect against, respond to, and combat terrorism. The Bush
Administration's fiscal 2006 budget request included $30.8 billion for homeland
security spending, an increase of $1.8 billion over 2005. While it is impossible
to quantify the effects that spending by the U.S. government on homeland
security will have on our businesses, we expect to benefit to the extent that
spending is allocated to increase the number of law enforcement personnel, to
purchase security equipment and consumables used in equipping and training these
personnel, and the armoring of vehicles.

Vehicle Armor Market. Recent conflicts, military actions, and protracted
involvement in peacekeeping missions around the globe have increased the demand
for rapidly deployable and highly mobile armored vehicles. We believe the
Up-Armored HMMWV has demonstrated an ability to survive front-line combat action
in Bosnia, Kosovo, Afghanistan, and Iraq. The U.S. Army has announced commitment
to a Long Term Armor Strategy that is expected to install an armor "A-Kit" on
all future tactical wheeled vehicles. The "A-Kit" provides for hard-to-install
armor in the manufacturing line at original equipment manufacturers and a
"B-Kit" that can be stored and easily installed on vehicles when needed. The
U.S. Army has published a Tactical Wheeled Vehicle Strategy that identifies a
requirement between fiscal year 2006 and fiscal year 2011 for 40,760 Light
Tactical Vehicles, 31,443 Medium Tactical Vehicles, and 6,981 Heavy Tactical
Vehicles. While no assurance can be given that these requirements won't change
or that we will succeed in attracting orders for a meaningful portion of these
vehicles, we believe our Aerospace & Defense Group will continue to maintain its
position as a major supplier of armor solutions due to our investments in
research & development, our reputation as a leading armor provider, and our
relationship with our customers. Foreign governments and militaries are also
investing in armored vehicle technology, including the Up-Armored HMMWV, and
other armored vehicle alternatives. Iraqi Freedom Funds are being used to
purchase Up-Armored HMMWVs to protect the fledgling Iraqi Army from the same
threats facing U.S. Forces. We believe the need to protect military forces,
government officials, private organizations, and private individuals will
increase the requirement for lightly armored commercial vehicles in many
countries facing high levels of crime, terrorism and violence around the world.

Aviation Safety Market. The aviation survivability market is comprised of three
distinct market segments: crash safety, ballistic survivability, and personnel
safety equipment. Historically, the primary market for crash safety has been in
military helicopters, driven by the military's interest in protecting both
aviators and troops under severe conditions. Over the past several years
interest in crash safety in the commercial marketplace has grown both due to
changes in government regulations and customer interest in safety as a
differentiator in aircraft operational capabilities. Products falling into the
area influencing survivability include crashworthy seats, airbags, landing gear,
fuel systems, and structures. Demand for these products on the military side has
begun to increase reflecting the military's need to upgrade aircraft such as the
U.S. Army's UH-60M Black Hawk, U.S. Navy's MH-60 Seahawk, and the U.S. Marine
Corps UH-1Y and AH-1Z programs. The replacement of helicopters that have been
damaged or destroyed in combat operations is also supporting near term
opportunities. Long term continued growth potential is indicated by programs
just starting or in development such as the U.S. Army's Armed Reconnaissance
Helicopter, the U.S. Army's Light Utility Helicopter, and the U.S. Air Force's
Combat Search and Rescue helicopter. The ballistic survivability market is both
for military helicopters and fixed wing transport aircraft. Many front line
aircraft have some basic armor protection. We believe there is a growing
interest in new protective solutions that can offer more complete ballistic
protection within the limited available weight on an aircraft. Foreign markets
for crash safety and ballistic survivability products are similar in size to the
U.S. market, although the types of aircraft and customer base are more
fragmented. The personnel safety market for aviators and passengers of aircraft
include equipment such as body armor, uniforms and helmets, survival vests and
survival equipment, inflatable life preservers, parachutes, and emergency
oxygen. The market is experiencing some growth as new ensembles incorporating
lessons learned from combat are introduced and replacement equipment is
increased due to the increased pace of operations.

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

plates in 2006 will increase the total SAPI requirement. We believe our
Aerospace & Defense Group is one of a small number of contractors qualified to
produce large volumes of the highest level protection SAPI for U.S. military
forces.

Law Enforcement Security Products Market. According to recent data available
from the Department of Justice, direct expenditures for police protection
services in the United States grew at a compound annual growth rate of 7.3% from
1984 through 2001, to a total of $72.4 billion in 2001. We currently believe
that this growth rate will continue, as will the growth in the number of police
officers and other first responders in the United States. The Department of
Homeland Security estimates that there are more than 2.0 million first
responders in the United States, categorized as follows:

o Local police departments have an estimated 556,000 full-time employees
including 436,000 sworn enforcement personnel.

o Sheriff's offices reported about 291,000 full-time employees,
including 186,000 sworn personnel.

o There are over 1 million firefighters, of which approximately 750,000
are volunteers.

o There are over 155,000 nationally registered emergency medical
technicians.

INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

For information concerning our business segments and geographical revenues,
please refer to Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 14 to our Consolidated Financial
Statements included elsewhere in this report.

BUSINESS STRENGTHS

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

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

Sole-Source Provider of Up-Armored HMMWVs. We are currently the sole-source
provider of up-armoring and have developed and provide the armor system for the
newest Up-Armored HMMWV procured by the U.S. military. In 2004 and 2005, we
delivered 10,483 Up-Armored M1114 HMMWVs to the U.S. military. Beginning in 2005
and ending in 2006, we estimate we will have provided the U.S. Marine Corps more
than 2,300 Up-Armored HMMWV's. We are also under contract in 2006 to provide
1,463 Up-Armored HMMWVs vehicles to the Iraqi Army. U.S. Army planning documents
show in excess of 21,000 Armored HMMWVs to be purchased in 2006 and 2007 of
which we are already on contract for over 4,000 kits. We are also currently
under contract to provide spare parts, logistics and ongoing field support
services for the U.S. military's Up-Armored HMMWV fleet. In addition, we have
provided up-armoring of HMMWVs to a number of foreign military customers,
including Canada, Egypt, Slovenia and Israel.

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

Sole-Source Provider of Aviation Safety Products. We are currently the
sole-source provider for the following military cockpit seating systems:
UH-60A/L and UH-60M Black Hawk helicopter, MH-60S and MH-60R Sea Hawk
helicopter, AH-1Z Cobra Venom attack helicopter, AH-64 Apache attack helicopter,
UH-1Y Super Huey utility helicopter and the V-22 Osprey tilt-rotor aircraft.
With respect to commercial helicopter systems, we are the sole source for seats
in the Bell M427 and M430 helicopters as well as the AgustaBell 609 commercial
helicopter. We are the sole-source provider for the C-17 centerline and
side-wall fixed-wing military seating systems and are the only supplier of a
common wall-mounted troop seat for the C-130, C-141 and KC-135 aircraft.
Additionally, we are sole-source provider of cockpit airbag systems for the
UH-60 Black Hawk helicopter and the OH-58 Kiowa Warrior helicopter.

Leading Innovator in Load Carrying Equipment. Our Specialty Defense brand was
the first producer of the U.S. Army's MOLLE and continues to be the largest
supplier of MOLLE's to the U.S. Government. Our association with the MOLLE
program resulted in the government granting us as the sole licensee of the MOLLE
technology for commercial application. We have leveraged the MOLLE technology to
develop backpacks, chest harnesses, and accessories for military, tactical, and
law enforcement markets.

Industry-Leading Market Position in Body Armor. We manufacture body armor for
the law enforcement community. Within our family of companies resides
industry-leading technology for the design and manufacturing of soft body armor
designed to protect against handgun threats and, in some cases, other threats
encountered in the line of duty. By virtue of the volume of soft armor produced
by us, we have developed supply relationships with ballistic fiber and material
suppliers that we believe enable us to manage our costs and obtain proprietary
materials. We believe our evolving product lines and technology insertion has
positioned us as one of the two primary suppliers of high end hard body armor
plates in the market. The SAPI plates being manufactured by us are in extremely
high demand and are the primary body armor plates being procured by the U.S.
Army and U.S. Marine Corps and some special police units to augment the soft
vest to provide rifle protection. We also manufacture the ACH for the U.S. Army
and U.S. Special Forces.

Valuable Brands with Leading Market Positions. We believe our products and
brands are established and have developed a reputation for high quality and
dependability. Due to the life-protecting nature of many of our products,
customers prefer premium, recognized brands with quality reputations. We believe
that our strong brand recognition attracts customer loyalty and repeat customer
business and helps us to establish leading positions with many of our product
offerings. On September 9, 2005, we announced the introduction of a new single
brand for our Mobile Security Division to better leverage our combined global
capabilities in the marketplace and present a unified face to customers around
the world. The business, now called CENTIGON(TM), also introduced the world's
first commercial vehicle armor system that protects against attacks from IEDs.
We believe CENTIGON(TM) constitutes the world's largest commercial vehicle
armoring business which is able to provide our customers with solutions to their
needs and draw upon resources across our company to be at the leading edge of
design, research and development and service.

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

Extensive Distribution Network. Our Products Group markets and delivers products
through an extensive network of approximately 260 domestic distributors and 200
international agents, and through a sales force of approximately 40
representatives and specialists. The Aerospace & Defense Group, in conjunction
with the Products Group and the Mobile Security Division, leverages this
marketing network to increase exposure for its products. Where practical, we
attempt to extend integrated solutions to our customers where we can meet all of
their personal survivability requirements. We believe that our distribution
networks of security products provides a foundation for our continued growth,
expansion and ability to promptly and expeditiously service our customers'
needs. We believe the diversity of the markets we serve and the strength of our
distribution relationships reduce our dependence on any particular product,
market or customer.

World Leader in Vehicle-Armoring Systems. We have been a leader in the
vehicle-armoring systems market for over 60 years. Serving clients in some 80
countries on five continents, from U.S. President Truman in the 1940s, to a
current list of over 60 heads-of-state and countless corporate leaders. We offer
a wide selection of protected vehicles, ranging from handgun protection against
random street violence, all the way to protection against assault rifle
ammunitions and blast protection. Our product range includes armored passenger
vehicles, cash-in-transit vehicles and special purpose vehicles. We are a
pioneer in developing ballistics performance standards, which are supported by
independent tests performed by certified laboratories, and maintain the world's
largest commercial ballistics database. We have three state-of-the-art ballistic
glass manufacturing facilities, located in the U.S. and Latin America. Ballistic
glass manufactured at these facilities meet stringent standards for esthetic
quality and ballistic performance.

Experienced Management Team. Our management team brings extensive knowledge of
our customers and a proven ability to effectively manage our operations. The
core of our management team has been together as a group since 1996, and has
been further augmented through acquisitions in the area of engineering and
research and development to provide the capability to develop a range of new
products. In addition, our management has a proven record of identifying,
executing and integrating strategic acquisitions into our business, including
our largest acquisitions to date: Second Chance in 2005, Specialty Defense and
Bianchi in 2004, Simula in 2003 and the O'Gara group of companies in 2001.

GROWTH STRATEGY

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

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

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

Increase Exposure to Military Programs. As the sole-source provider of the M1114
Up-Armored HMMWVs for the U.S. military, we believe that we are in a strong
position to capture opportunities to provide armoring of additional vehicles for
the U.S. Department of Defense. Examples include the next generation Up-Armored
HMMWV, M1151/52 and recent efforts to develop and supply armor kits for various
types of light through heavy tactical trucks and the continued relationship with
the original equipment manufacturers to explore up-armoring opportunities for
the U.S. Army's tactical vehicle fleet. We believe that the cost and time
required to develop an alternative protection system and the resources required
to manufacture components against cost, schedule and performance specifications
increases the likelihood that we will remain in a leading position on these
programs and capture additional programs.

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

Pursue Strategic Acquisitions. Since January 1, 1996, we have completed 26
acquisitions and integrated the acquired businesses into our Aerospace & Defense
Group, Products Group, and Mobile Security Division. We will continue to seek
opportunities to make value-based acquisitions that complement our business
operations or expand our product offerings, improve our technology, provide
access to new geographic markets or provide additional distribution channels and
new customer relationships. We have historically taken a disciplined,
value-based approach to evaluating acquisition opportunities, driven by a
prudent use of our capital, rigorous due diligence standards and a targeted
expected return on our investment.

ACQUISITIONS

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

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

o offers attractive margins;

o is accretive to earnings;

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

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

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

We have completed 26 acquisitions in continuing operations since January 1,
1996. The following table sets forth information regarding each of these
acquired businesses and their respective products:

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

Second Chance Body Armor, Inc. 2005 Aerospace & Body Armor and Soldier Equipage
Defense and
Products
Optemize.com, Inc. 2005 Corporate Information Technology
Bianchi International 2004 Products Duty Gear
The Specialty Group, Inc. 2004 Aerospace & Soldier Equipage
Defense
Kleen-Bore, Inc. 2004 Products Firearm Cleaning Kits
Vector Associates, Inc. (dba ODV, Inc.) 2004 Products Narcotic Identification Kits
Hatch Imports 2003 Products Specialty Gloves and Accessories
Simula 2003 Aerospace & Human Safety and Survival Systems
Defense
911 Emergency Products 2002 Products Warning and Emergency Lighting,
Safety Products
Trasco Bremen 2002 Mobile Security Commercial Vehicles
B-Square 2002 Products Firearm Accessories
Foldable Products Group 2002 Products Safety Products
Evi-Paq 2002 Products Forensics
Speedfeed 2002 Products Firearm Accessories
Identicator 2001 Products Forensics
O'Gara-Hess & Eisenhardt Companies 2001 Aerospace & Commercial and Military Vehicles
Defense and
Mobile Security
Guardian Products 2001 Products Less Lethal Products
Monadnock Lifetime Products 2000 Products Police Batons
Lightning Powder 2000 Products Forensics
Break Free 2000 Products Weapons Maintenance Products
Safariland 1999 Products Duty Gear
Federal Laboratories 1998 Products Less Lethal Products
Protech Armored Products 1998 Products Hard Armor
Supercraft Limited 1997 Products Military Apparel & Outerwear
Defense Technology 1996 Products Less Lethal Products
NIK Public Safety 1996 Products Forensics

PRODUCTS

AEROSPACE & DEFENSE GROUP

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

Vehicle Products. Our expertise in military vehicle safety systems focuses on
armor kits for tactical vehicles and ballistic armor systems for combat
vehicles. We are currently the sole-source provider to the U.S. military of
armor solutions for Up-Armored HMMWVs. The HMMWV chassis is produced by AM
General Corporation and shipped directly to our facility in Fairfield, Ohio,
where up-armoring components are added for the M1114 Up-Armored HMMWVs. The
Up-Armored HMMWVs provide exterior protection against various levels of armor
piercing ammunition, overhead airburst protection and underbody blast protection
against anti-tank and anti-personnel mines. In addition, we install other
features designed to enhance crew safety, comfort and performance, such as air
conditioning, weapon turrets and mounts, door locks and shock absorbing seats.
We also supply engineering design and prototype services in support of the
Up-Armored HMMWV program, and supply spare parts and logistics and ongoing field
support services. None of our contracts with the U.S. military have a minimum
purchase commitment and the U.S. military generally has the right to cancel its
contracts unilaterally, at its convenience.

We are currently the sole source provider of armor kits for the new M1151 and
M1152 Up-Armored HMMWV. We provide an A-kit to AM General which is installed as
part of the vehicle manufacturing process. The A-kit provides basic underbody
armor protection and the armored hard points required to install the B-Kit. The
B-Kit armor consists of transparent armor (glass), doors, roof, rear partition,
and other components. This armoring concept provides that all vehicles are
manufactured with an A-Kit and a B-Kit which can be easily installed when combat
conditions warrant it. This is expected to result in longer vehicle life and
reduced operating costs. The M1152 armor solution includes technologically
advanced composite/ceramic materials to provide improved ballistic and blast
protection while lowering the vehicle weight to increase payload.

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

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

We currently supply a substantial portion of the new and replacement crew
seating systems for U.S. military helicopters many of which incorporate our
armor systems. We are currently the sole supplier of crew seats for 16 different
helicopter models and other variants of these aircraft including the AH-64
Apache attack helicopter, UH-60 Black Hawk utility helicopter, SH-60 Sea Hawk
ASW helicopter, ASW and Transport helicopters, Italy's EH101 MMI ASW and
Transport helicopters, Canada's CH-149 Cormorant Search-and-Rescue helicopter,
and Norway's Sea King Multi-role helicopter. Over the past year, we added the
U.S. Marine Corps CH-46 Sea Knight helicopter as a new program. Our customer
base includes, among others, Boeing

Helicopters, Sikorsky Aircraft Corporation and Bell Helicopter and we also
supply crew seats directly to various agencies of the U.S. Department of Defense
and various foreign militaries. We also manufacture troop seats for both
helicopters and fixed-wing aircraft including the C-17 Globemaster. Our
expertise in helicopter crash safety led to the development of cockpit airbag
systems for the U.S. Army. Our role has evolved into the position of a
helicopter cockpit system integrator incorporating airbags, gas generators and
three-dimensional crash sensors.

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

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

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

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

PRODUCTS GROUP

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

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

Our sharp instrument penetration armor is designed primarily for use by
personnel in corrections facilities and by other law enforcement employees who
are primarily exposed to threats from knives and other sharp instruments. These
vests are constructed with special, blended fabrics, as well as flexible woven
fabrics and are available in

both concealable and tactical models. In addition, these vests can be combined
with ballistic armor configurations to provide "multi-threat protection" against
both ballistic and sharp instrument penetration.

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

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

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

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

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

We also manufacture a variety of hard armor ballistic shields primarily for use
in tactical clearance applications and ballistic resistant enclosures for use as
guard booths, shacks and towers. These shields are manufactured using a variety
of ballistic fibers, polyethylene ballistic materials, ballistic steel,
ballistic glass or a combination of these materials. Other hard armor products
include barrier shields and blankets. These products are designed to allow
tactical police officers to enter high-threat environments with maximum
ballistic protection.

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

MOBILE SECURITY DIVISION

Commercial Products. We provide armor systems with ballistic and blast
protection for a variety of vehicles, including limousines, sedans, sport
utility vehicles, commercial trucks and cash-in-transit vehicles. On September
9, 2005, we announced our introduction of a new single brand for our Mobile
Security Division to better leverage our combined global capabilities in the
marketplace and present a unified face to customers around the world.

CENTIGON(TM) was created from the recognized brand names of O'GARA-HESS &
EISENHARDT ARMORING COMPANY(TM), ARMOR MOBILE SECURITY France (formerly
LABBE(TM)), and

ARMOR MOBILE SECURITY GERMANY (formerly TRASCO(TM)). The commercial vehicle
armoring process requires the complete disassembly of a new base vehicle. This
disassembly can involve the removal of the dash, interior trim, seats, doors and
windows. The passenger compartment then is armored with both opaque and
transparent armor (ballistic glass). Other features, such as run flat tires and
anti-explosive fuel tanks, may also be added. Finally, the vehicle is
reassembled to as close to its original appearance as possible. The entire
conversion process results in a low profile, integrated ballistic protective
system. Our relationship with various vehicle manufacturers such as Jaguar and
Land Rover has been valuable in allowing us to offer our customers certain
vehicles which maintain the original warranties issued by the vehicle
manufacturer.

We produce fully armored vehicles as well as light armored vehicles. We also
offer armor piercing and blast protection for specific vehicles by enhancing the
ballistic system, and underbody protection with proprietary materials, and
installation methods that protect the occupants against a defined threat. We
produce a new IE-Defense System(TM) that we believe represents a unique
multiple-threat armor solution for certain commercially-available sport utility
vehicles ("SUVs"). It is intended to protect the vehicle's occupants against an
improvised explosive devices ("IED") attack and a subsequent attack by an
assault rifle with armor-piercing bullets. As these attacks have become more
frequent in Iraq and Afghanistan, we believe an increasing number of government
officials, private contractors, non-government organizations ("NGOs"), private
individuals and others are in need of such protection. We believe the launch of
our new IE-Defense System underscores the CENTIGON(TM) commitment to leading
technology and responding to the threats faced around the world, as well as our
efforts to integrate technology insights across our family of businesses.

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

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

In addition to the introduction of a new brand name and logo, CENTIGON(TM)
implemented a new global, customer-centric organizational structure. Its new
regionally-focused marketing, sales and customer service structure is designed
to allow CENTIGON(TM) to seamlessly access the full range of support for its
global customer base regardless of where they are located.

CUSTOMERS

Aerospace & Defense Group. In 2005, our Aerospace & Defense Group sold
approximately 99.4% of its products in North America, with the balance sold
internationally. Sales of Aerospace & Defense Group products to all branches of
the United States military and its prime contractors such as AM General,
Oshkosh, Textron Marine & Land, Boeing, Sikorsky Aircraft and Stewart &
Stevenson represented approximately 97.8% of the Aerospace & Defense Group's
revenue. The Aerospace & Defense Group's businesses have relied to a great
extent on relatively few major customers, although 2005 saw the development of
additional major users of Aerospace & Defense Group products within their
existing customer base (e.g. other users within the U.S. military). We believe
that historical customers, such as the U.S. Army and other branches of the U.S.
military, to whom we have supplied products for approximately 25 years, will
continue to be major customers. Current commercial and licensing customers
include Boeing, Bell Helicopter, Textron Marine & Land, PPG Industries,
Intercast Europe, and Avon Rubber Company. The loss of or significant reduction
in sales to a major customer could potentially have a material adverse effect on
our business, operations and financial condition.

The Aerospace & Defense Group is focused on increasing its share of the total
revenue in the international market in 2006. The demand from foreign militaries
for the same equipment U.S. military forces use in Iraq and Afghanistan has
significantly increased. The market for military hardware products is worldwide
in scope, including the U.S. military and foreign defense forces. The primary
contract for delivery of Up-Armored HMMWVs

is with the U.S. military, although smaller quantities are also sold to foreign
governments. The primary contracts for the armor kit programs are with the U.S.
military. Foreign interest and demand for our products has increased thereby
adding a new dimension to our market. We added a new Director for International
Military Programs in mid-2005 to address this interest.

Products Group. In 2005, the Products Group sold approximately 78.4% of its
products in North America, with the balance sold internationally. The primary
end users of the Products Group's products are federal, state and local law
enforcement agencies, local police departments, state corrections facilities,
U.S. and allied militaries, highway patrols and sheriffs' departments. The
Products Group's security products are marketed through an extensive network of
approximately 260 domestic distributors and 200 international agents, and
through a sales force of approximately 40 representatives and specialists under
brand names that are well established in the military and law enforcement
communities. Our Gregory(R) brand of products are sold primarily in North
America and such sales represent approximately 50% of Gregory sales.

Mobile Security Division. In 2005, the Mobile Security Division sold
approximately 27.5% of its products in North America, with the balance sold
internationally. The Mobile Security Division's armored commercial vehicle
customers include governmental and private buyers who purchase both fully and
light-armored vehicles. Governmental buyers and foreign royalty are also
customers for parade cars. Typically, governmental buyers consist of ministries
of foreign affairs, defense and internal affairs and offices of presidential
security. These customers are generally not constrained in their purchasing
decisions by considerations such as import duties and taxes and are free to
search globally for the best product available. The procurement cycles of
governmental buyers can range from relatively rapid, when the vehicles are for
the use of the head of state or in response to a particular crisis, to prolonged
highly documented bids and evaluations for normally budgeted items. Private
customers for armored commercial vehicles include corporations and individuals.
Private buyers tend to be more price-sensitive and will often purchase locally
manufactured vehicles to reduce taxes and avoid import duties. Local servicing
of the vehicle is also a critical concern to private buyers. Customers for
cash-in-transit vehicles are generally companies that provide cash-in-transit
services to financial institutions. Purchasing decisions for cash-in-transit
vehicles depend on many criteria including insurance, regulatory requirements
and costs, and whether the financial institution is private or governmental.

Approximately 75.7% of our revenues were from our ten largest customers for the
year ended December 31, 2005 ("fiscal 2005"). Approximately 72.7% of our
revenues came from U.S. military contracts. Our Aerospace & Defense Group's ten
largest customers accounted for approximately 98.3% of Aerospace & Defense Group
revenues for fiscal 2005. The Products Group's ten largest customers accounted
for approximately 25.3% of total revenues of the Products Group for fiscal 2005.
The Mobile Security Division's ten largest customers accounted for approximately
52.6% of total revenues of the Mobile Security Division for fiscal 2005.
Military and governmental contracts generally are awarded on a periodic or
sporadic basis. If the Aerospace & Defense Group were to lose either the M1114
Up-Armored HMMWV contract, which continues through June 2008, or additional
orders for the next-generation versions known as the M1151 and M1152 Up-Armored
HMMWVs, our financial performance would experience a material adverse effect.

MARKETING AND DISTRIBUTION

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

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

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

Our marketing and sales activities in the government sector focus primarily upon
identifying research and development and other contract opportunities with
various agencies of the United States government or with others acting as prime
contractors on government projects. Key members of our engineering and project

management staffs work to maintain close working relationships with
representatives of the United States military and their prime contractors.
Through these relationships, we seek to monitor needs, trends, and opportunities
within current military product lines.

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

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

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

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

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

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

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

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

Mobile Security Division. On a worldwide basis, the Mobile Security Division
employs approximately 25 full-time sales professionals. These employees operate
out of Washington, D.C.; Fairfield, Ohio; Sao Paulo, Brazil; Lamballe, France;
Mexico City, Mexico; Bogota, Colombia; Bremen, Germany; Caracas, Venezuela; Hong
Kong, China; and Dubai, U.A.E. All personnel have a geographic and/or
product-specific responsibility. In most cases, the sales personnel also recruit
and maintain sales agents or distributors. The agents or distributors have
geographic and product specific agreements, and compensation in most cases is
based on a commission arrangement. Sales personnel use a consultative approach
when offering solutions to customers' security problems. Sales cycles for
commercial physical security products can range from several months to a matter
of days, depending upon the product and the urgency associated with the security
problem being addressed.

PRODUCT MANUFACTURING AND RAW MATERIALS

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

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

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

We adhere to quality control standards and conduct extensive product testing
throughout our manufacturing processes. Raw materials are also tested to ensure
quality. We have obtained ISO 9001 certification for our Wyoming manufacturing
facility for less-lethal products, our facility in Pittsfield, Massachusetts for
hard armor products, and our facility in Ontario, California for body armor and
duty gear holsters and accessories. We have obtained ISO 9002 certification for
our Manchester, England manufacturing facility for body armor and high
visibility garments. ISO standards are promulgated by the International
Organization of Standardization and have

been adopted by more than 100 countries worldwide. We obtain ISO certification
by successfully completing an audit certifying our compliance with a
comprehensive series of quality management and quality control standards.

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

BACKLOG

Aerospace & Defense Group. At December 31, 2005, our Aerospace & Defense Group
had unfilled customer orders of approximately $836.6 million. Approximately
$324.0 million of these orders are expected to ship in the first quarter of
2006.

Products Group. At December 31, 2005, the Products Group had unfilled customer
orders of approximately $38.9 million. Substantially all of these orders are
expected to ship in the first quarter of 2006.

Mobile Security Division. At December 31, 2005, the Mobile Security Division had
unfilled customer orders of approximately $30.0 million. Approximately $20.0
million of these orders are expected to be shipped in the first quarter of 2006.

COMPETITION

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

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

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

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

Given the nature of some of our competitors, who are larger and better
capitalized than us, our failure to compete effectively or our inability to do
so could have a material adverse effect on our business, operations and
financial condition.

EMPLOYEES

As of January 1, 2006, we have a total of approximately 5,100 employees, of
which approximately 2,000 were employed in the Aerospace & Defense Group,
approximately 2,100 in the Products Group, approximately 960 in the Mobile
Security Division, and approximately 40 in our corporate headquarters and
information technology operation.

RESEARCH AND DEVELOPMENT

We view our research and development efforts as critical to maintaining a
leadership position in the security products and vehicle armoring markets. We
believe the continuously evolving threats of today demand the advancement and
application of state-of-the-art technology to ensure proper protection of our
customers. Our research and development occurs primarily under fixed-price or
cost-plus, government funded contracts as well as Company-sponsored efforts. We
seek to offer superior quality and advanced products and systems to our
customers at competitive prices. To achieve this objective, we engage in ongoing
engineering, research and development activities to improve the reliability,
performance and cost-effectiveness of our existing products. We also design and
develop new products in an ongoing effort to anticipate and meet our customers'
evolving needs. We expect to continue to focus on complete system integration to
provide unique finished products to our customers. In addition, we will seek to
strengthen our position in the area of core materials and technology that offer
superior performance when designed into those products. We believe a distinct
advantage comes from the leveraged synergy across all security products from
armor materials in helmets, vests, aircraft and vehicles to energy absorbing
seats in helicopters and landmine resistant trucks.

In order to fully realize the benefits of synergy across our divisions,
businesses and products, we have a centrally managed research and development
function at the corporate level. We seek to employ engineers and scientists with
expertise in materials, aerospace, mechanical, electrical, automotive and other
engineering disciplines. To maximize efficiency, we utilize important
relationships with outside testing laboratories, universities, companies and
often times our key clients.

Research and development costs include salaries and benefits of research and
development personnel, testing and certification, and other research and
development related costs. Research and development costs are included in
selling, general and administrative expenses as incurred and for fiscal 2005,
2004 and 2003, approximated $15.1 million, $8.9 million and $4.0 million,
respectively. We expect to incur research and development costs of $19 million
to $20 million in fiscal 2006. We recorded revenue of $4.2 million, $7.5 million
and $5.8 million from government funded research and development in fiscal 2005,
2004 and 2003, respectively. We expect an additional $5 million to $6 million of
research and development costs to be government funded in fiscal 2006.

PATENTS AND TRADEMARKS

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

Although we have protected our technologies to the extent that we believe
appropriate, the measures taken to protect our proprietary rights may not deter
or prevent unauthorized use of our technologies. Damage from any such failures
could have a material adverse effect on our business, operations and financial
condition. In other countries, our proprietary rights may not be protected to
the same extent as in the United States.

GOVERNMENT REGULATION

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

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

ENVIRONMENTAL LAWS AND REGULATIONS

We are subject to federal, state, and local and foreign laws and regulations
governing the protection of the environment and human health, including those
regulating discharges to the air and water, the management of wastes, and the
control of noise and odors. While we always strive to operate in compliance with
these requirements, we cannot assure you that we are at all times in complete
compliance with all such requirements. We are subject to potentially significant
fines or penalties if we fail to comply with environmental requirements and we
do not currently carry insurance for such noncompliance events. Although we have
made and will continue to make capital expenditures in order to comply with
environmental requirements, we do not expect material capital expenditures for
environmental controls in 2006. However, environmental requirements are complex,
change frequently, and could become more stringent in the future. Accordingly,
we cannot assure you that these requirements will not change in a manner that
will require material capital or operating expenditures or will otherwise have a
material adverse effect on us in the future.

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

disposed of properly. Simula's principal environmental focus is the handling and
disposal of paints, solvents, and related materials in connection with product
finishes, welding, and composite fabrication.

AVAILABLE INFORMATION

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

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

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

DISCONTINUED OPERATIONS

On June 30, 2004, our litigation support services subsidiary, New Technology
Armor, Inc. ("NTI"), was the last remaining business in discontinued operations.
On July 2, 2004, we sold the security consulting division of NTI. The remaining
division in NTI, consisting primarily of training services, is included as part
of the Products Group segment.

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to Aerwav
Integration Services, Inc. ("AIS"), a wholly owned subsidiary of Aerwav
Holdings, LLC.

ITEM 1 A. RISK FACTORS

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

In April, 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging that
ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured
and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to
meet the warranties provided with the vests. On November 5, 2004, the
Jacksonville, Florida (Duval County) Circuit Court gave final approval to a
settlement reached with the SSPBA which provided that (i) purchasers of certain
Zylon(R)-containing vest models could exchange their vests for other vests
manufactured by the Company and (ii) the Company would continue its internal
used-vest testing program (VestCheck(TM)). The other class action suit filed by
NAPO, in Ft. Myers, Florida (Lee County), was voluntarily dismissed with
prejudice on November 16, 2004.

On August 24, 2005, the United States Department of Justice, NIJ, released its
Third NIJ Report. The Third NIJ Report contained, among other items, information
and testing data on Zylon(R) and Zylon(R)-containing vests, and substantially
modified compliance standards for all ballistic-resistant vests with the
implementation of the NIJ 2005 Interim Requirements for Ballistic-Resistant Body
Armor. As a result of the actions of the NIJ, the Company halted all sales or
shipment of any Zylon(R)-containing vest models effective August 25, 2005, and
immediately established a Supplemental Relief (renamed the ZVE) Program that
provides either a cash or voucher option to those who purchased any
Zylon(R)-containing vests from us through August 29, 2005. The ZVE Program, with
the consent of the SSPBA, was given final approval by the Jacksonville, Florida
Court on October 27, 2005.

We are also voluntarily cooperating with a request for documents and data
received from the Department of Justice, which is reviewing the entire body
armor industry's use of Zylon(R), and a subpoena served by the General Services
Administration for information relating to Zylon(R).

Any adverse resolution of these matters could have a material adverse effect on
our business, financial condition, results of operations and liquidity.

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

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

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

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

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

One component of our strategy is to expand our operations into selected
international markets. Military procurement, for example, has traditionally had
a large international base. We actively market our products in Europe, North and
South America, the Middle East, Africa, and Asia. We, however, may be unable to
execute our business model in these markets or new markets. Further, foreign
providers of competing products and services may have a substantial advantage
over us in attracting consumers and businesses in their country due to earlier
established businesses in that country, greater knowledge with respect to the
cultural differences of consumers and businesses residing in that country and/or
their focus on a single market. We expect to continue to experience higher costs
as a percentage of revenues in connection with the development and maintenance
of international products and services. In pursuing our international expansion
strategy, we face several additional risks, including:

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

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

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

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

o longer payment cycles and foreign currency fluctuations;

o economic downturns; and

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

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

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

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

Since the invasion of Iraq by the U.S. and other forces in March 2003, we have
received steadily increasing orders from the U.S. military for the up-armoring
of HMMWVs and the armoring of other tactical trucks as well as orders for
personnel equipment, including SAPI and other engineered ceramic body armor,
helmets, and other protective and duty equipment. Orders for the up-armoring of
HMMWVs and the armoring of other tactical trucks as well as orders for personnel
equipment are the result, in significant part, from the particular combat
situations encountered by the U.S. military in Iraq, including the use of IEDs
by enemy combatants. We cannot be certain, therefore, to what degree the U.S.
military would continue placing armoring orders for its HMMWVs and other
tactical trucks as well as orders for personnel equipment, if the U.S. military
were to reduce its force levels or withdraw completely from Iraq. A significant
reduction in orders from the U.S. military for the armoring of HMMWVs and other
tactical trucks as well as orders for personnel equipment, following a reduction
of U.S. force levels in Iraq could have a material adverse effect on our
business, financial condition, results of operations and liquidity.

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

There continues to be new orders under our current M1114 Up-Armored HMMWV
contract and additional orders for the next-generation versions known as the
M1151 and M1152 Up-Armored HMMWVs. While backlog extends into 2006 for both the
M1114 and M1151/2 Up-Armored HMMWV versions, there are plans for procurement of
a replacement military light transport vehicle which is currently in the early
development stage. While current acquisition strategies plan for possible
production of new light and medium support vehicles beginning as early as 2008,
there is no assurance as to when a replacement for the HMMWV may be selected,
and, furthermore, it is reasonable to believe that the HMMWV may continue for
some time to be one of the primary transport vehicles in the U.S. military. In
the event the HMMWV is replaced, based on U.S. military procurement plans, it is
anticipated that vehicle armoring for a replacement vehicle would be provided to
the vehicle's OEM for inclusion in the manufacturing process. We anticipate that
procurements for the potential HMMWV replacement models would be competitive and
could be awarded to multiple armor suppliers based on full and open competition.
Although we anticipate continuation of developmental efforts and enhancement of
manufacturing capabilities, at this time, there is no certainty of obtaining
armoring contracts for any HMMWV replacement vehicles selected by the U.S.
military, and, if successful in competitive programs, we cannot determine the
specific levels of effort likely under such military contracts.

Additionally, with regard to the introduction of potential HMMWV replacement
vehicles, the U.S. military recently announced the U.S. Government's preference
to own the technical data rights for new major end items of equipment and
sub-systems, including the vehicle armoring packages. The U.S. Government's
intent to mitigate risk of limitations on producibility and to ensure
commonality of armor components produced by multiple sources may negatively
influence future manufacturing content and product pricing, which could have a
material adverse effect on our business, financial condition, results of
operations and liquidity.

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

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

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

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

o protest or challenge by unsuccessful bidders; and

o unilateral termination, reduction or modification by the government.

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

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

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

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

The raw materials that we use in manufacturing ballistic resistant garments,
SAPI plates and armored vehicles include: ceramic; steel; SpectraShield, a
patented product of Honeywell, Inc.; Kevlar(R), a patented product of E.I. du
Pont de Nemours Co., Inc. ("du Pont"); and Twaron, a patented product of Teijin.
We purchase these materials in the form of woven cloth from five independent
weaving companies. In the event du Pont or its licensee in Europe cease, for any
reason, to produce or sell Kevlar(R) to us, we would utilize these other
ballistic resistant materials as a substitute. However, neither SpectraShield
nor Twaron, is expected to become a complete substitute for Kevlar(R) in the
near future. We enjoy a good relationship with our suppliers of Kevlar(R),
SpectraShield and Twaron. Should these materials become unavailable for any
reason, we would be unable to replace them with materials of like weight and
strength. We use a variety of ceramic materials in the production of SAPI plates
and a variety of steels in armoring vehicles. Although we have a number of
suppliers that we deal with in obtaining both ceramic and steel supplies, the
industry generally, including our operations, is experiencing a limited supply
of certain of these materials, which is affecting the quantity of product that
we can complete in any given period. In addition, SpectraShield, the ballistic
fiber backing used in a variety of our ballistic applications, including SAPI
plates, is currently being rationed by the U.S. Department of Commerce, which
could limit the quantity of SAPI plates that we produce in any given period.
Thus, if our supply of any of these materials were materially reduced or cut off
or if there was a material increase in the prices of these materials, our
manufacturing operations could be adversely affected and our costs increased,
and our business, financial condition, results of operations and liquidity could
be materially adversely affected.

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

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

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

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

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

WE ARE DEPENDENT ON INDUSTRY RELATIONSHIPS.

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

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

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

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

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

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

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

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.

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

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

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

THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE.

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

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

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

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

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

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

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

WE HAVE $497 MILLION OF TOTAL DEBT (SHORT-TERM, CURRENT PORTION AND LONG-TERM)
AS OF DECEMBER 31, 2005

Our $497 million of total debt as of December 31, 2005, could have important
consequences to you and to us. For example:

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

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

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

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

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

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

ITEM 1 B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

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

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

AEROSPACE & DEFENSE GROUP
Phoenix, AZ $1,165,000 Leased 188,140 sq. ft. Human safety and survival
systems
Phoenix, AZ $ 380,000 Leased 25,312 sq. ft. Human safety and survival
systems
Phoenix, AZ $ 245,000 Leased 25,000 sq. ft. Human safety and survival
systems
Phoenix, AZ $ 107,000 Leased 11,182 sq. ft. Human safety and survival
systems
Phoenix, AZ $ 7,200 Leased 1,815 sq. ft. Human safety and survival
systems
Fairfield, OH N/A Owned 122,000 sq. ft. Armored vehicles and ballistic
11 Acres glass
Fairfield, OH N/A Owned 54,000 sq. ft. Armored kits
4 Acres
Fairfield, OH $ 384,800 Leased 175,000 sq. ft. Armored vehicles
Fairfield, OH $ 163,300 Leased 40,000 sq. ft. Armored vehicles and kits
Fairfield, OH $ 99,500 Leased 29,550 sq. ft. Armored Vehicles
Pittsfield, MA N/A Owned 19,700 sq. ft. Hard armor and vehicle armor
Dunmore, PA N/A Owned 62,740 sq. ft. Military helmets
Dunmore, PA $ 341,000 Leased 101,750 sq. ft. Military helmets and military back
pack systems
Jefferson City, TN N/A Owned 30,000 sq. ft. Military body armor
Jefferson City, TN N/A Owned 28,000 sq. ft. Military body armor
Jefferson City, TN N/A Owned 37,758 sq. ft. Military body armor
McKee, KY N/A Owned 20,020 sq. ft. Military back pack systems
McKee, KY N/A Owned 32,176 sq. ft. Military back pack systems

PRODUCTS GROUP
Jacksonville, FL N/A Owned 14 Acres Body armor, forensic products,
120,000 sq. ft. weapon cleaning lubricants, LED light bars
Casper, WY N/A Owned 66 Acres Tear gas, pepper spray, less-
72,525 sq. ft. lethal munitions
Pittsfield, MA $ 107,800 Leased 25,846 sq. ft. Hard armor, vehicle armor
Ontario, CA N/A Owned 117,500 sq. ft. Body armor, duty gear, automotive
accessories
El Segundo, CA $ 69,000 Leased 6,500 sq. ft. Fingerprint equipment
Oxnard, CA $ 147,000 Leased 25,000 sq. ft. Specialty gloves
Fort Worth, TX $ 422,500 Leased 35,100 sq. ft. Scope mounts and rings, foldable ladders
Fitzwilliam, NH $ 37,500 Leased 22,848 sq. ft. Police batons
Easthampton, MA $ 60,000 Leased 15,000 sq. ft. Gun cleaning kits
Chantilly, VA $ 322,400 Leased 79,423 sq. ft. DOD training
Tijuana, Mexico $ 256,300 Leased 57,722 sq. ft. Duty gear, body armor,
automotive accessories
Temecula, CA $ 295,000 Leased 55,000 sq. ft. Duty gear, back packs
Temecula, CA $ 114,800 Leased 12,500 sq. ft. Duty gear, back packs
Temecula, CA $ 181,900 Leased 36,000 sq. ft. Duty gear, back packs
Calexico, CA $ 172,600 Leased 40,000 sq. ft. Duty gear, back packs
Geneva, AL $ 171,100 Leased 62,000 sq. ft. Body armor
Central Lake, MI N/A Owned 84,000 sq. ft. Body armor
Westhoughton, England N/A Owned 45,000 sq. ft. Body armor and uniforms
Horwich, England N/A Owned 37,000 sq. ft. Body armor and uniforms

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

MOBILE SECURITY DIVISION
Fairfield, OH $ 217,300 Leased 75,000 sq. ft. Armored vehicles
Bremen, Germany (1) N/A Leased 11 Acres Armored vehicles
Owned 161,500 sq. ft.
Lamballe, France (2) $ 456,600 Leased 131,516 sq. ft. Armored vehicles
Sao Paulo, Brazil $ 288,400 Leased 56,000 sq. ft. Armored vehicles & ballistic glass
Bogota, Colombia $ 117,800 Leased 35,000 sq. ft. Armored vehicles & ballistic glass
Bogota, Colombia $ 32,400 Leased 6,823 sq. ft. Armored vehicles
Bogota, Colombia $ 34,100 Leased 7,801 sq. ft. Armored vehicles
Mexico City, Mexico N/A Owned 5,380 sq. ft. Armored vehicles
Caracas, Venezuela $ 128,000 Leased 15,360 sq. ft. Armored vehicles

CORPORATE
Jacksonville, FL N/A Owned 7,000 sq. ft. Corporate headquarters
Jacksonville, FL $ 134,900 Leased 9,000 sq. ft. Information technology center
Arlington, VA $ 87,600 Leased 770 sq. ft. Government affairs office

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

Kroll, Inc. Matters

O'Gara-Hess & Eisenhardt Armoring do Brasil Ltda. ("OHE Brazil") was assessed
41.1 Million Reals (US $17.6 million based on the exchange rate as of December
31, 2005) plus interest and penalties by the Brazilian tax authorities. OHE
Brazil has appealed the tax assessments and the cases are pending. To the extent
that there may be any liability resulting from such assessments, we believe that
we are entitled to indemnification from Kroll, Inc. for up to $7.8 million under
the terms of our purchase agreement dated April 20, 2001, because the events in
question with respect to up to $7.8 million of such assessments occurred prior
to our purchase of the O'Gara Companies from Kroll, Inc.

In 1999 and prior to our acquisition of OHEAC in 2001, several of the former
employees of Kroll O'Gara Company de Mexico, S.A. de C.V. ("O'Gara Mexico"), a
subsidiary of OHEAC, commenced labor claims against O'Gara Mexico seeking
damages for unjustified termination. In late 2004, the principal labor claim was
settled by us for approximately $2.2 million and two of the remaining claims
were settled for approximately $52,000. Kroll, Inc. indemnified us, subject to a
$500,000 deductible, with respect to these settlement payments.

In December 2001, O'Gara-Hess & Eisenhardt France S.A., which was acquired from
Kroll, Inc. ("OHE France") in August 2001, sold its industrial bodywork business
operated under the name Labbe/Division de O'Gara Hess & Eisenhardt France/
Carrosserie Industriells ("Carrosserie") to SNC Labbe. Subsequent to the sale,
the Labbe Family Trust ("LFT"), owner of the leasehold interest upon which the
Carrosserie business is operated, sued OHE France and SNC Labbe claiming that
the transfer of the leasehold was not valid because LFT had not given its
consent to the transfer as required under the terms of the lease. LFT sought to
have OHE France, as the sole tenant, maintain and repair the leased building
with an estimated cost of between US $3.7 and US $7.3 million, based on the
exchange rate as of December 31, 2005. The case is currently pending, and while
we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter. Although we do not have any insurance coverage for this
matter, at this time, we do not believe this matter will have a material impact
on our financial position, operations or liquidity.

Zylon(R)

In April, 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging that
ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured
and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to
meet the warranties provided with the vests. On November 5, 2004, the
Jacksonville, Florida (Duval County) Circuit Court gave final approval to a
settlement reached with the SSPBA which provided that (i) purchasers of certain
Zylon(R)-containing vest models could exchange their vests for other vests
manufactured by the Company and, (ii) the Company would continue its internal
used-vest testing program (VestCheck(TM)). The other class action suit filed by
NAPO, in Ft. Myers, Florida (Lee County), was voluntarily dismissed with
prejudice on November 16, 2004.

On August 24, 2005, the United States Department of Justice, NIJ, released its
Third NIJ Report. The Third NIJ Report contained, among other items, information
and testing data on Zylon(R) and Zylon(R)-containing vests, and substantially
modified compliance standards for all ballistic-resistant vests with the
implementation of the NIJ 2005 Interim Requirements for Ballistic-Resistant Body
Armor. As a result of the actions of the NIJ, the Company halted all sales or
shipment of any Zylon(R)-containing vest models effective August 25, 2005, and
immediately established a Supplemental Relief (renamed the ZVE) Program that
provides either a cash or voucher option to those who purchased
Zylon(R)-containing vests from us through August 29, 2005. The ZVE Program, with
the consent of the SSPBA, was given final approval by the Jacksonville, Florida
Court on October 27, 2005.

Other Matters

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

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

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

PART II

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

Our common stock, par value $.01 per share (the "Common Stock") is traded under
the symbol "AH" on the New York Stock Exchange (the "NYSE"). The following table
sets forth the range of high and low sales prices for our Common Stock on the
NYSE for the years ended December 31, 2005 and 2004 and for the first quarter of
2006 (through March 10, 2006).

HIGH LOW
------ ------
2006
1st Quarter - through March 10, 2006...... $61.69 $41.06

2005
4th Quarter............................... $45.59 $40.93
3rd Quarter............................... $43.86 $38.88
2nd Quarter............................... $39.93 $33.03
1st Quarter............................... $47.85 $36.05

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

HOLDERS

As of March 10, 2006, we had approximately 311 stockholders of record. Only
record holders of shares held in "nominee" or street names are included in this
number.

DIVIDENDS

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

RECENT SALES OF UNREGISTERED SECURITIES

None.

RECENT PURCHASES OF OUR REGISTERED EQUITY SECURITIES

We did not purchase any shares of our common stock during the Company's fourth
quarter of 2005.

ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL OVERVIEW

FIVE-YEAR SUMMARY

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

2005 2004 2003 2002 2001
---------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Total revenues (1) $1,636,930 $979,683 $365,172 $305,117 $197,100
Operating income $ 215,634 $145,715 $ 35,729 $ 38,365 $ 26,673
Income from continuing
operations $ 132,510 $ 80,577 $ 17,006 $ 21,337 $ 14,684
Net income (loss) (2) $ 132,510 $ 80,539 $ 10,886 $(17,689) $ 10,128
Basic income from continuing
operations per common share $ 3.83 $ 2.56 $ 0.61 $ 0.70 $ 0.61
Diluted income from continuing
operations per common share $ 3.70 $ 2.44 $ 0.59 $ 0.69 $ 0.59
Basic earnings (loss) per share $ 3.83 $ 2.56 $ 0.39 $ (0.58) $ 0.42
Diluted earnings (loss) per share $ 3.70 $ 2.44 $ 0.38 $ (0.57) $ 0.41

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

Note 2 - 2005 net income includes a pre-tax charge of $19.9 million for
the cost of the ZVE Program. 2004 net income includes a pre-tax charge of $5.0
million for the cost of the warranty revision. 2003 and 2002 net income (loss)
includes a pre-tax charge for impairment of long-lived assets of discontinued
operations of $21.5 million and $30.3 million, respectively. 2001 net income
includes a pre-tax restructuring charge of $10.3 million in discontinued
operations.

Cash and cash equivalents $ 471,841 $ 421,209 $111,926 $ 16,551 $ 53,719
Total assets $1,462,862 $1,292,351 $585,626 $367,753 $388,057
Working capital $ 387,211 $ 289,578 $168,644 $100,591 $142,723
Total debt $ 496,614 $ 501,128 $191,030 $ 8,188 $ 8,085
Long-term obligations $ 206,922 $ 196,929 $168,508 $ 5,240 $ 4,640
Stockholders' equity $ 710,582 $ 565,196 $295,365 $288,077 $326,019

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

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

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

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

COMPANY OVERVIEW

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

CONTINUING OPERATIONS

Aerospace & Defense Group. The Aerospace & Defense Group supplies human safety
and survival systems to the U.S. military and major aerospace and defense prime
contractors. Our core markets are land, marine and aviation safety and military
personnel protection. The most significant business within the Aerospace &
Defense Group is armoring a variety of light, medium and heavy wheeled vehicles
for the military. We also provide spare parts and logistical and field support
services for Up-Armored HMMWVs previously shipped by us as well as blast and
ballistic protection kits for the standard HMMWV which are installed in the
field. Additionally, we develop ballistic and blast protected armored and sealed
truck cabs for other military tactical wheeled vehicles. For example, we design,
develop and manufacture armor systems for a variety of military vehicles,
including such platforms as the HEMTT, PLS, HET, M915, ASV and FMTV.

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

Mobile Security Division. Our Mobile Security Division, operating under the
brand name CENTIGON(TM), manufactures, services, and integrates certified
armoring systems into commercial vehicles, to protect against varying degrees of
ballistic and blast threats on a global basis. We armor a variety of platforms
that are available commercially, including custom limousines, sedans, sport
utility vehicles, commercial trucks and cash-in-transit vehicles. Our customers
in this business include U.S. federal law enforcement and intelligence agencies,
foreign heads of state, multinational corporations, as well as high net worth
individuals and cash-in-transit operators.

DISCONTINUED OPERATIONS

On June 30, 2004, our litigation support services subsidiary, NTI, was the last
remaining business in discontinued operations. On July 2, 2004, we sold the
security consulting division of NTI. The remaining division in NTI, consisting
primarily of training services, is included as part of the Products Group
segment.

On November 26, 2003, we announced that we completed the sale of ArmorGroup, our
security service division, for $33.7 million in consideration to a group of
private investors led by Granville Baird Capital Partners of London, England and
Management. We received $31.4 million in cash at closing and a note receivable
of $2.3 million, which we collected in full in fiscal 2004.

On April 17, 2003, we announced that we had completed the sale of our ArmorGroup
Integrated Systems business through the sale of 100% of the stock of ArmorGroup
Integrated Systems, Inc. and Low Voltage Systems Technologies, Inc. to AIS, a
wholly owned subsidiary of Aerwav Holdings, LLC.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in Item 8 of this Form 10-K. We believe our most
critical accounting policies include the following:

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

We record Aerospace & Defense Group revenue related to government contracts
which results principally from fixed price contracts and is recognized when
persuasive evidence of an arrangement exists, the fee is reasonably
determinable, the customer has accepted the product and collectibility is
probable. All of these conditions are met, in substantially all cases, when the
Department of Defense inspector signs the Material Inspection and Receiving
Report indicating acceptance and title transfer.

We record revenue of the remaining Aerospace & Defense Group, Products Group and
Mobile Security Division when the product is shipped, except for larger
commercial contracts typically longer than four months in length. Revenue from
large commercial contracts is recognized on the percentage of completion,
units-of-work performed method. Should large commercial contracts be in a loss
position, the entire estimated loss would be recognized for the balance of the
contract at such time. Current contracts are profitable.

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

Allowance for Doubtful Accounts. We encounter risks associated with sales and
the collection of the associated accounts receivable. As such, we review our
accounts receivable aging on a monthly basis and determine a provision for
accounts receivable that is considered to be uncollectible.

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

Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" ("SFAS 133") as amended. All derivative instruments are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair-value hedge
transactions in which we hedge changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. Put options on Company stock are marked to market through the income
statement at the end of each period.

Goodwill. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in a purchase business combination. Goodwill
and other intangible assets are stated on the basis of cost. The $220.9 million
in goodwill resulting from acquisitions made by us subsequent to June 30, 2001
was immediately subjected to the non-amortization provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). (See also Impairment below). The purchase method of accounting for
business combinations requires us to make use of estimates and judgments to
allocate the purchase price paid for acquisitions to the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
Goodwill is tested for impairment annually, or when a possible impairment is
indicated, using the fair value based test prescribed by SFAS 142. We performed
our annual assessment of goodwill and determined that no impairment existed as
of June 30, 2005.

Patents, licenses and trademarks. Patents, licenses and trademarks were
primarily acquired through acquisitions accounted for by the purchase method of
accounting. Such assets are amortized on a straight-line basis over their useful
lives. Certain of these assets with indefinite lives are not amortized.

Estimates. The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Significant
estimates inherent in the preparation of the accompanying consolidated financial
statements include the carrying value of long-lived assets, valuation allowances
for receivables, inventories and deferred income tax assets, liabilities for
potential litigation claims and settlements, potential liabilities related to
tax filings in the ordinary course of business, the Vest Exchange Program /
Warranty Revision accrual, the defined benefit plan liabilities and contract
contingencies and obligations. Actual results could differ from those estimates.

Income taxes. We account for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
the asset and liability method specified thereunder, deferred taxes are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities. Deferred tax liabilities are offset by deferred tax
assets relating to net operating loss carryforwards, tax credit carryforwards
and deductible temporary differences. Recognition of deferred tax assets is
based on management's belief that it is more likely than not that the tax
benefit associated with temporary differences and operating and capital loss
carryforwards will be utilized. A valuation allowance is recorded for those
deferred tax assets for which it is more likely than not that the realization
will not occur.

Impairment. Long-lived assets, including certain identifiable intangibles and
goodwill are reviewed annually for impairment or whenever events or changes in
circumstances indicate that the carrying amount of the asset in question may not
be recoverable including, but not limited to, a deterioration of profits for a
business segment that has long-lived assets, and when other changes occur which
might impair recovery of long-lived assets. The method used to determine the
existence of an impairment would be discounted operating cash flows estimated
over the remaining useful lives of the related long-lived asset or asset groups.
Impairment is measured as the difference between fair value and the unamortized
cost at the date an impairment is determined.

Comprehensive income. Financial statements of foreign subsidiaries are measured
using the local currency as the functional currency. Assets and liabilities
denominated in a foreign currency are translated into U.S. dollars at the
current rate of exchange existing at period-end and revenues and expenses are
translated at the average monthly exchange rates. The current year change in the
accumulated amount, net of tax, is included as a component of comprehensive
income.

In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
we classify our investment in certain equity-based securities as
available-for-sale, with unrealized gains and losses excluded from earnings and
recorded as a component of comprehensive income or loss. This investment is
classified in other assets on the Consolidated Balance Sheets. Declines in fair
value below the amortized cost basis of this investment that are determined to
be other than temporary are charged to earnings. There were no such other than
temporary declines in the year ended December 31, 2005.

Stock options and grants. Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement
of Financial Accounting Standard Number 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("SFAS 148") establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for employee stock compensation plans under APB 25 with pro
forma disclosures of net earnings and earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied. Restricted
stock awards are generally recorded as compensation expense using fixed
accounting over the vesting periods based on the market value on the date of
grant except in situations where provisions of the agreements allow for
acceleration of vesting upon a certain event. If the event occurs, this may
result in an acceleration of vesting and recognition of associated expense.

If compensation cost for stock option grants had been determined based on the
fair value on the grant dates for the years ended December 31, 2005, 2004 and
2003, consistent with the method prescribed by SFAS 123, our net earnings and
earnings per share would have been adjusted to the pro-forma amounts indicated
below:

2005 2004 2003
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income as reported $132,510 $80,539 $10,886
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (37,305) (6,717) (4,157)
Add: Employee compensation expense for
modification of stock option awards included
in report net income, net of income taxes 118 57 506
-------- ------- -------
Pro-forma net income $ 95,323 $73,879 $ 7,235
======== ======= =======
Earnings per share:
Basic - as reported $ 3.83 $ 2.56 $ 0.39
======== ======= =======
Basic - pro forma $ 2.75 $ 2.35 $ 0.26
======== ======= =======
Diluted - as reported $ 3.70 $ 2.44 $ 0.38
======== ======= =======
Diluted - pro forma $ 2.66 $ 2.24 $ 0.25
======== ======= =======

$15.3 million of the stock-based employee compensation expense determined under
the fair vale method for fiscal 2005 is related to accelerated vesting of
certain existing stock options and $22.0 million is related to certain stock
options issued in fiscal 2005.

On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123, "Share Based Payment (revised 2004)" ("FAS 123R"). FAS
123R revises SFAS 123 and requires companies to expense the fair value of
employee stock options and other forms of stock-based compensation. In addition
to revising SFAS 123, FAS 123R supersedes APB 25, and amends FASB Statement No.
95, "Statement of Cash Flows" ("SFAS 95"). On April 14, 2005, the Securities and
Exchange Commission extended the compliance date of FAS 123R from the first
interim to the first annual reporting period of a company's fiscal year
beginning on or after June 15, 2005. We will be required to apply the expense
recognition provisions of FAS 123R beginning in the first quarter of 2006. We
expect to incur approximately $1.6 million of expense in the year ended December
31, 2006 as a result of the adoption of FAS 123R.

RESULTS OF OPERATIONS

Effective June 30, 2002, we decided to sell the ArmorGroup Services Division
(the sale was completed on November 26, 2003) through an organized and formal
auction managed by outside advisors. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), the operating results of our Services Division
have been reported as discontinued operations in the Consolidated Statements of
Operations for all periods prior to the sale of this division.

The following table sets forth selected Consolidated Statements of Operations
data as a percentage of total revenues for the periods indicated:

FISCAL YEAR
----------------------
2005 2004 2003
----- ----- -----
Revenues:
Aerospace & Defense 72.6% 61.8% 25.1%
Products 18.9% 25.5% 53.1%
Mobile Security 8.5% 12.7% 21.8%
Total revenues 100.0% 100.0% 100.0%
Cost of revenues 76.3% 72.9% 69.4%
Cost of vest exchange program / warranty revision 1.2% 0.5% 0.0%
Selling, general and administrative expenses 8.5% 10.2% 17.2%
Amortization 0.5% 0.4% 0.1%
Integration 0.2% 0.3% 0.6%
Other charges 0.1% 0.8% 2.9%
Operating income 13.2% 14.9% 9.8%
Interest expense, net 0.4% 0.7% 1.1%
Other (income) expense, net (0.2)% 0.2% 0.1%
Income from continuing operations before
provision for income taxes 13.0% 14.0% 8.5%
Provision for income taxes 4.9% 5.8% 3.9%
Income from continuing operations 8.1% 8.2% 4.7%
Loss from discontinued operations, net of
income tax benefit -- 0.0% (1.7)%
Net income 8.1% 8.2% 3.0%

FISCAL 2005 AS COMPARED TO FISCAL 2004

Net income. Net income increased $52.0 million, or 65%, to $132.5 million for
fiscal 2005, compared to $80.5 million for fiscal 2004.

CONTINUING OPERATIONS

Total revenues. Total revenues increased $657.2 million, or 67%, to $1,636.9
million in fiscal 2005, compared to $979.7 million in fiscal 2004. For fiscal
2005, total revenue increased $526.5 million, or 54%, internally, including
year-over-year changes in acquired businesses, and $130.7 million, or 13%, due
to acquisitions. Internal revenue growth represents year-over-year increases in
revenue from businesses that were either owned or acquired by us during the
periods presented. Our calculation of internal revenue growth takes into
consideration pro-forma revenue for relevant periods of acquired entities in
determining year-over-year revenue growth.

Aerospace & Defense Group revenues. Aerospace & Defense Group revenues increased
$583.2 million, or 96%, to $1,188.6 million in fiscal 2005, compared to $605.4
million in fiscal 2004. For fiscal 2005, Aerospace & Defense Group revenue
increased $514.2 million, or 85%, internally, including year-over-year changes
in acquired businesses and $69.0 million, or 11%, from the acquisition of
Specialty Defense in November 2004 and the OTV business of Second Chance
acquired in July 2005. Our calculation of acquired growth is the amount of
current year revenue equal to the prior year revenue before our acquisition of
the acquired company. Internal growth was primarily due to the following
factors:

(1) We experienced strong demand for the Up-Armored High Mobility
Multi-purpose Wheeled Vehicle (Up-Armored HMMWV, commonly known as the
Humvee), including spare part revenues, as we shipped 6,684 M1114
Up-Armored HMMWVs in fiscal 2005, compared to 3,945 in fiscal 2004, a 69%
increase. There continues to be new orders under our current M1114
Up-Armored HMMWV contract and additional orders for the next-generation
versions known as the M1151 and M1152 Up-Armored HMMWVs. While backlog
extends into 2006 for both the M1114 and M1151/52 Up-Armored HMMWV
versions, we believe the U.S. Military's plans include procurement of a
replacement military light transport vehicle with current status being in
the early development stage. While the U.S. Military's current acquisition
strategies plan for possible production of new light and medium support
vehicles beginning as early as 2008, there is no assurance as to when a
replacement for the HMMWV may be selected, and furthermore, it is
reasonable to believe that the HMMWV will continue for some time to be one
of the primary transport vehicles in the U.S. military. In the event the
HMMWV is replaced, based on U.S. military procurement plans, it is
anticipated that vehicle armoring for a replacement vehicle would be
provided to the vehicle OEM for inclusion in the manufacturing process as
components to be integrated with the vehicle while additional armor
components would be provided for attachment to the vehicle at a later time
when warranted by threat conditions. We anticipate that procurements for
the potential HMMWV replacement models would be competitive and could be
awarded to multiple armor suppliers based on full and open competition.
Although we anticipate continuation of developmental efforts and
enhancement of manufacturing capabilities, at this time, there is no
certainty of obtaining armoring contracts for any HMMWV replacement
vehicles selected by the U.S. military, and if successful in competitive
programs, we cannot determine the specific levels of effort likely under
such military contracts.

An additional consideration and risk factor regarding the introduction of
new vehicle versions for tactical wheeled vehicles is the U.S. military's
recent pronouncements that it is the Government's preference to own
technical data rights for new major end items of equipment and sub-systems,
including the vehicle armoring packages. The Government's intent to
mitigate risk of limitations on producibility and to ensure commonality of
armor components produced by multiple sources may negatively influence
future manufacturing content and product pricing.

See risk factor "A Replacement of the HMMWV in the U.S. Military May Affect
Our Results of Operations" under Item 1 A in Part I of this Annual Report.

(2) During fiscal 2005, revenue from add-on armor components for fielded
vehicles including add-on armor kits for the light, medium and heavy truck
fleet operating in Iraq increased 12%, compared to fiscal 2004. Although we
may receive additional add-on armor kit business in the future, the
majority of armoring of fielded trucks has been completed. We also believe
that the U.S. Military's tactical wheeled vehicle procurement strategy
includes replacement or additional production of current type medium or
heavy trucks and these vehicles are also planned to receive armor
subsystems in the future.

(3) SAPI plate volume decreased by 25% in fiscal 2005, compared to fiscal
2004. The reduction in volume was a result of a change in requirements by
the U.S. military and the resultant need to modify product design and to
make adjustments in the supply base. Production and deliveries slowed
predominantly as a result of the inability of our industrial base to meet
delivery requirements at the new enhanced specifications. We are expanding
our current industrial base through the investment in production capacity
and have qualified new sources of supply.

Continued growth in the SAPI plate business is dependent upon the continued
level of hostilities in Iraq and Afghanistan as well as the U.S.
Government's requirements for improved technology and performance of the
SAPI plate. Future revenues may be constrained by our ability to procure
certain raw materials necessary for the manufacture of the SAPI plate. See
the risk factor "There are Limited Sources for Some of Our Raw Materials,
Which May Significantly Curtail our Manufacturing Operations" under Item 1
A in Part I of this Annual Report.

(4) OTV units increased by 65% in fiscal 2005, over fiscal 2004. We
experienced 210% unit growth in helmets. Also, our MOLLE revenue increased
19%.

Products Group revenues. Products Group revenues increased $59.1 million, or
24%, to $308.9 million in fiscal 2005, compared to $249.8 million in fiscal
2004. For fiscal 2005, Products Group revenue decreased $2.6 million, or 1%,
internally including period-over-period changes in acquired businesses, and
increased $61.7 million, or 25%, from the acquisitions of Bianchi International,
which was completed during the fourth quarter 2004, Kleen Bore, Inc., which was
completed during the third quarter of 2004, and the law enforcement business of
Second Chance, acquired in July 2005. Internal growth was negative due to the
decline in sales of ballistic reinforced enclosures for the nuclear power
industry, large one-time, non-recurring sales of ballistic plates in 2004, and a
decline in our less lethal business attributable to non-recurring, large
government orders. Excluding the acquisition of Second Chance, which was
purchased out of bankruptcy and had experienced legal and financial troubles,
Products Group internal revenue growth was 2%. Also, the growth of body armor
slowed domestically due to: (1) industry concerns regarding Zylon(R) and the
NIJ's decertification of all Zylon(R) containing body armor, and (2) the impact
of shortages in the supply of ballistic material. We expect our American Body
Armor and Safariland body armor revenues to rebound from the recent Zylon(R)
decertification by the end of the second quarter of 2006. We expect to stabilize
the Second Chance revenues and be in position for growth in fiscal year 2006.

Mobile Security revenues. Mobile Security Division revenues increased $14.9
million, or 12%, to $139.5 million in fiscal 2005, compared to $124.5 million in
fiscal 2004, primarily due to the increasing threat of terrorism. Commercial
vehicle shipments increased 17%, to 1,644 vehicles in fiscal 2005 compared to
1,402 vehicles in fiscal 2004. All of Mobile Security Division's revenue growth
was internal.

Cost of revenues. Cost of revenues increased $534.4 million, or 75%, to $1,248.6
million for fiscal 2005, compared to $714.2 million for fiscal 2004. As a
percentage of total revenues, cost of revenues increased to 76.3% of total
revenues for fiscal 2005, from 72.9% for fiscal 2004.

Gross margins in the Aerospace & Defense Group were 20.9% for fiscal 2005,
compared to 25.7% for fiscal 2004, primarily due to: (1) lower selling prices on
M1114 Up-Armored HMMWVs effective in mid-2004; (2) an increased mix of lower
margin armor kits; and (3) a temporary decline in gross margins on SAPI plates
due to incremental costs incurred in the design, manufacture and delivery of
updated plates.

Gross margins in the Products Group were 35.2% for fiscal 2005, compared to
33.6% for fiscal 2004. The improvement in gross margins is primarily related to
product mix, a shift in production to lower cost manufacturing facilities, and
additional inventory provisions in 2004.

Gross margins in the Mobile Security Division were 22.7% in fiscal 2005,
compared to 20.9% for fiscal 2004. The improvement is a result of an improved
product mix and manufacturing efficiencies.

Cost of vest exchange program/warranty revision. As a result of our voluntary
Zylon(R) Vest Exchange Program relating to our Zylon(R)-vests, we recorded a
pre-tax charge of $19.9 million in fiscal 2005. This charge includes estimated
exchange program costs and inventory write-offs. Through December 31, 2005, we
have incurred $2.5 million and have a remaining liability of $18.5 million,
which includes $1.1 million remaining from the superseded 2004 warranty revision
and product exchange program. This liability has been classified in accrued
expenses and other current liabilities on the Consolidated Balance Sheet at
December 31, 2005. As a result of our fiscal 2004 warranty revision and product
exchange program relating to our Zylon(R)-containing vests, we recorded a net

pre-tax charge of $5.0 million, which includes all the legal costs associated
with the class action lawsuits settled in 2004. The warranty revision and
product exchange program has been superseded by the vest exchange program.

In April, 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging that
ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured
and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to
meet the warranties provided with the vests. On November 5, 2004, the
Jacksonville, Florida (Duval County) Circuit Court gave final approval to a
settlement reached with the SSPBA which provided that (i) purchasers of certain
Zylon(R)-containing vest models could exchange their vests for other vests
manufactured by the Company and, (ii) the Company would continue its internal
used-vest testing program (VestCheck(TM)). The other class action suit, which
was filed by NAPO, in Ft. Myers, Florida (Lee County), was voluntarily dismissed
with prejudice on November 16, 2004.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $39.0 million, or 39%, to $139.3 million (8.5%
of total revenues) for fiscal 2005, compared to $100.3 million (10.2% of total
revenues) for fiscal 2004. The decrease as a percentage of revenues was largely
a function of our ability to achieve scale as revenues have increased, and the
fourth quarter of 2004 acquisition of Specialty Defense, which operates with
lower selling, general and administrative expenses as a percentage of revenues
than the Products Group and the Mobile Security Division.

Aerospace & Defense Group selling, general and administrative expenses increased
$11.9 million, or 52%, to $35.0 million (2.9% of Aerospace & Defense Group
revenues) for fiscal 2005, compared to $23.1 million (3.8% of Aerospace &
Defense Group revenues) for fiscal 2004. The increase in selling, general and
administrative expenses is due primarily to additional expenses associated as a
result of the acquisition of Specialty Defense in November 2004, increased
research and development expense, and an increase in administrative expenses as
a result of increased production of the M1114 Up-Armored HMMWV, M1151/52 kits
and supplemental armor for other military vehicles. The decrease in selling,
general and administrative expenses as a percentage of revenue was due to
leveraging these expenses over a larger revenue base.

Products Group selling, general and administrative expenses increased $14.0
million, or 31%, to $58.9 million (19.1% of Products Group revenues) for fiscal
2005, compared to $44.9 million (18.0% of Products Group revenues) for fiscal
2004. The increase is primarily due to the impact of acquisitions, which
amounted to $11.2 million of the increase, as well as increased marketing and
advertising expenses, and management severance expenses.

Mobile Security Division selling, general and administrative expenses increased
$1.6 million, or 10%, to $16.4 million (11.7% of Mobile Security Division
revenues) for fiscal 2005, compared to $14.8 million (11.9% of Mobile Security
Division revenues) for fiscal 2004. The increase in expense was primarily due to
increased research and development costs, increased selling and marketing costs
for the roll out of the CENTIGON(TM) brand name, and the negative impact of a
weaker U.S. dollar when converting foreign based expenses to U.S. dollars. The
increase in expenses as a percentage of revenues was due to the non-recurring
nature of the roll-out costs of the CENTIGON(TM) brand name and the additional
research and development costs.

Corporate general and administrative expenses increased $11.5 million, or 66%,
to $29.0 million (1.8% of total revenues) for fiscal 2005, compared to $17.5
million (1.8% of total revenues) for fiscal 2004. This increase in
administrative expenses is associated with the overall growth of the Company,
including increased travel expenses, bonus expense, pension expense, accounting
fees, legal fees, hiring costs and insurance expenses.

Amortization. Amortization expense increased $4.4 million, or 103%, to $8.6
million for fiscal 2005, compared to $4.3 million for fiscal 2004, primarily due
to the amortization of certain intangible assets acquired as part of the
acquisitions of Second Chance in July 2005, Bianchi in December 2004 and
Specialty Defense in November 2004.

Integration. Integration expense increased $1.1 million, or 43%, to $3.7 million
for fiscal 2005, compared to $2.6 million for fiscal 2004. Integration expense
in fiscal 2005 primarily included charges for the integration of Second Chance,
which was acquired in July 2005, and Specialty Defense and Bianchi, which were
acquired in the fourth quarter of 2004. Integration expense in fiscal 2004
primarily included charges for integration related to the acquisitions of Simula
and Hatch Imports, which were acquired in the fourth quarter of 2003.

Other charges. Other charges for fiscal 2005 were $1.2 million. Other charges
for fiscal 2004 were $7.7 million. Other charges in fiscal 2004 were charges for
a non-cash charge of $6.3 million related to the acceleration of
performance-based, long-term restricted stock awards granted to certain
executives in 2002, and an impairment charge of $1.4 million to reduce the
carrying value of the remaining portion of NTI to its estimated fair value.

Operating income. Operating income increased $69.9 million, or 48%, to $215.6
million for fiscal 2005, compared to $145.7 million in fiscal 2004, due to the
factors discussed above.

Interest expense, net. Interest expense, net, decreased $495,000, or 7%, to $6.3
million for fiscal 2005, compared to $6.8 million for fiscal 2004. This decrease
is primarily due to an increase in interest income generated from the increase
in investment yield from higher interest rates and the increase in investment
balances primarily resulting from our 2% Convertible Notes offering in the
fourth quarter of 2004 and positive operating cash flow. This increase is
partially offset by an increase in interest expense as a result of the issuance
of the 2% Convertible Notes and the increase in the six-month LIBOR. On
September 2, 2003, we entered into interest rate swap agreements that
effectively exchanged the 8.25% fixed rate on the 8.25% Notes for a variable
rate of six-month LIBOR (4.7% at December 31, 2005, and 2.8% at December 31,
2004), set in arrears, plus a spread of 2.735% to 2.75%.

Other (income) expense, net. Other income, net, which was $4.0 million for
fiscal 2005, relates primarily to the expiration of our unexercised, 2.5 million
previously announced sale of put option contracts on Company stock as well as an
increase in the fair market value of 1 million new put option contracts on
Company stock we entered into, which expired unexercised in February 2006. Of
the $5.9 million in other income related to the sale of put options on Company
stock in fiscal 2005, $4.8 million related to the expiration of the 2.5 million
unexercised put options. The other income is partially offset by a non-cash
asset impairment, loss on disposal of fixed assets and losses related to foreign
currency transactions. Other expense, net, of $1.9 million for fiscal 2004,
relates primarily to a non-cash, asset impairment, loss on disposal of fixed
assets and losses related to foreign currency fluctuations.

Income before provision for income taxes. Income before provision for income
taxes increased $76.4 million, or 56%, to $213.4 million for fiscal 2005,
compared to $137.0 million for fiscal 2004, due to the reasons discussed above.

Provision for income taxes. Provision for income taxes was $80.9 million for
fiscal 2005, compared to $56.4 million for fiscal 2004. The effective tax rate
was 37.9% for fiscal 2005, compared to 41.2% for fiscal 2004. The decreased tax
rate relates primarily to the non-taxable, fair market gain on put options sold
on Company stock in fiscal 2005, and the non-tax deductible charge due to the
accelerated vesting of performance based, long-term restricted stock awards
during fiscal 2004.

Net income. Net income increased $52.0 million, or 65%, to $132.5 million for
fiscal 2005, compared to $80.5 million for fiscal 2004, due to the factors
discussed above.

FISCAL 2004 AS COMPARED TO FISCAL 2003

Net income. Net income increased $69.6 million, or 640%, to net income of $80.5
million for fiscal 2004 compared to net income of $10.9 million for fiscal 2003.
Income from continuing operations and a loss from discontinued operations were
$80.6 million and ($38,000), respectively, for fiscal 2004, compared to income
from continuing operations and a loss from discontinued operations of $17.0
million and $(6.1) million, respectively, for fiscal 2003.

CONTINUING OPERATIONS

Total revenues. Total revenues increased $614.5 million, or 168%, to $979.7
million in fiscal 2004, compared to $365.2 million in fiscal 2003. For fiscal
2004, total revenue increased $515.3 million, or 141%, internally, including
year-over-year changes in acquired businesses, and $99.2 million, or 27%, due to
acquisitions. Internal revenue growth represents year-over-year increases in
revenue from businesses that were either owned or acquired by us during the
periods presented. Our calculation of internal revenue growth takes into
consideration pro-forma revenue for relevant periods of acquired entities in
determining year-over-year revenue growth.

Aerospace & Defense Group revenues. Aerospace & Defense Group revenues increased
$513.7 million, or 560%, to $605.4 million in fiscal 2004 compared to $91.7
million in fiscal 2003. For fiscal 2004, Aerospace & Defense revenue increased
$429.2 million, or 468% internally, including year-over-year changes in acquired
businesses and $84.6 million, or 92%, from the acquisition of Specialty Defense
in November 2004 and the OTV business of Second Chance, acquired in July 2005.
Our calculation of acquired growth is the amount of current year revenue equal
to the prior year revenue before our acquisition of the acquired company.
Internal growth was primarily due to the following factors:

(1) We experienced strong demand for the Up-Armored HMMWV, including spare
part revenues, as we shipped 3,945 Up-Armored M1114 HMMWVs in fiscal
year 2004 compared to 873 in fiscal year 2003, a 352% increase. There
continues to be new orders under our current M1114 Up-Armored HMMWV
contract and additional orders for the next-generation versions known
as the M1151 and M1152 Up-Armored HMMWVs. While backlog extends into
2006 for both the M1114 and M1151/52 Up-Armored HMMWV versions, we
believe the U.S. Military's plans include procurement of a replacement
military light transport vehicle with current status being in the
early development stage. While current acquisition strategies plan for
possible production of new light and medium support vehicles beginning
as early as 2008, there is no assurance as to when a replacement for
the HMMWV may be selected, and furthermore, it is reasonable to
believe that the HMMWV will continue for some time to be one of the
primary transport vehicles in the U.S. military. In the event the
HMMWV is replaced, based on U.S. military procurement plans, it is
anticipated that vehicle armoring for a replacement vehicle would be
provided to the vehicle OEM for inclusion in the manufacturing process
as components to be integrated with the vehicle while additional armor
components would be provided for attachment to the vehicle at a later
time when warranted by threat conditions. We anticipate that
procurements for the potential HMMWV replacement models would be
competitive and could be awarded to multiple armor suppliers based on
full and open competition. Although we anticipate continuation of
developmental efforts and enhancement of manufacturing capabilities,
at this time, there is no certainty of obtaining armoring contracts
for any HMMWV replacement vehicles selected by the U.S. military, and
if successful in competitive programs, we cannot determine the
specific levels of effort likely under such military contracts.

An additional consideration and risk factor regarding the introduction
of new vehicle versions for tactical wheeled vehicles is the U.S.
military's recent pronouncements that it is the Government's
preference to own technical data rights for new major end items of
equipment and sub-systems, including the vehicle armoring packages.
The Government's intent to mitigate risk of limitations on
producibility and to ensure commonality of armor components produced
by multiple sources may negatively influence future manufacturing
content and product pricing.

See risk factor "A Replacement of the HMMWV in the U.S. Military May
Affect Our Results of Operations" under Item 1 A in Part I of this
Annual Report.

(2) During 2004 add-on armor components for fielded vehicles increased
significantly, including 3,000 add-on-armor kits for the medium and
heavy truck fleet operating in Iraq and 10,000 sets of ballistic glass
for the Army Depot HMMWV kits. We believe that vehicle armoring will
likely play a significant role in 2006 and beyond.

(3) Adjusting for Simula, acquired on December 9, 2003, SAPI plate volume
increased 181% in fiscal year 2004 over pro forma SAPI volume in
fiscal year 2003. On an actual basis, we increased SAPI plate volume
by 1,924% in fiscal year 2004 over fiscal year 2003. Continued growth
in the SAPI plate business is dependent upon the continued level of
hostilities in Iraq and Afghanistan as well as the U.S. Government's
requirements for improved technology and performance of the SAPI
plate. Future revenues may be constrained by our ability to procure
certain raw materials necessary for the manufacture of the SAPI plate.
See risk factor "There are Limited Sources for Some of Our Raw
Materials, Which May Significantly Curtail our Manufacturing
Operations" under Item 1 A in Part I of our 10-K.

Products Group revenues. Our Products Group revenues increased $55.8 million, or
29%, to $249.8 million in fiscal 2004, compared to $194.0 million in fiscal
2003. For fiscal 2004, Products Group revenue increased $41.2 million, or 21%,
internally, including year-over-year changes in acquired businesses, and $14.6
million, or 8%, from the acquisitions of Hatch Imports, Inc., which was
completed in the fourth quarter of 2003, and Vector Associates, Inc. (dba ODV,
Inc.) and Kleen-Bore, Inc., both of which were completed subsequent to 2003. The
acquisition of Bianchi on December 30, 2004, had no effect on the fiscal 2004
revenues of the Products Group. Internal growth was due to strong sales of
international body armor, and other soft armor and hard armor sectors, providing
protection to troops and private sector employees within Iraq, strong military
and international sales within duty gear and the sales of ballistic reinforced
enclosures within the energy sector.

Mobile Security Division revenues. Our Mobile Security Division revenues
increased $45.0 million, or 57%, to $124.5 million in fiscal 2004, compared to
$79.5 million in fiscal 2003. All of the revenue growth for the Mobile Security
Division was generated internally, primarily as a result of the increasing
threat of terrorism, and, to a less extent, the impact of a weakened U.S. dollar
versus the euro. The threat of terrorism was the cause of our European revenue
growth. Commercial vehicle shipments increased 25%, to 1,402 vehicles in fiscal
2004 compared to 1,125 vehicles in fiscal 2003.

Cost of revenues. Cost of revenues increased $460.6 million, or 182%, to $714.2
million for fiscal 2004 compared to $253.6 million for fiscal 2003. As a
percentage of total revenues, cost of revenues increased to 72.9% of total
revenues for fiscal 2004 from 69.4% for fiscal 2003.

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

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

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

Cost of vest exchange program/warranty revision. In April 2004, two class action
lawsuits were filed against us in Florida state court by police organizations
and individual police officers, alleging that ballistic-resistant soft body
armor (vests) containing Zylon(R), manufactured and sold by American Body
Armor(TM), Safariland(R) and PROTECH(R), failed to meet the warranties provided
with the vests. On November 5, 2004, the Jacksonville, Florida (Duval County)
Circuit Court gave final approval to a settlement reached with the SSPBA which
provided that (i) purchasers of certain Zylon(R)-containing vest models could
exchange their vests for other vests manufactured by the Company and, (ii) the
Company would continue its internal used-vest testing program (VestCheck(TM)).
The other class action suit, which was filed by NAPO, in Ft. Myers, Florida (Lee
County), was voluntarily dismissed with prejudice on November 16, 2004.

As a result of our warranty revision and product exchange program relating to
our Zylon(R)-containing vests announced August 12, 2004, we have recorded a
pre-tax charge of $5.0 million in fiscal 2004, which is net of $4.0 million of
cost reimbursements from our suppliers and includes all the legal costs
associated with the class action lawsuits. This liability has been classified in
accrued expenses and other current liabilities on the Consolidated

Balance Sheet and will be funded through cash provided by operating activities.
See Fiscal 2005 As Compared To Fiscal 2004 in Item 7 of this Annual Report for
an update regarding the Zylon(R) related matters.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $37.5 million, or 60%, to $100.3 million
(10.2% of total revenues) for fiscal 2004 compared to $62.8 million (17.2% of
total revenues) for fiscal 2003.

Aerospace & Defense Group selling, general and administrative expenses increased
$17.5 million, or 309%, to $23.1 million (3.8% of Aerospace & Defense Group
revenues) for fiscal 2004 compared to $5.6 million (6.2% of Aerospace & Defense
revenues) for fiscal 2003 primarily due to the acquisition of Simula on December
9, 2003, and Specialty Defense on November 18, 2004, as well as additional
selling, general and administrative expenses associated with increased
production of the Up-Armored HMMWV and supplemental armor for other military
vehicles. The decrease in selling, general and administrative expense as a
percentage of revenue was due to leveraging of the selling, general and
administrative expenses over a much larger revenue base.

Products Group selling, general and administrative expenses increased $11.8
million, or 35%, to $44.9 million (18.0% of Products Group revenues) for fiscal
2004 compared to $33.1 million (17.1% of Products Group revenues) for fiscal
2003. This increase is due primarily to acquisitions, a one time settlement
charge related to the early cancellation of an exclusive distribution agreement,
increased research and development spending, higher sales expenses as related to
increased sales volumes, higher insurance costs, increased bad debt provisions,
and bonus expenses that in the prior year were allocated to corporate selling,
general and administrative expenses.

Mobile Security Division selling, general and administrative expenses increased
$2.5 million, or 21%, to $14.8 million (11.9% of Mobile Security Division
revenues) for fiscal 2004 compared to $12.3 million (15.4% of Mobile Security
Division revenues) for fiscal 2003. The increase in selling, general and
administrative expense was primarily due to the large increase in production and
revenues, and, to a lesser extent, the impact of a weaker U.S. dollar versus the
euro. The decrease in selling, general and administrative expense as a
percentage of revenue was due to leveraging of the selling, general and
administrative expenses over a much larger revenue base.

Corporate general and administrative expenses increased $5.7 million, or 49%, to
$17.5 million (1.8% of total revenues) in fiscal 2004 compared to $11.8 million
in fiscal 2003 (3.2% of total revenues). This increase in administrative
expenses is associated with the overall growth of the Company, increased travel
expenses, bonus provision, and Sarbanes-Oxley requirements. The decrease in
general and administrative expense as a percentage of revenue was due to
leveraging of the general and administrative expenses over a much larger revenue
base.

Amortization. Amortization expense increased $3.8 million, or 770%, to $4.3
million for fiscal 2004 compared to $489,000 for fiscal 2003 primarily due the
amortization of certain intangible assets acquired as part of the acquisitions
of Simula and Hatch Imports in December 2003 and ODV, Kleen-bore, and Specialty
Defense in fiscal 2004. SFAS 142, which we adopted on January 1, 2002,
eliminated amortization of intangible assets with indefinite lives and goodwill
for all acquisitions completed after July 1, 2001, as well as for all fiscal
years ending after January 1, 2002. Remaining amortization expense is related to
patents and trademarks with finite lives, and acquired identifiable intangible
amortizable assets that meet the criteria for recognition as an asset apart from
goodwill under Statement of Financial Accounting Standard No. 141, "Business
Combinations" ("SFAS 141").

Integration. Integration increased $0.5 million, or 25%, to $2.6 million for
fiscal 2004 compared to $2.1 million in fiscal 2003. Included in integration in
fiscal 2004 are primarily charges for the integration of Simula and Hatch
Imports, which were acquired in December 2003 and the integration of ODV, Kleen
Bore, and Specialty Defense, which were acquired subsequent to fiscal 2003.
Included in integration in fiscal 2003 are primarily charges for the integration
of entities acquired during fiscal 2003.

Other charges. Other charges decreased $2.8 million, or 37%, to $7.7 million for
fiscal 2004 compared to $10.5 million in fiscal 2003. Included other charges in
fiscal 2004 were charges for a non-cash charge of $6.3 million related to the
acceleration of performance-based, long-term restricted stock awards granted to
certain executives in 2002, and an impairment charge of $1.4 million to reduce
the carrying value of the remaining portion of NTI to its estimated fair value.
Included in other charges in fiscal 2003 is a non-cash charge of $7.3 million
for stock-based compensation for a performance plan for certain key executives
and a $3.2 million severance charge (including a $2.1 million non-cash charge)
related to the 2003 departure of our former Chief Executive Officer.

Operating income. Operating income from continuing operations increased $110.0
million, or 309%, to $145.7 million in fiscal 2004 compared to $35.7 million in
fiscal 2003 due to the factors discussed above.

Interest expense, net. Interest expense, net increased $2.8 million, or 69% to
$6.8 million for fiscal 2004 compared to $4.0 million for fiscal 2003. This
increase was due primarily to interest expense associated with the $300 million
aggregate principal amount of 2% Convertible Notes, which were issued on October
29, 2004, and $150 million aggregate principal amount of 8.25% Notes, which were
issued on August 12, 2003. On November 5, 2004, Goldman, Sachs & Co. exercised
its option to purchase an additional $45 million principal amount of the 2%
Convertible Notes also contributing to the increase in interest expense. On
September 2, 2003, we entered into interest rate swap agreements that
effectively exchanged the 8.25% fixed rate on the 8.25% Notes for a variable
rate of six month LIBOR, set in arrears, plus a spread of 2.735% to 2.75%. At
December 31, 2004, the six month LIBOR rate was 2.78%.

Other expense, net. Other expense, net, increased $1.4 million, or 283% to $1.9
million for fiscal 2004, compared to $508,000 for fiscal 2003. The increase
related primarily to a non-cash asset impairment, foreign exchange currency
losses and a loss on disposal of certain fixed assets partially offset by the
realization of a gain on the sale of certain equity investments in fiscal 2004.
In fiscal 2003, other expense net related primarily to foreign exchange currency
losses.

Income from continuing operations before provision for income taxes. Income from
continuing operations before provision for income taxes increased $105.8
million, or 339%, to $137.0 million for fiscal 2004 compared to $31.2 million
for fiscal 2003 due to the reasons discussed above.

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

Income from continuing operations. Income from continuing operations increased
$63.6 million, or 374%, to $80.6 million for fiscal 2004 compared to $17.0
million for fiscal 2003 due to the factors discussed above.

DISCONTINUED OPERATIONS

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

Services revenues. Services Division revenue decreased $93.4 million to $1.7
million for fiscal 2004, compared to $95.1 million for fiscal 2003. Exclusive of
ArmorGroup Integrated Systems, which we sold on April 17, 2003, and ArmorGroup,
which we sold on November 26, 2003, revenue decreased $1.1 million, or 38%, to
$1.7 million for fiscal 2004 compared to $2.8 million for fiscal 2003 primarily
due to the sale of the security consulting business of NTI on July 2, 2004.

Cost of revenues. Cost of revenues decreased $66.1 million to $697,000 for
fiscal 2004, compared to $66.8 million for fiscal 2003. Exclusive of ArmorGroup
Integrated Systems and ArmorGroup, cost of revenues decreased $356,000, or 34%,
to $697,000 for fiscal 2004, compared to $1.1 million for fiscal 2003. This
decrease was primarily due to the sale of the security consulting business of
NTI on July 2, 2004.

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

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

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

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

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

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

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

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

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

QUARTERLY RESULTS

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

QUARTER ENDED

(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------------
Dec 31, Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
2005 2005 2005 2005 2004 2004 2004 2004
-------- -------- -------- -------- -------- -------- -------- --------

Revenues:
Aerospace & Defense $332,327 $339,113 $256,688 $260,470 $234,379 $160,238 $129,773 $ 81,008
Products 87,604 75,911 76,805 68,558 65,523 64,659 65,743 53,840
Mobile Security 32,728 32,640 38,149 35,937 37,646 31,906 28,188 26,780
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 452,659 447,664 371,642 364,965 337,548 256,803 223,704 161,628
Operating income 61,093 42,489 57,396 54,656 47,356 41,735 33,976 22,648
Interest expense, net 1,143 1,379 1,514 2,245 1,591 1,400 2,057 1,728
Other (income) expense, net (685) (1,370) (3,093) 1,123 2,066 154 (390) 115
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before taxes 60,635 42,480 58,975 51,288 43,699 40,181 32,309 20,805
Provision for income taxes 23,052 15,997 21,560 20,259 17,345 16,307 14,588 8,177
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations $ 37,583 $ 26,483 $ 37,415 $ 31,029 $ 26,354 $ 23,874 $ 17,721 $ 12,628
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from discontinued
operations, net of provision
(benefit) for income taxes -- -- -- -- -- -- 100 (138)
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 37,583 $ 26,483 $ 37,415 $ 31,029 $ 26,354 $ 23,874 $ 17,821 $ 12,490
======== ======== ======== ======== ======== ======== ======== ========
Net income per common share -- Basic
Income from continuing operations $ 1.07 $ 0.76 $ 1.09 $ 0.90 $ 0.78 $ 0.73 $ 0.60 $ 0.44
Income (loss) from discontinued
operations 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- --------
Basic earnings per share $ 1.07 $ 0.76 $ 1.09 $ 0.90 $ 0.78 $ 0.73 $ 0.60 $ 0.44
======== ======== ======== ======== ======== ======== ======== ========
Net income per common share -- Diluted
Income from continuing operations $ 1.04 $ 0.74 $ 1.05 $ 0.87 $ 0.74 $ 0.70 $ 0.57 $ 0.42
Income (loss) gain from discontinued
operations 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- -------- -------- --------
Diluted earnings per share $ 1.04 $ 0.74 $ 1.05 $ 0.87 $ 0.74 $ 0.70 $ 0.57 $ 0.42
======== ======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding
Basic 35,045 34,714 34,480 34,509 33,946 32,861 29,670 28,472
Diluted 36,243 35,959 35,562 35,832 35,555 34,198 31,008 29,934

Revenues:
Aerospace & Defense 73.4% 75.7% 69.1% 71.4% 69.4% 62.4% 58.0% 50.1%
Products 19.4% 17.0% 20.7% 18.8% 19.4% 25.2% 29.4% 33.3%
Mobile Security 7.2% 7.3% 10.2% 9.8% 11.2% 12.4% 12.6% 16.6%
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income 13.5% 9.5% 15.4% 15.0% 14.0% 16.3% 15.2% 14.0%
Interest expense, net 0.3% 0.3% 0.4% 0.6% 0.5% 0.5% 0.9% 1.1%
Other (income) expense, net (0.2%) (0.3%) (0.8%) 0.3% 0.6% 0.1% (0.2)% 0.1%
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before taxes 13.4% 9.5% 15.9% 14.1% 12.9% 15.6% 14.4% 12.9%
Provision for income taxes 5.1% 3.6% 5.8% 5.6% 5.1% 6.4% 6.5% 5.1%
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations 8.3% 5.9% 10.1% 8.5% 7.8% 9.3% 7.9% 7.8%
Income (loss) from discontinued
operations, net of provision
(benefit) for income taxes 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% (0.1)%
-------- -------- -------- -------- -------- -------- -------- --------
Net income 8.3% 5.9% 10.1% 8.5% 7.8% 9.3% 8.0% 7.7%
======== ======== ======== ======== ======== ======== ======== ========

LIQUIDITY AND CAPITAL RESOURCES

In March 2002, our Board of Directors approved a stock repurchase program
authorizing the repurchase of up to a maximum 3.2 million shares of our common
stock. In February 2003, the Board of Directors increased this stock repurchase
program to authorize the repurchase, from time to time depending upon market
conditions and other factors, of up to an additional 4.4 million shares. On
March 25, 2005, our Board of Directors increased our existing stock repurchase
program to enable us to repurchase, from time to time depending upon market
conditions and other factors, up to an additional 3.5 million shares of its
outstanding common stock. Through February 24, 2006, we repurchased 3.8 million
shares of our common stock under the stock repurchase program at an average
price of $12.49 per share, leaving us with the ability to repurchase up to an
additional 7.3 million shares of our common stock. We did not repurchase any
shares in fiscal 2005 or fiscal 2004. Repurchases may be made in the open
market, in privately negotiated transactions utilizing various hedging
mechanisms including, among others, the sale to third parties of put options on
our common stock, or otherwise. At December 31, 2005, we had 35.3 million shares
of common stock outstanding.

During fiscal 2005, we sold put options in various private transactions covering
3.5 million shares of Company stock for $6.6 million in premiums. During fiscal
2005, put options covering 2.5 million shares of Company stock expired
unexercised leaving outstanding put options covering 1 million shares
outstanding (2.8% of outstanding shares at December 31, 2005) at a weighted
average strike price of $40.00 per share. In February 2006, the outstanding put
options covering 1 million shares expired unexercised. Accordingly, we recorded
an additional $0.7 million in other income in the first quarter of fiscal 2006.
The fair values of the put options of Company stock are obtained from our
counter-parties and represent the estimated amount we would receive or pay to
terminate the put options, taking into account the consideration we received for
the sale of the put options. In fiscal 2005, we recognized fair value gains of
$5.9 million recorded in other income, net, of which $4.8 million was recognized
on the 2.5 million previously expired and unexercised put options.

We expect to continue our policy of repurchasing our common stock from time to
time, subject to the restrictions contained in our secured revolving credit
facility (the "Credit Facility") with Bank of America, N.A., Wachovia Bank, N.A.
and a syndicate of other financial institutions arranged by Bank of America
Securities, LLC; the indenture governing the 8 1/4% Senior Subordinated Notes
due 2013 (the "8.25% Notes") and the indenture governing the 2.00% Senior
Subordinated Convertible Notes due November 1, 2024 (the "2% Convertible
Notes"). Our Credit Facility permits us to repurchase shares of our common stock
with no limitation if our ratio of Consolidated Senior Indebtedness to
Consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") (as such terms are defined in the Credit Facility) for any rolling
twelve-month period is less than 1.00 to 1. When such ratio is greater than 1.00
to 1, our Credit Facility limits our ability to repurchase shares at $15.0
million. This basket resets to $0 each time the ratio is less than 1.00 to 1. As
of December 31, 2005, such ratio was 0.04 to 1. Our indentures governing the
8.25% Notes and the 2% Convertible Notes also permit us to repurchase shares of
our common stock, subject to certain limitations, as long as we satisfy the
conditions to such repurchase contained therein.

On June 22, 2005, we implemented the 2005 Stock Incentive Plan. The 2005 Stock
Incentive Plan authorizes the issuance of up to 2,500,000 shares of our common
stock. Any shares of our common stock granted as restricted stock, performance
stock or other stock-based awards will be counted against the shares authorized
as one and eight-tenths (1.8) shares for every one share issued in connection
with such award. The 2005 Stock Incentive Plan authorizes the granting of stock
options, restricted stock, performance awards and other stock-based awards to
employees, officers, directors and consultants, independent contractors and
advisors of the Company and its subsidiaries. In accordance with the 2005 Stock
Incentive Plan, our pre-existing stock incentive plans are frozen. Accordingly,
we are no longer authorized to grant awards under such pre-existing plans.

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

On June 15, 2004, we sold 4,000,000 primary shares of common stock at a price of
$37.50 per share, raising $142.5 million of net proceeds after deducting the
underwriter discounts and commissions. In addition, our Board of Directors
granted the underwriters a 30-day option to purchase up to 600,000 shares. The
30-day option expired unexercised on July 15, 2004. We used the net proceeds
from the offering to primarily fund the acquisitions of Specialty Defense and
Bianchi International in the fourth quarter of 2004.

guaranteed by most of our domestic subsidiaries on a senior subordinated basis.
The 2% Convertible Notes were initially rated B1/B+ by Moody's Investors'
Service and Standard & Poor's Rating Services, respectively. The 2% Convertible
Notes will bear interest at a rate of 2.00% per year, payable on November 1 and
May 1 of each year beginning on May 1, 2005, and ending on November 1, 2011. The
2% Convertible Notes will be subject to accretion of the principal amount
beginning on November 1, 2011, at a rate that provides holders with an aggregate
annual yield to maturity of 2.00%, as defined in the agreement. The 2%
Convertible Notes will bear contingent interest during any six-month period
beginning November 1, 2011, of 15 basis points paid in cash if the average
trading price of the notes is above certain levels. The 2% Convertible Notes
will be convertible, at the bond holder's option at any time, initially at a
conversion rate of 18.5151 shares of our common stock per $1,000 principal
amount of notes, which is the equivalent conversion price of approximately
$54.01 per share, subject to adjustment. Upon conversion, we will satisfy our
conversion obligation with respect to the accreted principal amount of the notes
to be converted in cash, with any remaining amount to be satisfied in shares of
our common stock. The conversion rate will be subject to adjustment, without
duplication, upon the occurrence of any of the following events: (1) stock
dividends in common stock, (2) issuance of rights and warrants, (3) stock splits
and combinations, (4) distribution of indebtedness, securities or assets, (5)
cash distributions, (6) tender or exchange offers, and (7) repurchases of common
stock. In accordance with U.S. GAAP, the 2% Convertible Notes are classified as
short term debt as they can be converted at any time prior to maturity. We used
a portion of the proceeds of the offering to fund the acquisition of Second
Chance in July 2005, and for general corporate and working capital purposes,
including the funding of capital expenditures. Funds that are not immediately
used are invested in money market funds and other investment grade securities
until needed.

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

On September 2, 2003, we entered into interest rate swap agreements, which have
been designated as fair value hedges as defined under SFAS 133 with a notional
amount totaling $150 million. The agreements were entered into to exchange the
fixed interest rate on our 8.25% Notes for a variable interest rate equal to
six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth day of February and August. The agreements
are subject to other terms and conditions common to transactions of this type.
In accordance with SFAS 133, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the fixed rate debt due to
changes in the market interest rate. Accordingly, interest rate swaps included
in other assets on the Consolidated Balance Sheet decreased by $4.6 million from
December 31, 2004, which reflected a decrease in the fair value of the interest
rate swap agreements to $1.4 million. The corresponding decrease in the hedge
liability was recorded in long-term debt. The agreements are deemed to be a
perfectly effective fair value hedge, and, therefore, qualify for the short-cut
method of accounting under SFAS 133. As a result, no ineffectiveness is expected
to be recognized in our earnings associated with the interest rate swap
agreements.

On August 12, 2003, in concert with our 8.25% Note offering, we entered into the
Credit Facility. The Credit Facility consists of a five-year revolving credit
facility, and, among other things, provides for (i) total maximum borrowings of
$60 million, (ii) a $25 million sub-limit for the issuances of standby and
commercial letters of credit, (iii) a $5 million sub-limit for swing-line loans,
and (iv) a $5 million sub-limit for multi-currency borrowings. All borrowings
under the Credit Facility will bear interest at either (i) a rate equal to
LIBOR, plus an applicable margin ranging from 1.125% to 1.625%, (ii) an
alternate base rate which will be the higher of (a) the Bank of America prime
rate and (b) the Federal Funds rate plus 0.50%, or (iii) with respect to foreign
currency loans, a fronted offshore currency rate, plus an applicable margin
ranging from 1.125% to 1.625%, depending on certain conditions. The Credit
Facility is guaranteed by certain of our direct and indirect domestic
subsidiaries and is collateralized by, among other things, (i) a pledge of all
of the issued and outstanding shares of stock or other equity interests of
certain of our domestic subsidiaries, (ii) a pledge of 65% of the issued and
outstanding voting shares of stock or other voting equity interests of certain
of our direct and indirect foreign subsidiaries, (iii) a pledge of 100% of the
issued and outstanding nonvoting shares of stock or other nonvoting equity
interests of

certain of our direct and indirect foreign subsidiaries, and (iv) a first
priority perfected security interest on certain of our domestic assets and
certain domestic assets of certain of our direct and indirect subsidiaries that
will become guarantors of our obligations under the Credit Facility, including,
among other things, accounts receivable, inventory, machinery, equipment,
certain contract rights, intellectual property rights and general intangibles.
On January 9, 2004, we amended our Credit Facility to broaden our ability to
make additional open-market purchases of publicly-traded securities subject to
certain limitations. On March 29, 2004, we amended our Credit Facility to allow
us to pay dividends subject to certain limitations. On October 19, 2004, we
amended our Credit Facility to allow us to subtract cash equivalents from total
indebtedness in calculation of our compliance covenants. On April 14, 2005, we
amended our credit agreement to amend the definition of cash equivalents to
include auction rate securities held by our existing bank group. On July 26,
2005, we amended the Credit Facility to allow for advances, loans, extensions of
credit to or any other investments in key suppliers of the Company in an
aggregate amount not to exceed $15 million at any time outstanding for the
purpose of facilitating the sale and purchase of goods and services to the
Company. In addition, the amendment allows for leases or other dispositions of
assets of not more than 10% of the consolidated EBITDA, as defined in the Credit
Facility. At December 31, 2005, we had $53.0 million in availability under our
Credit Facility, excluding $7.0 million in outstanding letters of credit.

As of December 31, 2005, we believe we were in material compliance with all of
our negative and affirmative covenants contained in the Credit Facility and the
indentures governing the 8.25% Notes and the 2% Convertible Notes.

Working capital was $387.2 million and $289.6 million as of December 31, 2005,
and December 31, 2004, respectively. The increase in working capital is largely
a function of increases in cash and cash equivalents of $50.6 million, accounts
receivable of $35.3 million and inventory of $31.1 million partially offset by
the increase in accounts payable of $21.4 million primarily to support the
growth in demand for our force protection related products from the U.S.
Department of Defense.

Net cash provided by operating activities was $134.9 million for fiscal 2005,
compared to $16.9 million for fiscal 2004. Net cash provided by operating
activities improved due to increased net income for fiscal 2005, and was
negatively impacted due to increases in working capital in both periods. Net
cash used in investing activities was $101.9 million for fiscal 2005, compared
to $175.6 million for fiscal 2004. The decrease was primarily due to the
purchase of Second Chance in 2005 compared to the purchases of Specialty Defense
and Bianchi among others in 2004, partially offset by the purchase of
equity-based securities in fiscal 2005. Net cash provided by financing
activities was $19.3 million for fiscal 2005, compared to $466.1 million for
fiscal 2004. The decrease in fiscal 2005 is primarily due to net cash provided
by financing activities in fiscal 2004 including the issuance of the 2%
Convertible Bonds and the sale of 4,000,000 shares of Company stock. We have
revised our 2004 and 2003 Consolidated Statements of Cash Flow to separately
disclose the operating, investing and financing portions of cash flows
attributable to our discontinued operations. We had previously reported these
amounts on a combined basis.

Our fiscal 2005 capital expenditures were $15.6 million. Such expenditures
included additional manufacturing and office space, manufacturing machinery and
equipment, leasehold improvements, information technology and communications
infrastructure equipment. Our fiscal 2006 capital expenditures are expected to
be approximately $30.0 million to $34.0 million.

On February 27, 2006, we announced that we signed a definitive agreement to
acquire all of the outstanding stock of Stewart & Stevenson Services, Inc.
("SVC"), a leading manufacturer of military tactical wheeled vehicles including
the FMTV, the U.S. Army's primary transport platform, for $35 per share in a
cash merger transaction. The total value of the transaction is expected to be
approximately $755 million after deducting SVC's net cash balance which was $312
million as of January 31, 2006. The transaction is subject to SVC shareholder
approval, the expiration or termination of the Hart-Scott-Rodino waiting period
and other customary conditions. The transaction is expected to close mid-2006.
We expect to finance the transaction through available cash and with proceeds
from new senior credit facilities.

On February 28, 2006, Standard & Poor's Ratings Services affirmed its B+ rating
on our senior subordinated debt. Also on February 28, 2006, Moody's Investors
Service announced that it will review our debt ratings for a possible downgrade
on its B1 rating of our senior subordinated debt in the wake of our announcement
that we have signed a definitive agreement to acquire all of the outstanding
stock of SVC.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

On December 16, 2004, the FASB issued FAS 123R. FAS 123R revises SFAS 123 and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. In addition to revising SFAS 123, FAS 123R
supersedes APB 25, and amends SFAS 95. On April 14, 2005, the Securities and
Exchange Commission extended the compliance date of FAS 123R from the first
interim to the first annual reporting period of a company's fiscal year
beginning on or after June 15, 2005. We will be required to apply the expense
recognition provisions of FAS 123R beginning in the first quarter of 2006. We
expect to incur approximately $1.6 million of expense in the year ended December
31, 2006, as a result of the adoption of FAS 123R.

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

INFLATION

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

OFF BALANCE SHEET ARRANGEMENTS

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

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table presents our contractual obligations as of December 31,
2005:

CONTRACTUAL OBLIGATIONS

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

Long-term debt obligations $152,340 $ 430 $ 890 $ 620 $150,400
Operating lease obligations 34,948 7,401 9,048 5,126 13,373
Other long-term liabilities 10,475 -- 878 658 8,939
-------- ------ ------- ------ --------
Total $197,763 $7,831 $10,816 $6,404 $172,712
======== ====== ======= ====== ========

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our global operating and financial activities, we are exposed to
changes in raw material prices, interest rates, foreign currency exchange rates
and our stock price, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates, and foreign currency exchange rates through our regular
operating and financing activities. We have entered into interest rate swap
agreements to reduce our overall interest expense.

MARKET RATE RISK

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

Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relates primarily to borrowings under our $150 million senior subordinated
notes, our credit facilities and our short-term monetary investments. To the
extent that, from time to time, we hold short-term money market instruments,
there is a market rate risk for changes in interest rates on such instruments.
To that extent, there is inherent rollover risk in the short-term money market
instruments as they mature and are renewed at current market rates. The extent
of this risk is not quantifiable or predictable, because of the variability of
future interest rates and business financing requirements. However, there is
only a remote risk of loss of principal in the short-term money market
instruments. The main risk is related to a potential reduction in future
interest income.

On September 2, 2003, we entered into interest rate swap agreements in which we
effectively exchanged the $150 million fixed rate 8.25% interest on the senior
subordinated notes for variable rates in the notional amount of $80 million, $50
million, and $20 million at six-month LIBOR, set in arrears, plus 2.75%, 2.75%,
and 2.735%, respectively. The agreements involve receipt of fixed rate amounts
in exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The variable interest
rates are fixed semi-annually on the fifteenth day of February and August each
year through maturity. The six-month LIBOR rate was 5.05% on March 10, 2006. The
maturity dates of the interest rate swap agreements match those of the
underlying debt. Our objective for entering into these interest rate swaps was
to reduce our exposure to changes in the fair value of senior subordinated notes
and to obtain variable rate financing at an attractive cost. Changes in the
six-month LIBOR would affect our earnings either positively or negatively. An
assumed 100 basis point increase in the six-month LIBOR would increase our
interest obligations under the interest rate swaps by approximately $1.5 million
for a twelve month period.

In accordance with SFAS 133, we designated the interest rate swap agreements as
perfectly effective fair value hedges and, accordingly, use the short-cut method
of evaluating effectiveness. As permitted by the short-cut method, the change in
fair value of the interest rate swaps will be reflected in earnings and an
equivalent amount will be reflected as a change in the carrying value of the
swaps, with an offset to earnings. There is no ineffectiveness to be recorded.
On December 31, 2005, we recorded the fair value of the interest rate swap
agreements of $1.4 million and recorded the corresponding fair value adjustment
to the 8.25% Notes in other assets and long-term debt sections of the
Consolidated Balance Sheets, respectively.

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

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

Marketable Security Price Risk. At December 31, 2005, our marketable securities
had a fair value of $28.6 million, including an unrealized loss of $2.5 million.
The estimated loss in the fair value resulting from a hypothetical 10% decrease
in the price would have been $2.9 million.

Since the securities are classified as "available-for-sale," adjustments to fair
value of a temporary nature are reported in accumulated other comprehensive
loss, and would not impact our results of operations or cash flows until such
time that the securities are sold or that the impairment is determined to be
other than temporary in nature.

Stock Price Risk. The fair values of the put options of Company stock are
obtained from our counter-parties and represent the estimated amount we would
receive or pay to terminate the put options, taking into account the
consideration we received for the sale of the put options. As our stock price
fluctuates the value of these contracts also fluctuates. For fiscal 2005, we
incurred a fair value gain of $5.9 million, recorded in other income, net, of
which $4.8 million was recognized on the 2.5 million previously expired and
unexercised put options. In February 2006, the outstanding put options covering
1 million shares expired unexercised. Accordingly, we recorded an additional
$0.7 million in other income in the first quarter of fiscal 2006.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

As of the end of the Company's 2005 fiscal year, management conducted an
assessment of the effectiveness of the Company's internal control over financial
reporting based on the framework established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the
Company's internal control over financial reporting as of December 31, 2005, is
effective.

Our internal control over financial reporting includes policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets of the
Company; (2) provide reasonable assurances that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and (3) provide
reasonable assurance regarding prevention or

timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on our financial statements.

ATTESTATION REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP, our independent registered certified public
accounting firm that audited the Company's Consolidated Financial Statements for
the fiscal year ended December 31, 2005, has audited our assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2005, as stated in their report which appears on page F-2.

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

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

ITEM 9A. CONTROLS AND PROCEDURES

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

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

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

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

ITEM 9B. OTHER INFORMATION

None.

PART III

The information called for pursuant to this Part III, Items 10, 11, 12, 13 and
14 is incorporated by reference from our definitive proxy statement, which we
intend to file with the Securities and Exchange Commission no later than April
30, 2006.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

Report of Independent Registered Certified Public Accountants

Consolidated Balance Sheets

Consolidated Statements of Operations

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

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(b) Exhibits

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

EXHIBIT NO. DESCRIPTION

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

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

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

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

+2.5 Agreement and Plan of Merger, dated as of September 28, 2004, by and
among Armor Holdings, Inc., Specialty Acquisition Corp., The
Specialty Group, Inc., and Joseph F. Murray, Jr. and John P.
Sweeney, as the Shareholders' Agent (filed as Exhibit 2.1 to our
Current Report on Form 8-K filed on October 4, 2004).

+2.6 Stock Purchase Agreement, dated as of November 5, 2004, by and among
Armor Holdings Products, L.L.C., Jack B. Corwin, as Trustee of the
Jack B. Corwin Revocable Trust dated June 26, 1992, Gary W. French,
as Trustee of the Gary W. and Carol D. French Revocable Trust dated
December 31, 1999, Gary W. French, as Trustee of the French Family
Irrevocable Trust dated December 31, 1999, Bianchi International,
AccuCase, LLC, Bianchi Gunleather and Leather Products Co., Inc.,
Armor Holdings, Inc., Jack B. Corwin and Gary W. French (filed as
Exhibit 2.1 to our Current Report on Form 8-K filed on November 12,
2004).

+2.7 Agreement and Plan of Merger, dated as of February 27, 2006, by and
among Armor Holdings, Inc., Santana Acquisition Corp., and Stewart &
Stevenson Services, Inc. (filed as Exhibit 2.1 to our Current Report
on Form 8-K dated March 3, 2006).

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

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

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

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

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

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

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

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

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

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

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

+4.8 Seventh Supplemental Indenture, dated as of December 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors listed as
signatories thereto, and Wachovia Bank, National Association, as
trustee (filed as Exhibit 4.8 to our Form 10-K Annual Report for the
fiscal year ended December 31, 2004).

+4.9 Eighth Supplemental Indenture, dated as of May 25, 2005, among Armor
Holdings, Inc., the subsidiary guarantors listed as signatories
thereto, and Wachovia Bank, National Association, as trustee (filed
as Exhibit 4.2 to our Form 10-Q Quarterly Report for the fiscal
quarter ended June 30, 2005).

+4.10 Ninth Supplemental Indenture, dated as of August 25, 2005, among
Armor Holdings, Inc., the subsidiary guarantors listed as
signatories thereto, and Wachovia Bank, National Association, as

trustee (filed as Exhibit 4.2 to our Form 10-Q Quarterly Report for
the fiscal quarter ended September 30, 2005).

+4.11 Registration Rights Agreement, dated August 12, 2003, among Armor
Holdings, Inc., the subsidiary guarantors listed as signatories
thereto and Wachovia Capital Markets, LLC (filed as Exhibit 10.3 to
our Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2003).

+4.12 Form of the new 8 1/4% Senior Subordinated Notes Due 2013 (filed as
Exhibit 4.6 to our Registration Statement on Form S-4 filed with the
Commission on January 7, 2004).

+4.13 Indenture, dated as of October 29, 2004, among Armor Holdings, Inc.
and Wachovia Bank, National Association, as trustee (filed as
Exhibit 4.1 to our Current Report on Form 8-K filed on November 1,
2004).

+4.14 First Supplemental Indenture, dated as of October 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee, together with the
form of Note attached thereto (filed as Exhibit 4.2 to our Current
Report on Form 8-K filed on November 1, 2004).

+4.15 Second Supplemental Indenture, dated as of December 29, 2004, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee (filed as Exhibit
4.13 to our Form 10-K Annual Report for the fiscal year ended
December 31, 2004).

+4.16 Third Supplemental Indenture, dated as of May 25, 2005, among Armor
Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee (filed as Exhibit
4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended
June 30, 2005).

+4.17 Fourth Supplemental Indenture, dated as of August 25, 2005, among
Armor Holdings, Inc., the subsidiary guarantors named therein, and
Wachovia Bank, National Association, as trustee (filed as Exhibit
4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended
September 30, 2005).

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

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

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

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

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

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

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

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

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

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

+10.11 Third Amendment to Credit Agreement, dated as of October 19, 2004,
by and among Armor Holdings, Inc., the lenders from time to time
party thereto, Bank of America, N.A., as Administrative Agent,
Wachovia Bank, National Association, as Syndication Agent, and
Keybank National Association, as Documentation Agent (filed as
Exhibit 10.1 to our Current Report on Form 8-K filed on November 1,
2004).

+10.12 Fourth Amendment to Credit Agreement, dated as of April 14, 2005, by
and among Armor Holdings, Inc., the lenders from time to time party
to thereto, Bank of America, N.A., as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, and KeyBank
National Association, as Documentation Agent (filed as Exhibit 10.9
to our Form 10-Q Quarterly Report for the fiscal quarter ended June
30, 2005).

+10.13 Fifth Amendment to Credit Agreement, dated as of July 26, 2005, by
and among Armor Holdings, Inc., the lenders from time to time party
to thereto, Bank of America, N.A., as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, and KeyBank
National Association, as Documentation Agent (filed as Exhibit 10.10
to our Form 10-Q Quarterly Report for the fiscal quarter ended June
30, 2005).

@+10.14 Amended and Restated Employment Agreement, dated as of January 1,
2005, between Armor Holdings, Inc. and Warren B. Kanders (filed as
Exhibit 10.1 to our Form 10-Q Quarterly Report for the fiscal
quarter ended June 30, 2005).

@+10.15 Amended and Restated Employment Agreement, dated as of January 1,
2005, between Armor Holdings, Inc. and Robert R. Schiller (filed as
Exhibit 10.2 to our Form 10-Q Quarterly Report for the fiscal
quarter ended June 30, 2005).

@+10.16 Employment Agreement, dated as of May 20, 2005, between Armor
Holdings, Inc. and Glenn J. Heiar (filed as Exhibit 10.3 to our Form
10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).

@+10.17 Employment Agreement, dated as of May 20, 2005, between Armor
Holdings, Inc. and Robert F. Mecredy (filed as Exhibit 10.4 to our
Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2005).

@+10.18 Non-competition Agreement, dated as of May 20, 2005, between Armor
Holdings, Inc. and Scott T. O'Brien (filed as Exhibit 10.6 to our
Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2005).

@+10.19 Employment Agreement, dated as of May 20, 2005, between Armor
Holdings, Inc. and Scott T. O'Brien (filed as Exhibit 10.5 to our
Form 10-Q Quarterly Report for the fiscal quarter ended June 30,
2005).

+10.20 Form of Indemnification Agreement for Directors and Officers of
Armor Holdings, Inc., (filed as Exhibit 10.4 to our Form 10-Q
Quarterly Report for the fiscal quarter ended March 31, 2004).

**+10.21 American Body Armor & Equipment, Inc. 1994 Incentive Stock Plan
(incorporated by reference from Form S-8 filed on October 10, 1994,
Reg. No. 33-018863).

**+10.22 American Body Armor & Equipment, Inc. 1994 Directors Stock Plan
(incorporated by reference from Form S-8 filed on October 31, 1994,
Reg. No. 33-018863).

**+10.23 Armor Holdings, Inc. Amended and Restated 1996 Stock Option Plan
(incorporated by reference from our 1997 Definitive Proxy Statement
with respect to our 1997 Annual Meeting of Stockholders, held June
12, 1997, as filed with the Commission on May 27, 1997).

**+10.24 Armor Holdings Inc. Amended and Restated 1996 Non-Employee Directors
Stock Option Plan (incorporated by reference from our 1997
Definitive Proxy Statement with respect to our 1997 Annual Meeting
of Stockholders, held June 12, 1997, as filed with the Commission on
May 27, 1997).

**+10.25 Armor Holdings, Inc. 1998 Stock Option Plan (filed as Exhibit 10.19
to our Form 10-K Annual Report for the fiscal year ended December
31, 1998).

**+10.26 Armor Holdings, Inc. 1999 Stock Incentive Plan (filed as Appendix A
to our 1999 Definitive Proxy Statement with respect to our 1999
Annual Meeting of Stockholders, as filed with the Commission on May
21, 1999).

**+10.27 Armor Holdings, Inc. Amended and Restated 2002 Stock Incentive Plan
(filed as Exhibit 10.24 to our Form 10-K Annual Report for the
fiscal year ended December 31, 2004).

**+10.28 Armor Holdings, Inc. 2002 Executive Stock Plan (filed as Exhibit
10.6 to our Form 10-Q Quarterly Report for the fiscal quarter ended
March 31, 2002).

**+10.29 Armor Holdings, Inc. 2005 Stock Incentive Plan (filed as Appendix A
to our 2005 Definitive Proxy Statement with respect to our 2005
Annual Meeting of Stockholders, as filed with the Commission on May
23, 2005).

**+10.30 Form of Stock Option Agreement under the 2005 Stock Incentive Plan
(filed as Exhibit 10.7 to our Form 10-Q Quarterly Report for the
fiscal quarter ended June 30, 2005).

**+10.31 Form of Stock Bonus Award Agreement under the 2005 Stock Incentive
Plan (filed as Exhibit 10.8 to our Form 10-Q Quarterly Report for
the fiscal quarter ended June 30, 2005).

**+10.32 Armor Holdings, Inc. 2005 Annual Incentive Plan (filed as Appendix B
to our 2005 Definitive Proxy Statement with respect to our 2005
Annual Meeting of Stockholders, as filed with the Commission on May
23, 2005).

**+10.33 Executive Deferred Compensation Plan of Armor Holdings, Inc.
(incorporated by reference from Form S-8 filed on November 30, 2005,
Reg. No. 333-130016).

**+10.34 Amendment No. 1 to the Executive Deferred Compensation Plan of Armor
Holdings, Inc. (incorporated by reference from Form S-8 filed on
November 30, 2005, Reg. No. 333-130016).

* **10.35 Armor Holdings, Inc., Executive Retirement Plan, dated as of January
25, 2006.

+10.36 Transportation Services Agreement, dated as of December 10, 2003, by
and between Kanders Aviation, LLC and Armor Holdings, Inc. (filed as
Exhibit 10.3 to our Form 10-Q Quarterly Report for the fiscal
quarter ended March 31, 2004).

*21.1 Subsidiaries of the Registrant.

*23.1 Consent of PricewaterhouseCoopers LLP.

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

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

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

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

----------
* Filed herewith.

+ Incorporated herein by reference.

@ This Exhibit represents a management contract.

** This Exhibit represents a compensatory plan.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ARMOR HOLDINGS, INC.

Report of Independent Registered Certified Public Accounting Firm F-2

Consolidated Balance Sheets F-4

Consolidated Statements Of Operations F-5

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

Consolidated Statements of Cash Flow F-7

Notes to Consolidated Financial Statements F-8

F-1

REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

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

We have completed integrated audits of Armor Holdings, Inc.'s December 31, 2005
and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005, and an audit of its December 31,
2003 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Armor
Holdings, Inc. and its subsidiaries ("the Company") at December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Managements Annual
Report on Internal Control Over Financial Reporting appearing under Item 8,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

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

F-2

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

/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 14, 2006

F-3

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------

ASSETS
Current assets:
Cash and cash equivalents $ 471,841 $ 421,209
Accounts receivable (net of allowance for doubtful accounts of $6,763
and $3,077) 211,281 174,559
Costs and earned gross profit in excess of billings 843 893
Inventories 210,517 176,208
Prepaid expenses and other current assets 38,087 46,935
---------- ----------
Total current assets 932,569 819,804
Property and equipment (net of accumulated depreciation of $37,041
and $27,917) 79,929 77,307
Goodwill (net of accumulated amortization of $4,024 and $4,024) 273,696 262,013
Patents, licenses and trademarks (net of accumulated amortization of
$15,256 and $6,830) 130,620 112,459
Other assets 46,048 20,768
---------- ----------
Total assets $1,462,862 $1,292,351
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 430 $ 621
Short-term debt 344,274 343,756
Accounts payable 90,963 69,601
Accrued expenses and other current liabilities 100,924 107,247
Income taxes payable 8,767 9,001
---------- ----------
Total current liabilities 545,358 530,226
Long-term debt, less current portion 151,910 156,751
Other long-term liabilities 10,475 1,951
Deferred income taxes 44,537 38,227
---------- ----------
Total liabilities 752,280 727,155
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, $.01 par value; 75,000,000 shares authorized;
41,347,628 and 40,133,870 issued; 35,287,406 and 34,073,648
outstanding at December 31, 2005 and December 31, 2004, respectively 415 402
Additional paid-in capital 525,890 504,809
Retained earnings 257,991 125,481
Accumulated other comprehensive (loss) income (1,397) 6,821
Treasury stock (72,317) (72,317)
---------- ----------
Total stockholders' equity 710,582 565,196
---------- ----------
Total liabilities and stockholders' equity $1,462,862 $1,292,351
========== ==========

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

F-4

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- -----------------

REVENUES:
Aerospace & Defense $1,188,598 $605,398 $ 91,673
Products 308,878 249,765 193,960
Mobile Security 139,454 124,520 79,539
---------- -------- --------
Total revenues 1,636,930 979,683 365,172
---------- -------- --------
COSTS AND EXPENSES:
Cost of revenues 1,248,596 714,192 253,586
Cost of vest exchange program / warranty revision 19,900 5,000 --
Selling, general and administrative expenses 139,304 100,261 62,795
Amortization 8,627 4,255 489
Integration 3,669 2,558 2,054
Other charges 1,200 7,702 10,519
---------- -------- --------
OPERATING INCOME 215,634 145,715 35,729

Interest expense, net 6,281 6,776 4,012
Other (income) expense, net (4,025) 1,945 508
---------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES 213,378 136,994 31,209

PROVISION FOR INCOME TAXES 80,868 56,417 14,203
---------- -------- --------
INCOME FROM CONTINUING OPERATIONS 132,510 80,577 17,006

DISCONTINUED OPERATIONS (NOTE 2):
LOSS FROM DISCONTINUED OPERATIONS, NET OF
INCOME TAX BENEFIT -- (38) (6,120)
---------- -------- --------
NET INCOME $ 132,510 $ 80,539 $ 10,886
========== ======== ========
NET INCOME PER COMMON SHARE - BASIC

INCOME FROM CONTINUING OPERATIONS $ 3.83 $ 2.56 $ 0.61
LOSS FROM DISCONTINUED OPERATIONS 0.00 0.00 (0.22)
---------- -------- --------
BASIC INCOME PER SHARE $ 3.83 $ 2.56 $ 0.39
========== ======== ========
NET INCOME PER COMMON SHARE - DILUTED

INCOME FROM CONTINUING OPERATIONS $ 3.70 $ 2.44 $ 0.59
LOSS FROM DISCONTINUED OPERATIONS 0.00 0.00 (0.21)
---------- -------- --------
DILUTED INCOME PER SHARE $ 3.70 $ 2.44 $ 0.38
========== ======== ========
WEIGHTED AVERAGE SHARES - BASIC 34,602 31,419 28,175
========== ======== ========
WEIGHTED AVERAGE SHARES - DILUTED 35,822 33,025 28,954
========== ======== ========

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

F-5

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)

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

Balance, December 31, 2002 29,457 $336 $307,487 $ 34,056 $(4,169) $(49,633) $288,077
Exercise of stock options and
distribution of stock awards 743 8 9,028 9,036
Tax benefit from exercises of
options 1,136 1,136
Extension of stock options
related to termination of
former Chief Executive
Officer 809 809
Repurchase of stock (1,923) (22,684) (22,684)
--------
Comprehensive income:
Net income 10,886 10,886
Sale of ArmorGroup 3,231 3,231
Foreign currency translation
adjustments 4,874 4,874
--------
Total comprehensive income 18,991
------ ---- -------- -------- ------- -------- --------
Balance, December 31, 2003 28,277 344 318,460 44,942 3,936 (72,317) 295,365
Exercise of stock options and
distribution of stock awards 1,797 18 40,582 40,600
Tax benefit from exercises of
stock options 4,646 4,646
Issuance of common stock 4,000 40 141,121 141,161
--------
Comprehensive income:
Net income 80,539 80,539
Foreign currency translation
adjustments, net of taxes
of $642 2,885 2,885
--------
Total comprehensive income 83,424
------ ---- -------- -------- ------- -------- --------
Balance, December 31, 2004 34,074 402 504,809 125,481 6,821 (72,317) 565,196
Exercise of stock options and
distribution of stock awards 1,213 13 16,289 16,302
Tax benefit from exercises of
stock options 4,792 4,792
--------
Comprehensive income:
Net income 132,510 132,510
Foreign currency translation
adjustments, net of taxes
of ($728) (5,022) (5,022)
Minimum pension liability
adjustment, net of taxes
of $403 (712) (712)
Unrealized loss on equity
investment (2,484) (2,484)
--------
Total comprehensive income 124,292
------ ---- -------- -------- ------- -------- --------
Balance, December 31, 2005 35,287 $415 $525,890 $257,991 $(1,397) $(72,317) $710,582
====== ==== ======== ======== ======= ======== ========

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

F-6

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)

YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003
------------ ------------ ------------
(REVISED - SEE NOTE 17)

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 132,510 $ 80,577 $ 17,006
Adjustments to reconcile income from continuing operations to cash
provided by operating activities:
Depreciation and amortization 22,408 15,051 7,608
Loss on disposal of fixed assets 934 864 327
Deferred income taxes (3,411) 4,006 5,025
Non-cash termination charge -- 1,408 2,093
Non-cash restricted stock charges -- 6,294 7,266
Non-cash SERP expense 2,427 -- --
Fair value gain on put options (5,905) -- --
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (35,340) (90,496) (995)
Increase in inventories (31,135) (73,106) (2,501)
Decrease (increase) in prepaid expenses and other assets 23,541 (22,075) (2,381)
Increase in accounts payable, accrued expenses and other current
liabilities 24,288 77,418 17,060
Increase in income taxes payable 4,558 17,324 361
--------- --------- ---------
Net cash provided by operating activities from continuing
operations 134,875 17,265 50,869
Net cash used in operating activities from discontinued operations -- (407) (6,429)
--------- --------- ---------
Net cash provided by operating activities 134,875 16,858 44,440
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,593) (19,419) (8,684)
Purchase of patents and trademarks (1,053) (112) (185)
Purchase of equity investment (31,082) (5,275) --
Proceeds from sale of equity investment -- 5,823 --
Purchase of short-term investment securities (754,300) (286,430) (143,400)
Proceeds from sales of short-term investment securities 754,300 286,430 143,400
Collection of note receivable -- 2,175 --
Financing lease receivable (1,187) -- --
Decrease (increase) in restricted cash -- 2,600 (2,600)
Sale of businesses, net of cash disposed -- 125 31,361
Additional cash received from sale of business 300 -- --
Additional consideration for purchased businesses (6,528) (2,808) (1,026)
Purchase of businesses, net of cash acquired (46,805) (158,442) (90,512)
--------- --------- ---------
Net cash used in investing activities from continuing operations (101,948) (175,333) (71,646)
Net cash used in investing activities from discontinued operations -- (263) (8,227)
--------- --------- ---------
Net cash used in investing activities (101,948) (175,596) (79,873)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 18,902 25,192 8,471
Proceeds from sale of put options 6,614 -- --
Proceeds from the issuance of common stock -- 142,500 --
Cash paid for common stock offering costs -- (1,339) --
Taxes paid for withheld shares on restricted stock issuances (5,642) (2,585) (17)
Repurchases of treasury stock -- -- (22,684)
Cash paid for financing costs -- (6,156) (4,599)
Borrowings of short-term debt -- 341,550 --
Borrowings of long-term debt -- -- 148,278
Repayments of long-term debt (585) (34,516) (1,688)
Borrowings under line of credit 13,649 24,588 31,830
Repayments under line of credit (13,635) (23,049) (32,098)
--------- --------- ---------
Net cash provided by financing activities from continuing operations 19,303 466,185 127,493
Net cash used in financing activities from discontinued operations -- (125) (228)
--------- --------- ---------
Net cash provided by financing activities 19,303 466,060 127,265
Effect of exchange rate changes on cash and cash equivalents (1,598) 1,961 3,543
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 50,632 309,283 95,375
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 421,209 111,926 16,551
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 471,841 $ 421,209 $ 111,926
========= ========= =========
CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 471,841 $ 421,209 $ 111,850
DISCONTINUED OPERATIONS -- -- 76
--------- --------- ---------
$ 471,841 $ 421,209 $ 111,926
========= ========= =========

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

F-7

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company and nature of business. Armor Holdings, Inc. and its wholly-owned
subsidiaries (the "Company", "we", "our", "us") is a leading manufacturer and
provider of armored military and commercial vehicles, armor kits for the
retrofit of military vehicles, protective and security products for military and
law enforcement personnel, aircraft armor, aircraft safety products,
survivability equipment used by military aviators and other personnel protection
technologies. Our customers include domestic and international military, law
enforcement, security and corrections personnel and government agencies,
multinational corporations and individuals.

We are organized and operating under three business segments: the Aerospace &
Defense Group, the Products Group and the Mobile Security Division. ArmorGroup
Services Division (the "Services Division") has been classified as discontinued
operations. The amounts disclosed in the footnotes are related to continuing
operations unless otherwise indicated.

CONTINUING OPERATIONS

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

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

Mobile Security Division. Our Mobile Security Division, operating under the
brand name CENTIGON(TM), manufactures, services, and integrates certified
armoring systems into commercial vehicles, to protect against varying degrees of
ballistic and blast threats on a global basis. We armor a variety of platforms
that are available commercially, including custom limousines, sedans, sport
utility vehicles, commercial trucks and cash-in-transit vehicles. Our customers
in this business include U.S. federal law enforcement, intelligence and
diplomatic agencies, foreign heads of state, multinational corporations, as well
as high net worth individuals and cash-in-transit operators.

F-8

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

DISCONTINUED OPERATIONS

SIGNIFICANT ACCOUNTING POLICIES

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

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

Concentration of credit risk. Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of cash and cash equivalents
and trade accounts receivable. We maintain our cash and cash equivalents with
what we believe to be various high quality banks. During the year, we make
periodic investments in AAA rated auction rate securities, which are held in
these same banks. There were no investments in auction rate securities at
December 31, 2005 or 2004. Amounts held in individual banks exceed federally
insured amounts. Our accounts receivable consist of amounts due from customers
and distributors located throughout the world. International product sales
generally require cash in advance or confirmed letters of credit on U.S. banks.
We maintain reserves for potential credit losses. As of December 31, 2005 and
2004, management believes that we have no significant concentrations of credit
risk excluding the U.S. military.

Inventories. Inventories are stated at the lower of cost or market determined on
the average cost method.

F-9

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

Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximates fair value at
December 31, 2005 and 2004. The fair value of debt was estimated based on quoted
market prices. See the table below for the carrying amount and fair value of our
public debt as at December 31, 2005 and 2004, respectively.

DECEMBER 31, 2005 DECEMBER 31, 2004
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)

8.25% Senior Subordinated Notes
due 2013 $148,099 $161,250 $147,850 $168,000
2.00% Senior Subordinated
Convertible Notes due
November 1, 2024 341,751 341,550 341,579 396,384
-------- -------- -------- --------
$489,850 $502,800 $489,429 $564,384
======== ======== ======== ========

Derivative Instruments and Hedging Activities. We account for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedge
Activities" ("SFAS 133") as amended. All derivative instruments are recorded on
the Consolidated Balance Sheets at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. For fair
value hedge transactions in which we hedge changes in an asset's, liability's,
or firm commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. Put options on Company stock are marked to market
through the Consolidated Statement of Operations at the end of each period.

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

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

Goodwill. Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in a purchase business combination. Goodwill
and other intangible assets are stated on the basis of cost. The $220.9 million
in goodwill resulting from acquisitions made by us subsequent to June 30, 2001,
was immediately subjected to the non-amortization provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). (See also Impairment below). The purchase method of accounting for
business combinations requires us to make use of estimates and judgments to
allocate the purchase price paid for acquisitions to the fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed.
Goodwill is tested for impairment annually, or when a possible impairment is
indicated, using the fair value based test prescribed by SFAS 142. We performed
our annual assessment of goodwill and determined that no impairment existed as
of June 30, 2005.

F-10

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

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

Research and development. Our research and development occurs primarily under
fixed-price or cost-plus, government funded contracts as well as
Company-sponsored efforts. Research and development costs incurred under
contracts with customers are expensed as incurred and are reported as a
component of cost of revenues. Revenue from such contracts is recognized as
revenue when earned. We recorded revenue of $4.2 million, $7.5 million and $5.8
million from government funded research and development in fiscal 2005, 2004 and
2003, respectively.

Legal and tax contingencies. We are involved in legal and tax proceedings and
claims arising from time to time. Management, in connection with outside
advisors, periodically assesses liabilities and contingencies in connection with
these matters, based on the latest information available. For those matters
where it is probable that a loss has been or will be incurred, we record the
loss, or a reasonable estimate of the loss, in the Consolidated Financial
Statements. As additional information becomes available, estimates of probable
losses are adjusted based on an assessment of the circumstances. We believe that
the outcome of these matters, individually and in the aggregate, will not have a
material adverse effect on the Consolidated Financial Statements.

F-11

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

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

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

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

Warranty. Warranty costs are generally recorded as a component of cost of
revenues and accrued expenses in our consolidated financial statements. The
amount recognized is based on historical claims cost experience. See Note 23
regarding our vest exchange program / warranty revision related to our
Zylon(R)-containing vests.

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

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

In accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
we classify our investment in certain equity-based securities as
available-for-sale, with unrealized gains and losses excluded from earnings and
recorded as a component of comprehensive income or loss. The unrealized holding
loss on equity-based securities classified as available-for-sale was $2.5
million at December 31, 2005. There was no such unrealized loss at December 31,
2004. This investment is classified in other assets on the Consolidated Balance
Sheets. Declines in fair value below the amortized cost basis of this investment
that are determined to be other than temporary are charged to earnings. There
were no such other than temporary declines in the year ended December 31, 2005.

F-12

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

Stock options and grants. Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement
of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," ("SFAS 148") establishes a fair value
based method of accounting for stock-based employee compensation plans; however,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. We have elected to
continue to account for employee stock compensation plans under APB 25 with pro
forma disclosures of net earnings and earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied. Restricted
stock awards are generally recorded as compensation expense using fixed
accounting over the vesting periods based on the market value on the date of
grant except in situations where provisions of the agreements allow for
acceleration of vesting upon a certain event. If the event occurs, this may
result in an acceleration of vesting and recognition of associated expense.

If compensation cost for stock option grants had been determined based on the
fair value on the grant dates for fiscal 2005, 2004 and 2003 consistent with the
method prescribed by SFAS 123, our net earnings and earnings per share would
have been adjusted to the pro forma amounts indicated below:

2005 2004 2003
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)

Net income as reported $132,510 $80,539 $10,886

Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects (37,305) (6,717) (4,157)

Add: Employee compensation expense for
modification of stock option awards included
in report net income, net of income taxes 118 57 506
-------- ------- -------
Pro-forma net income $ 95,323 $73,879 $ 7,235
======== ======= =======
Earnings per share:
Basic - as reported $ 3.83 $ 2.56 $ 0.39
======== ======= =======
Basic - pro forma $ 2.75 $ 2.35 $ 0.26
======== ======= =======
Diluted - as reported $ 3.70 $ 2.44 $ 0.38
======== ======= =======
Diluted - pro forma $ 2.66 $ 2.24 $ 0.25
======== ======= =======

$15.3 million of the stock-based employee compensation expense determined under
the fair value method for fiscal 2005 is related to accelerated vesting of
certain existing stock options and $22.0 million is related to certain stock
options issued in fiscal 2005.

F-13

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

Discontinued Operations. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), a component classified as held for sale is reported in
discontinued operations when the following conditions are met: (a) the
operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
In a period in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement for current and prior periods
reports the results of operations of the component, including any estimated
impairment gain or loss recognized in accordance with SFAS 144 paragraph 37, in
discontinued operations. The results of discontinued operations, less applicable
income tax expense (benefit), is reported as a separate component of income
before extraordinary items and the cumulative effect of accounting changes (if
applicable). The assets and liabilities of a disposal group classified as held
for sale are presented separately in the asset and liability sections,
respectively, of the statement of financial position. We had no discontinued
operations at December 31, 2005 or 2004. See Note 2 for information related to
discontinued operations during 2003 and the first half of 2004.

Reclassifications. Certain reclassifications have been made to the 2004 and 2003
financial statements in order to conform to the presentation adopted for 2005.
These reclassifications had no effect on net income or retained earnings.

Recent accounting pronouncements.

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

F-14

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

2. DISCONTINUED OPERATIONS

See Note 1 for information related to discontinued operations. The following is
a summary of the operating results of the discontinued operations for the years
ended December 31, 2004 and 2003. There were no discontinued operations in the
year ended December 31, 2005.

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

Revenue $1,733 $ 95,124
Cost of revenues 697 66,780
Gross profit 1,036 28,344
Selling, general and administrative expenses 821 19,910
Charge for impairment of long-lived assets -- 21,535
Integration -- 776
------ --------
Operating income (loss) 215 (13,877)
Interest expense, net 2 16
Other expense, net 273 479
------ --------
Loss from discontinued operations before
income tax benefit (60) (14,372)
Income tax benefit (22) (8,252)
------ --------
Loss from discontinued operations $ (38) $ (6,120)
====== ========

3. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive (loss) income, net of tax
(benefit) expense of $(325,000) and $642,000 as of December 31, 2005 and 2004,
respectively, are listed below:

DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
(IN THOUSANDS)

Foreign currency translations, net of tax $ 1,799 $6,821
Minimum pension liability adjustment,
net of tax (712) --
Unrealized loss on equity investment (2,484) --
------- ------
Accumulated other comprehensive (loss) $(1,397) $6,821
income ======= ======

F-15

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

4. BUSINESS COMBINATIONS

We have completed numerous purchase business combinations for cash and/or shares
of our common stock and assumption of liabilities in certain cases. In the three
years ended December 31, 2005, the following acquisitions were completed:

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

2005
Aggregate 2005 acquisitions, net of cash (1) $ 46,992 -- --
Additional purchase price paid/issued for
deferred consideration 6,528 -- --
-------- --- ---
$ 53,520 -- --
======== === ===
2004
Aggregate 2004 acquisitions, net of cash (2) $158,442 -- --
Additional purchase price paid/issued for
deferred consideration/repayment of debt 2,808 -- --
-------- --- ---
$161,250 -- --
======== === ===
2003
Aggregate 2003 acquisitions, net of cash (3) $ 90,512 -- --
Additional purchase price paid/issued for
acquisition earnouts 1,026 -- --
-------- --- ---
$ 91,538 -- --
======== === ===

(1) Includes Second Chance Body Armor, Inc. and Optemize.com, Inc.

(2) Includes Vector Associates, Inc. (dba ODV, Inc.), Kleen-Bore, Inc., The
Specialty Group, Inc. (aka "Specialty Defense"), and Bianchi International

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

2005 ACQUISITIONS

On July 27, 2005, we acquired substantially all of the domestic assets of Second
Chance Body Armor, Inc. ("Second Chance") for $45 million in cash. Transaction
costs for Second Chance included $187,000 of non-cash equity compensation to a
corporate development consultant. Second Chance manufactures concealable and
tactical body armor for the law enforcement and military markets worldwide. The
Second Chance law enforcement business is included in the Products Group and
their military business is included in the Aerospace & Defense Group. As a
result of the Second Chance acquisition, we expect to: (1) strengthen our
position as a leading supplier of body armor to the law enforcement and military
markets; (2) achieve cross-selling opportunities by leveraging our global sales
force and relationships; and (3) offer opportunities for cost reduction through
integration savings and rationalization of operations.

F-16

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

The acquisitions were accounted for as purchase business combinations, and
accordingly, the results of operations were included in our financial statements
after the acquisition date. The costs to acquire substantially all of the assets
of Second Chance and Optemize.com, Inc., acquired during the year ended December
31, 2005, have been allocated to the assets acquired and liabilities assumed
according to their estimated fair values at the time of the acquisition as
follows:

2005
-------
(IN THOUSANDS)
Working capital, net of cash $ 7,928
Property and equipment 2,677
Other long-term assets 16
Customer-related intangibles 5,160
Technology-related intangibles 4,761
Marketing-related intangibles 18,966
Goodwill (Deductible) 7,484
-------
$46,992
=======

The customer-related intangible assets relate to acquired customer relationships
and are being amortized over an eighteen-year weighted-average useful life on a
straight-line basis. The technology-related intangible assets relate to certain
acquired patents and are being amortized over an eight-year weighted-average
useful life on a straight-line basis. The marketing-related intangible assets
relate to acquired trade names and trademarks and have an indefinite useful
life. The goodwill acquired in the acquisitions of Second Chance and
Optemize.com, Inc. is deductible for tax purposes.

2004 ACQUISITIONS

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

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

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

F-17

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

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

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

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

2003 ACQUISITIONS

On December 9, 2003, we acquired all of the outstanding stock of Simula, for
approximately $84.8 million in cash including transaction costs. Simula is a
safety technology company that supplies human safety and survival systems to all
branches of the United States military, major aerospace and defense prime
contractors. Its core markets are military aviation safety, military personnel
safety, and land and marine safety. Simula is a provider of military helicopter
seating systems, aircraft and land vehicle armor systems, protective equipment
for military personnel and technologies used to protect humans in a variety of
life-threatening or catastrophic situations. As part of the acquisition of
Simula, we assumed their 8% Senior Subordinated Convertible Notes. In January
2004, we paid $31.1 million as repayment of these notes plus accrued interest
thereon.

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

F-18

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

The Simula acquisition was accounted for as a purchase business combination, and
accordingly, the results of operations were included in our financial statements
after December 9, 2003. The cost to acquire Simula has been allocated to the
assets acquired and liabilities assumed according to their estimated fair values
at the time of the acquisition as follows:

(IN THOUSANDS)
--------------
Working capital $ 5,027
Property and equipment 5,360
Other long-term assets 434
Assumed note payable (31,135)
Assumed long-term liabilities (1,704)
Customer-related intangible 25,140
Technology-related intangible 8,814
Goodwill (Deductible) 72,816
--------
$ 84,752

The customer-related intangible asset relates to acquired customer relationships
and is being amortized over a 14-year weighted-average useful life on a
straight-line basis. The technology-related intangible asset relates to certain
acquired technology and is being amortized over an eight-year weighted-average
useful life on a straight-line basis.

Unaudited Pro forma Results. Businesses acquired are included in consolidated
results from the date of acquisition. Pro forma results of the 2005 acquisition
of Optemize.com, Inc.; the 2004 acquisitions of Vector Associates, Inc. (dba
ODV, Inc.) and Kleen-Bore, Inc.; and the 2003 acquisition of Hatch Imports, Inc.
are not presented, as they would not differ by a material amount from actual
results. The following unaudited pro forma consolidated results are presented to
show the results on a pro forma basis as if the 2005 acquisition of Second
Chance, the 2004 acquisitions of Specialty Defense and Bianchi and the 2003
acquisition of Simula had been made as of January 1, 2003:

2005 2004 2003
---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues $1,657,809 $1,147,430 $569,245
Net income from continuing operations $ 127,139 $ 80,268 $ 11,700
Basic earnings per share from continuing operations $ 3.67 $ 2.41 $ 0.36
Diluted earnings per share from continuing operations $ 3.55 $ 2.30 $ 0.36

The pro forma results were negatively impacted by the acquisition of Second
Chance, which was purchased out of bankruptcy and had experienced legal and
financial troubles.

F-19

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

5. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Under SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but are tested for impairment at least annually or more often
if indicators of impairment arise. The changes in the carrying amount of
goodwill for the years ended December 31, 2005 and 2004, are as follows:

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

Balance at December 31, 2003 $104,949 $ 64,405 $6,353 $ -- $175,707
Goodwill acquired during year 50,243 35,830 -- -- 86,073
Finalization of purchase price allocation (879) 925 -- -- 46
Foreign currency translation and other adjustments -- 132 55 -- 187
-------- -------- ------ ------ --------
Balance at December 31, 2004 154,313 101,292 6,408 -- 262,013
Goodwill acquired during year -- 5,841 -- 1,643 7,484
Finalization of purchase price allocation 1,459 2,842 150 -- 4,451
Foreign currency translation and other adjustments -- (184) (68) -- (252)
-------- -------- ------ ------ --------
Balance at December 31, 2005 $155,772 $109,791 $6,490 $1,643 $273,696
======== ======== ====== ====== ========

F-20

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

The purchase price allocations for the acquisitions of Bianchi International and
Specialty Defense, acquired in the fourth quarter of 2004, were completed during
2005.

Included in patents, licenses and trademarks in the accompanying Consolidated
Balance Sheets are the following intangible assets as of December 31, 2005 and
2004:

CUSTOMER
RELATIONSHIPS TECHNOLOGY MARKETING TOTAL
------------------- --------------- ----------------- ------------------
(IN THOUSANDS)

Gross amount at December 31, 2005 $ 60,351 $ 20,070 $ 65,455 $ 145,876
Accumulated amortization (8,769) (3,608) (2,879) (15,256)
------------------- --------------- ----------------- ------------------
Net amount at December 31, 2005 $ 51,582 $ 16,462 $ 62,576 $ 130,620
=================== =============== ================= ==================

Gross amount at December 31, 2004 $ 58,454 $ 14,711 $ 46,124 $ 119,289
Accumulated amortization (2,796) (1,461) (2,573) (6,830)
------------------- --------------- ----------------- ------------------
Net amount at December 31, 2004 $ 55,658 $ 13,250 $ 43,551 $ 112,459
=================== =============== ================= ==================

Included in Marketing are approximately $60.6 million and $41.2 million of
marketing-related intangible assets that have indefinite lives as of December
31, 2005 and 2004, respectively.

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

YEAR (IN THOUSANDS)
---------- --------------
2006 $ 8,852
2007 8,852
2008 8,820
2009 7,635
2010 5,291
Thereafter 30,602
-------
$70,052
=======

F-21

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

6. INVENTORIES

The components of inventory as of December 31, 2005 and 2004, are as follows:

2005 2004
-------- --------
(IN THOUSANDS)
Raw materials $127,465 $ 97,528
Work-in-process 48,900 51,137
Finished goods 34,152 27,543
-------- --------
$210,517 $176,208
======== ========

7. PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2005 and 2004, are summarized as
follows:

2005 2004
-------- --------
(IN THOUSANDS)
Land $ 5,315 $ 6,096
Buildings and improvements 45,398 39,308
Machinery and equipment 63,978 53,947
Construction in process 2,279 5,873
-------- --------
Total 116,970 105,224
Accumulated depreciation (37,041) (27,917)
-------- --------
$ 79,929 $ 77,307
======== ========

Depreciation expense for the years ended December 31, 2005, 2004 and 2003, was
approximately $11,779,000, $9,645,000 and $5,719,000, respectively.

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of December 31, 2005 and 2004,
are summarized as follows:

2005 2004
-------- --------
(IN THOUSANDS)
Accrued expenses $ 75,505 $ 69,494
Vest exchange program / warranty revision accrual
(See Note 23) 18,511 1,375
Customer deposits 5,837 32,317
Deferred consideration for acquisitions 1,071 4,061
-------- --------
$100,924 $107,247
======== ========

F-22

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

9. SHORT AND LONG TERM DEBT

SHORT TERM DEBT

2005 2004
-------- --------
(IN THOUSANDS)
2% Convertible Notes (a) $341,751 $341,579
Credit facility - Colombia (b) 1,565 2,177
Credit facility - Brazil (c) 958 --
-------- --------
$344,274 $343,756
======== ========

(a) On October 29, 2004, we completed the placement of $300 million aggregate
principal amount of 2.00% Senior Subordinated Convertible Notes due November 1,
2024 ("2% Convertible Notes"). On November 5, 2004, Goldman, Sachs & Co.
exercised its option to purchase an additional $45 million principal amount of
the 2% Convertible Notes. The 2% Convertible Notes are guaranteed by most of our
domestic subsidiaries on a senior subordinated basis (see Note 22). The 2%
Convertible Notes were initially rated B1/B+ by Moody's Investors' Service and
Standard & Poor's Rating Services, respectively. The 2% Convertible Notes will
bear interest at a rate of 2.00% per year, payable on November 1 and May 1 of
each year beginning on May 1, 2005 and ending on November 1, 2011. The 2%
Convertible Notes will be subject to accretion of the principal amount beginning
on November 1, 2011, at a rate that provides holders with an aggregate annual
yield to maturity of 2.00%, as defined in the agreement. The 2% Convertible
Notes will bear contingent interest during any six-month period beginning
November 1, 2011, of 15 basis points paid in cash if the average trading price
of the notes is above certain levels. The 2% Convertible Notes will be
convertible, at the bond holder's option, at any time prior to maturity,
initially at a conversion rate of 18.5151 shares of our common stock per $1,000
principal amount of notes, which is the equivalent conversion price of
approximately $54.01 per share, subject to adjustment. Upon conversion, we will
satisfy our conversion obligation with respect to the accreted principal amount
of the notes to be converted in cash, with any remaining amount to be satisfied
in shares of our common stock. The conversion rate will be subject to
adjustment, without duplication, upon the occurrence of any of the following
events: (1) stock dividends in common stock, (2) issuance of rights and
warrants, (3) stock splits and combinations, (4) distribution of indebtedness,
securities or assets, (5) cash distributions, (6) tender or exchange offers, and
(7) repurchases of common stock. In accordance with U.S. GAAP, the 2%
Convertible Notes are classified as short term debt as they can be converted at
any time prior to maturity.

(b) On March 12, 2003, we entered into a collateralized revolving credit
facility with Corporacion Financiera to provide for working capital needs for
our Colombia facility. In 2004, we expanded the collateralized revolving credit
facility with four additional Colombian banks. The Colombian credit facility is
a one-year revolving credit facility and, among other things, provides for total
maximum borrowings of 6 billion Colombian Pesos (U.S. $2.6 million based on the
exchange rate as of December 31, 2005). All borrowings under the credit facility
bear interest at a rate equal to the Colombian Central Bank rate based on
averages of 30 day loans, plus an applicable margin ranging from 3.5% to 4.0%.
The Colombian credit facility is guaranteed by a U.S. $100,000 standby letter of
credit and bank signature notes.

(c) In February 2005, we entered into a collateralized revolving credit facility
with Itau S.A. to provide working capital funds for our Brazilian facility. The
Brazilian credit facility runs through March 2006 and, among other things,
provides for total maximum borrowings of 3.3 million Brazilian Reals (U.S. $1.4
million based on the exchange rate as of December 31, 2005). All borrowings
under the Brazilian credit facility bear interest at a rate equal to 5% per
annum. The Brazilian credit facility is guaranteed by a stand by letter of
credit with Itau S.A. and other bank signature notes guaranteed by the parent
company.

F-23

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

LONG TERM DEBT

2005 2004
-------- --------
(IN THOUSANDS)
Credit facility (a) $ -- $ --
8.25% Senior Subordinated Notes due 2013 (b) 148,099 147,850
Note payable in annual principal and interest
installments of $200 through January 2013, with an
interest rate of 5% 1,252 1,377
Note to former officer payable in monthly principal and
interest installments of $7 through December 2009,
with an imputed interest rate of 9.25% 256 310
Note payable in monthly principal and interest
installments of $13 through September 2008, with an
interest rate of 3% 415 642
Mortgage payable in monthly principal and interest
installments of $12 through November 2013, with an
interest rate of 6.25% 891 975
Minimum guaranteed royalty to former officer payable in
monthly principal and interest installments of $4
through August 2005, with an imputed interest rate
of 9.2% -- 31
Minimum guaranteed royalty to former officer payable in
monthly principal and interest installments of $36
through April 2005, with an imputed interest rate
of 7.35% -- 141
Plus fair value of interest rate swaps (c) 1,427 6,046
-------- --------
152,340 157,372
Less current portion (430) (621)
-------- --------
$151,910 $156,751
======== ========

(a) Credit Facility - On August 12, 2003, we terminated our existing credit
facility and entered into a new collateralized revolving credit facility with
Bank of America, N.A., Wachovia Bank, N.A. and Key Bank, N.A. The new credit
facility is a five-year revolving credit facility and, among other things,
provides for: 1) total maximum borrowings of $60 million; 2) a $25 million
sub-limit for the issuances of standby and commercial letters of credit; 3) a $5
million sub-limit for swing-line loans; and 4) a $5 million sub-limit for
multi-currency borrowings. All borrowings under the new credit facility will
bear interest at either 1) a rate equal to LIBOR, plus an applicable margin
ranging from 1.125% to 1.625%; 2) an alternate base rate which will be the
higher of (a) the Bank of America prime rate and (b) the Federal Funds rate plus
0.50%; or 3) with respect to foreign currency loans, a fronted offshore currency
rate, plus an applicable margin ranging from 1.125% to 1.625%, depending on
certain conditions. The Credit Facility is guaranteed by certain of our direct
and indirect domestic subsidiaries and is collateralized by, among other things,
(i) a pledge of all of the issued and outstanding shares of stock or other
equity interests of certain of our domestic subsidiaries, (ii) a pledge of 65%
of the issued and outstanding voting shares of stock or other voting equity
interests of certain of our direct and indirect foreign subsidiaries, (iii) a
pledge of 100% of the issued and outstanding nonvoting shares of stock or other
nonvoting equity interests of certain of our direct and indirect foreign
subsidiaries, and (iv) a first priority perfected security interest on certain
of our domestic assets and certain domestic assets of certain of our direct and
indirect subsidiaries that will become guarantors of our obligations under the
new credit facility, including, among other things, accounts receivable,
inventory, machinery, equipment, certain contract rights, intellectual property
rights and general intangibles. On January 9, 2004, we amended our Credit
Facility to broaden our ability to make additional open-market purchases of
publicly-traded securities subject to certain limitations. On March 29, 2004, we
amended our Credit Facility to allow us to pay dividends subject to certain
limitations. On October 19, 2004, we amended our Credit Facility to allow us to
subtract cash equivalents from total indebtedness in calculation of our
compliance covenants. On April 14, 2005, we amended our credit agreement to
amend the definition of cash equivalents to include auction rate securities held
by our existing bank group. On July 26, 2005, we amended the Credit Facility to
allow for advances, loans, extensions of credit to or any other investments in
key suppliers of the Company in an aggregate amount not to exceed $15 million at
any time outstanding for the purpose of facilitating the sale and purchase of
goods and services to the Company. In addition, the amendment allows for leases
or other dispositions of assets of not more than 10% of the consolidated
earnings before interest, taxes, depreciation and amortization ("EBITDA"), as
defined in the Credit Facility. At December 31, 2005, we had $53.0 million in
availability under our Credit Facility excluding $7.0 million in outstanding
letters of credit.

F-24

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

(b) 8.25% Senior Subordinated Notes due 2013 - On August 12, 2003, we completed
a private placement of $150 million aggregate principal amount of 8.25% Senior
Subordinated Notes due 2013 (the "8.25% Notes"). The 8.25% Notes are guaranteed
by most of our domestic subsidiaries on a senior subordinated basis (see Note
22). The 8.25% Notes were sold to qualified institutional buyers in reliance on
Rule 144A of the Securities Act of 1933, as amended, and to non-U.S. persons in
reliance on Regulation S under the Securities Act of 1933, as amended. In 2004,
after the completion of the private placement of the 8.25% Notes, we conducted
an exchange offer pursuant to which holders of the privately placed 8.25% Notes
exchanged such notes for 8.25% Notes registered under the Securities Act of
1933, as amended. The 8.25% Notes were rated B1/B+ by Moody's Investors' Service
and Standard & Poor's Rating Services, respectively. During 2003, we used a
portion of the funds to acquire Simula, Inc. and Hatch Imports, Inc., and we
used the remaining proceeds of the offering to fund acquisitions, repay a
portion of our outstanding debt and for general corporate and working capital
purposes, including the funding of capital expenditures. Interest on the 8.25%
Notes is payable semiannually on the fifteenth of February and August of each
year. The 8.25% Notes were issued at a discount of approximately $2.5 million to
investors. The 8.25% Notes may be redeemed at our option in whole or in part on
a pro-rata basis, on and after August 15, 2008, at certain specified redemption
prices plus accrued interest payable to the redemption date.

(c) Fair Value of Interest Rate Swaps - On September 2, 2003, we entered into
interest rate swap agreements, designated as a fair value hedge as defined under
SFAS 133 with an aggregate notional amount totaling $150 million. The agreements
were entered to exchange the fixed interest rate on the 8.25% Notes for a
variable interest rate equal to six-month LIBOR, set in arrears, plus a spread
ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth day of
February and August. At December 31, 2005, the six-month LIBOR was 4.7%. The
agreements are subject to other terms and conditions common to transactions of
this type. In accordance with SFAS 133, changes in the fair value of the
interest rate swap agreements offset changes in the fair value of the fixed rate
debt due to changes in the market interest rate. The fair value of the interest
rate swap agreements was approximately $1.4 million at December 31, 2005. The
agreements are deemed to be a perfectly effective fair value hedge and therefore
qualify for the short-cut method of accounting under SFAS 133. As a result, no
ineffectiveness is expected to be recognized in earnings associated with the
interest rate swap agreements on the 8.25% Notes.

Maturities of long-term debt are as follows:

YEAR (IN THOUSANDS)
--------------- --------------
2006 $ 430
2007 453
2008 437
2009 338
2010 282
Thereafter 150,400
--------
$152,340
========

F-25

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

10. DERIVATIVE FINANCIAL INSTRUMENTS

We account for derivative instruments in accordance with Statement of Financial
Accounting Standards No. 133, " Accounting for Derivative Instruments and
Hedging Activities," as amended by Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of SFAS 133", and Statement of Financial Accounting
Standards No. 149 "Amendment of SFAS 133 on Derivative Instruments and Hedging
Activities" (collectively "SFAS 133"). SFAS 133 requires all freestanding and
embedded derivative instruments to be measured at fair value and recognized on
the Consolidated Balance Sheet as either assets or liabilities. In addition, all
derivative instruments used in hedging relationships must be designated,
reassessed and accounted for as either fair value hedges or cash flow hedges
pursuant to the provisions of SFAS 133.

On October 29, 2004, we completed the placement of the 2% Convertible Notes. On
November 5, 2004, Goldman, Sachs & Co. exercised its option to purchase an
additional $45 million principal amount of the 2% Convertible Notes. The 2%
Convertible Notes will bear interest at a rate of 2.00% per year, payable on
November 1 and May 1 of each year beginning on May 1, 2005 and ending on
November 1, 2011. The 2% Convertible Notes will be subject to accretion of the
principal amount beginning on November 1, 2011, at a rate that provides holders
with an aggregate annual yield to maturity of 2.00%, as defined in the
agreement. The 2% Convertible Notes will bear contingent interest during any
six-month period beginning November 1, 2011, of 15 basis points paid in cash if
the average trading price of the notes is above certain levels. As defined in
SFAS 133, "Accounting for Derivative Instruments and Hedge Activities" the
contingent interest feature of the 2% Convertible Notes is an embedded
derivative that is not considered clearly and closely related to the host
contract. The fair value of this bifurcated derivative at December 31, 2005, and
December 31, 2004 is immaterial to our financial position.

We hedge the fair value of our 8.25% Notes using interest rate swaps. We enter
into these derivative contracts to manage fair value changes which could be
caused by our exposure to interest rate changes. On September 2, 2003, we
entered into interest rate swap agreements, designated as fair value hedges as
defined under SFAS 133 with an aggregate notional amount totaling $150 million.
The agreements were entered into to exchange the fixed interest rate on the
8.25% Notes for a variable interest rate equal to six-month LIBOR (4.7% at
December 31, 2005), set in arrears, plus a spread ranging from 2.735% to 2.75%
fixed semi-annually on the fifteenth of February and August each year through
maturity. The agreements are subject to other terms and conditions common to
transactions of this type. These fair value hedges qualify for hedge accounting
using the short-cut method since the swap terms match the critical terms of the
8.25% Notes. Accordingly, changes in the fair value of the interest rate swap
agreements offset changes in the fair value of the 8.25% Notes due to changes in
the market interest rate. As a result, no ineffectiveness is expected to be
recognized in our earnings associated with the interest rate swap agreements on
the 8.25% Notes. The fair value of the interest rate swap agreements was
approximately $1.4 million and $6.0 million at December 31, 2005 and December
31, 2004, respectively, and is included in other assets and long-term debt on
the accompanying consolidated balance sheets.

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

F-26

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

11. INTEGRATION

We incurred integration expenses of approximately $3.7 million, $2.6 million and
$2.1 million for the years ending December 31, 2005, 2004 and 2003,
respectively. Integration expenses include costs related to integrating new
acquisitions and costs associated with unsuccessful acquisitions. Integration
expenses in fiscal 2005 related primarily to the integration of Second Chance,
which was acquired in July 2005, and Specialty Defense and Bianchi, which were
acquired in the fourth quarter of 2004. Integration expenses in fiscal 2004
related primarily to the integration of Simula and Hatch, which were acquired in
the fourth quarter of 2003. Integration expenses in fiscal 2003 related
primarily to entities acquired during fiscal 2002, including Trasco Bremen, 911
Emergency Products, Foldable Products Group, B-Square, Inc., Speedfeed, Inc. and
Evi-Paq, Inc.

12. OTHER CHARGES

We incurred other charges of approximately $1.2 million, $7.7 million and $10.5
million for the years ending December 31, 2005, 2004 and 2003, respectively.
Other charges in fiscal 2004 includes charges for a non-cash charge of $6.3
million related to the acceleration of performance-based, long-term restricted
stock awards granted to certain executives in 2002 due to our achievement of
reaching certain EBITDA, as defined, targets. Other charges in fiscal 2004 also
includes an impairment charge of $1.4 million to reduce the carrying value of
the remaining portion of NTI to its estimated fair value. Other charges in
fiscal 2003 includes a non-cash charge of $7.3 million for stock-based
compensation for a performance plan for certain key executives of 350,000 shares
of our common stock. On November 11, 2003, our stock price closed above $20 for
the fifth consecutive trading day, which caused the complete vesting of the
stock bonus awards. Other charges in fiscal 2003 also includes a $3.2 million
severance charge (including a $2.1 million non-cash charge) related to the 2003
departure of our former Chief Executive Officer.

13. COMMITMENTS AND CONTINGENCIES

Employment contracts. We are party to several employment contracts as of
December 31, 2005 with certain members of management. Such contracts are for
varying periods and include restrictions on competition after termination. These
agreements provide for salaries, bonuses and other benefits and also specify and
delineate the granting of various stock options.

Legal/litigation matters.

Kroll, Inc. Matters

O'Gara-Hess & Eisenhardt Armoring do Brasil Ltda. ("OHE Brazil") was previously
assessed 41.1 Million Reals (US $17.6 million based on the exchange rate as of
December 31, 2005) plus interest and penalties by the Brazilian tax authorities.
OHE Brazil has appealed the tax assessments and the cases are pending and we
believe no accrual is necessary. To the extent that there may be any liability
resulting from such assessments, we believe that we are entitled to
indemnification from Kroll, Inc. for up to $7.8 million under the terms of our
purchase agreement dated April 20, 2001, because the events in question with
respect to up to $7.8 million of such assessments occurred prior to our purchase
of the O'Gara Companies from Kroll, Inc.

F-27

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

approximately $52,000. Kroll, Inc. indemnified us, subject to a $500,000
deductible, with respect to these settlement payments.

In December 2001, O'Gara-Hess & Eisenhardt France S.A., which was acquired from
Kroll, Inc. ("OHE France") in August 2001, sold its industrial bodywork business
operated under the name Labbe/Division de O'Gara Hess & Eisenhardt France/
Carrosserie Industriells ("Carrosserie") to SNC Labbe. Subsequent to the sale,
the Labbe Family Trust ("LFT"), owner of the leasehold interest upon which the
Carrosserie business is operated, sued OHE France and SNC Labbe claiming that
the transfer of the leasehold was not valid because LFT had not given its
consent to the transfer as required under the terms of the lease. LFT sought to
have OHE France, as the sole tenant, maintain and repair the leased building
with an estimated cost of between U.S. $3.7 and U.S. $7.3 million, based on the
exchange rate as of December 31, 2005. The case is currently pending, and while
we are contesting the allegations vigorously, we are unable to predict the
outcome of this matter and as such, no amount has been accrued. Although we do
not have any insurance coverage for this matter, at this time, we do not believe
this matter will have a material impact on our financial position, operations or
liquidity.

Zylon(R)

In April, 2004, two class action lawsuits were filed against us in Florida state
court by police organizations and individual police officers, alleging that
ballistic-resistant soft body armor (vests) containing Zylon(R), manufactured
and sold by American Body Armor(TM), Safariland(R) and PROTECH(R), failed to
meet the warranties provided with the vests. On November 5, 2004, the
Jacksonville, Florida (Duval County) Circuit Court gave final approval to a
settlement reached with the Southern States Police Benevolent Association
("SSPBA") which provided that (i) purchasers of certain Zylon(R)-containing vest
models could exchange their vests for other vests manufactured by the Company
and, (ii) the Company would continue its internal used-vest testing program
(VestCheck(TM)). The other class action suit, which was filed by the National
Association of Police Organizations, Inc. (NAPO), in Ft. Myers, Florida (Lee
County), was voluntarily dismissed with prejudice on November 16, 2004.

On August 24, 2005, the United States Department of Justice National Institute
of Justice ("NIJ"), released its Third Status Report to the Attorney General on
Body Armor Safety Initiative Testing and Activities (the "Third NIJ Report").
The Third NIJ Report contained, among other items, information and testing data
on Zylon(R) and Zylon(R)-containing vests, and substantially modified compliance
standards for all ballistic-resistant vests with the implementation of the NIJ
2005 Interim Requirements for Ballistic-Resistant Body Armor. As a result of the
actions of the NIJ, the Company halted all sales or shipment of any
Zylon(R)-containing vest models effective August 25, 2005, and immediately
established a Supplemental Relief (renamed the Zylon(R) Vest Exchange ("ZVE"))
Program that provides either a cash or voucher option to those who purchased
Zylon(R)-containing vests from us through August 29, 2005. The ZVE Program, with
the consent of the SSPBA, was given final approval by the Jacksonville, Florida
Court on October 27, 2005. (See also Note 23 for information regarding the
estimated cost of the ZVE program.)

Other Matters

F-28

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

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

14. INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

For management and internal reporting purposes, we have organized our business
into three segments - the Aerospace & Defense Group, the Products Group and the
Mobile Security Division. As described further in Note 1, the Aerospace &
Defense Group supplies human safety and survival systems to the U.S. military
and major aerospace and defense prime contractors. The Products Group,
previously referred to as the Armor Holdings Products Division, manufactures and
sells a broad range of high quality equipment marketed under brand names that
are known in the military and law enforcement communities. Our Mobile Security
Division, operating under the brand name CENTIGON(TM), manufactures, services,
and integrates certified armoring systems into commercial vehicles, to protect
against varying degrees of ballistic and blast threats on a global basis. Our
Corporate costs include the corporate management and expenses associated with
managing the overall company. These expenses include compensation and benefits
of corporate management and staff, legal and professional fees, and
administrative and general expenses, which are not allocated to the business
units. Our Corporate assets primarily include cash and cash equivalents held by
the corporate entities, property & equipment related to the corporate facility
and certain information technology costs, assets related to the deferred
compensation plan, costs related to the issuance of debt, including the 2%
Convertible Notes, the 8.25% Notes and the Credit Facility.

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

2005 2004 2003
---------- -------- --------
(IN THOUSANDS)
Revenues:
Aerospace & Defense $1,188,598 $605,398 $ 91,673
Products 308,878 249,765 193,960
Mobile Security 139,454 124,520 79,539
---------- -------- --------
Total revenues $1,636,930 $979,683 $365,172
========== ======== ========

Operating income:
Aerospace & Defense $ 206,194 $127,520 $ 22,775
Products (a) 25,005 32,719 33,054
Mobile Security 14,066 11,168 2,538
Corporate (29,631) (25,692) (22,638)
---------- -------- --------
Total operating income $ 215,634 $145,715 $ 35,729
========== ======== ========

(a) The Products Group operating income for fiscal 2005 includes a pre-tax
charge of $19.9 million for the cost of the ZVE. The Products Group operating
income for fiscal 2004 includes a pre-tax charge of $5.0 million for the cost of
the warranty revision program (see Notes 13 and 23).

F-29

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

2005 2004 2003
---------- ---------- --------
(IN THOUSANDS)
Total assets:
Aerospace & Defense $ 543,188 $ 490,754 $209,834
Products 350,885 278,912 183,972
Mobile Security 87,866 103,799 63,161
Corporate 480,923 418,886 126,303
---------- ---------- --------
Total assets $1,462,862 $1,292,351 $583,270
========== ========== ========

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

2005 2004 2003
---------- -------- --------
(IN THOUSANDS)
Revenues:
United States of America $1,452,098 $778,052 $236,037
North America (excluding the
United States of America) 10,404 50,614 39,492
South America 21,995 16,317 15,007
Africa 14,400 4,693 1,420
Europe/Asia 138,033 130,007 73,216
---------- -------- --------
Total revenues $1,636,930 $979,683 $365,172
========== ======== ========
Total property and equipment, net:
North America $ 60,573 $ 54,332 $ 38,337
South America 1,419 1,461 1,392
Europe/Asia 17,937 21,514 17,847
---------- -------- --------
Total property and equipment, net: $ 79,929 $ 77,307 $ 57,576
========== ======== ========

15. INCOME TAXES

Provision for income taxes from continuing operations for the years ended
December 31, 2005, 2004 and 2003 consisted of the following:

2005 2004 2003
---------- -------- --------
(IN THOUSANDS)
Current
U.S. Federal $ 71,062 $ 42,552 $ 9,347
State 8,148 4,322 1,040
Foreign 5,069 5,537 403
---------- -------- --------
Total current 84,279 52,411 10,790
---------- -------- --------
Deferred
U.S. Federal (3,164) 3,328 3,274
State (296) 989 (1,268)
Foreign 49 (311) 1,407
---------- -------- --------
Total deferred (3,411) 4,006 3,413
---------- -------- --------
Total provision for income taxes $ 80,868 $ 56,417 $ 14,203
========== ======== ========

F-30

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

Significant components of our net deferred tax liability as of December 31, 2005
and 2004, are as follows:

2005 2004
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Reserves not currently deductible $ 20,404 $ 8,535
Capital loss 11,469 9,545
Operating loss carryforwards 2,851 3,163
Accrued expenses 3,140 1,931
Foreign tax credits 729 1,122
Research and development and other credits 959 1,129
Other 97 --
-------- --------
39,649 25,425
Deferred tax asset valuation allowance (12,569) (9,620)
-------- --------
Deferred tax asset, net of valuation allowance 27,080 15,805
Deferred tax liability:
Goodwill not amortized for financial
statement purposes under SFAS 142 (10,734) (5,924)
Patents, trademarks and purchased intangibles (23,969) (26,416)
Interest on 2% Convertible Notes (7,732) (1,141)
Property and equipment (7,800) (9,541)
Other -- (642)
-------- --------
Net deferred tax liability $(23,155) $(27,859)
======== ========

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

Our valuation allowance at December 31, 2005, consisted of approximately $11.5
million related to capital loss carryforwards and approximately $1.0 million
related to net operating loss and tax credit carryforwards. The increase in our
valuation allowance was primarily attributable to certain capital losses
realized in 2005, the unrealized holding loss on equity-based securities which
was offset to accumulated other comprehensive income, and the finalization of
purchase accounting related to various acquisitions.

As of December 31, 2005, we have U.S. federal, state, and foreign net operating
losses ("NOLs") providing a tax effected benefit of $2.8 million. The NOLs
expire in varying amounts in fiscal years 2011 through 2024. At December 31,
2005, we also have certain state income tax credits of approximately $1.0
million that are subject to limitations under Internal Revenue Code ("IRC")
Section 383. We also have approximately $0.7 million of foreign tax credits
expiring in 2015.

In connection with our acquisitions of Specialty Defense and Bianchi, we
recorded net deferred tax liabilities of approximately $12.3 million and $13.1
million, respectively, relating primarily to identifiable intangibles, which are
not deductible for U.S. federal income tax purposes. These net deferred tax
liabilities were offset as an increase to goodwill. Additionally, in 2004, we
recorded a net deferred tax liability of approximately $780,000 related to the
finalization of purchase accounting for the December 2003 acquisition of Hatch,
which was offset as an increase to goodwill.

In April 2004, we reached an agreement with the Internal Revenue Service ("IRS")
regarding our tax returns for the years ended December 31, 2001 and 2000 that
did not have a material impact on our financial position, operations or
liquidity. On February 9, 2006, we were notified by the IRS that our tax returns
for the taxable years ended December 31, 2003 and 2004, had been selected for
examination. We do not expect this examination will have a material impact on
our financial position, operations or liquidity.

F-31

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

United States income taxes have not been provided on certain undistributed
earnings of non-U.S. subsidiaries of approximately $14.1 million. These earnings
are considered to be permanently reinvested in non-U.S. operations. The
determination of the U.S. tax liability related to these earnings is not
practicable.

Net deferred tax liabilities described above have been included in the
accompanying Consolidated Balance Sheets as follows:

2005 2004
-------- --------
(IN THOUSANDS)
Other current assets $ 21,382 $ 10,368
Deferred income taxes (44,537) (38,227)
-------- --------
Total net deferred tax liabilities $(23,155) $(27,859)
======== ========

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

2005 2004 2003
-------- -------- -------
(IN THOUSANDS)
Domestic $200,683 $123,050 $25,681
Foreign 12,695 13,944 5,528
-------- -------- -------
Total $213,378 $136,994 $31,209
======== ======== =======

The following reconciles the provision for income taxes computed at the Federal
statutory income tax rate to the provision for income taxes recorded in the
Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003:

2005 2004 2003
---- ---- ----
Provision for income taxes at statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit 2.4 2.5 (0.5)
Compensation subject to IRC Section 162(m) 0.0 2.5 8.6
Foreign income taxes 0.3 0.3 2.1
Other permanent items 0.2 0.9 0.3
---- ---- ----
37.9% 41.2% 45.5%
==== ==== ====

F-32

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

16. STOCKHOLDERS' EQUITY

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

Common stock. On June 15, 2004, we sold 4,000,000 primary shares of common stock
at a price of $37.50 per share, raising $142.5 million of net proceeds after
deducting the underwriter discounts and commissions. In addition, our
board of directors granted the underwriters a 30-day option to purchase up
to 600,000 shares. The 30-day option expired unexercised on July 15, 2004. We
used the net proceeds from the offering to primarily fund the acquisitions of
Specialty Defense and Bianchi International in the fourth quarter of 2004.

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

Treasury stock. We had 6,060,222 shares in treasury as of December 31, 2005 and
2004.

Stock options and grants. On June 22, 2005, we implemented the 2005 Stock
Incentive Plan. The 2005 Stock Incentive Plan authorizes the issuance of up to
2,500,000 shares of our common stock. Any shares of our common stock granted as
restricted stock, performance stock or other stock-based awards will be counted
against the shares authorized as one and eight-tenths (1.8) shares for every one
share issued in connection with such award. The 2005 Stock Incentive Plan
authorizes the granting of stock options, restricted stock, performance awards
and other stock-based awards to employees, officers, directors and consultants,
independent contractors and advisors of the Company and its subsidiaries. In
accordance with the 2005 Stock Incentive Plan, our pre-existing stock incentive
plans described below are frozen. Accordingly, we are no longer authorized to
grant awards under such pre-existing plans.

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

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

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

F-33

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

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

Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2005, 2004 and
2003:

2005 2004 2003
------- ------- ------
Expected life of option 5.2 yrs 4.7 yrs 4.0 yrs
Dividend yield 0% 0% 0%
Volatility 48.5% 50.0% 49.8%
Risk free interest rate 4.03% 3.36% 2.51%

The weighted average fair value of options granted during 2005, 2004 and 2003
are as follows:

2005 2004 2003
------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Fair value of each option granted $ 19.23 $ 15.57 $ 6.21
Total number of options granted 1,728 979 898
Total fair value of all options granted $33,229 $15,243 $5,576

Outstanding options, generally consisting of ten-year or seven-year incentive
and non-qualified stock options, generally vest and become exercisable over a
three or five year period from the date of grant. Other options granted are
immediately vested, but are subject to lock-up provisions that disallow the
recipient from selling the shares until the lock-up expires, which is generally
over a seven year period. The outstanding options generally expire ten or seven
years from the date of grant or upon retirement from the Company, respectively,
and are contingent upon continued employment during the applicable ten-year or
seven-year period.

F-34

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

A summary of the status of stock option grants as of December 31, 2005, and
changes during the three years ending December 31, 2005, is presented below:

WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
Outstanding at December 31, 2002 4,284,658 $ 7.81
Granted 898,347 $16.62
Exercised (724,934) $11.83
Forfeited (567,150) $21.52
----------
Outstanding at December 31, 2003 3,890,921 $17.00
Granted 979,000 $33.95
Exercised (1,642,195) $15.36
Forfeited (69,210) $17.26
----------
Outstanding at December 31, 2004 3,158,516 $23.15
Granted 1,727,500 $40.54
Exercised (975,189) $19.61
Forfeited (100,270) $39.15
----------
Outstanding at December 31, 2005 3,810,557 $31.51
==========
Options exercisable at December 31, 2005 3,631,651 $31.46
==========

The following table summarizes information about stock options outstanding at
December 31, 2005:

REMAINING
OPTIONS OPTIONS LIFE IN
EXERCISE PRICE RANGE OUTSTANDING EXERCISABLE YEARS
-------------------- ----------- ----------- ---------
$7.50 - $11.19 79,767 79,767 2.6
13.19 - 13.98 59,797 46,961 6.1
14.00 - 14.55 446,048 438,547 6.6
15.05 - 17.12 280,344 280,344 7.2
23.09 - 23.26 54,301 54,301 6.1
24.07 - 25.07 269,300 265,966 6.5
25.69 - 28.90 370,000 364,999 8.1
33.04 - 36.05 466,500 321,266 8.6
37.90 - 38.99 938,000 938,000 9.2
39.20 - 45.93 846,500 841,500 8.3
--------- ---------
Total 3,810,557 3,631,651 8.0
========= =========

Remaining non-exercisable options as of December 31, 2005, become exercisable as
follows:

2006 50,770
2007 44,933
2008 41,599
2009 41,604
Thereafter --

F-35

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

Restricted stock and stock bonuses. We granted the following restricted stock
and stock bonuses during the years ended December 31, 2005, 2004 and 2003:

2005 2004 2003
------- ------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)

Restricted stock and stock bonus shares granted 59,116 70,534 416,500
Weighted-average fair value per share at grant date $ 43.18 $ 38.58 $ 19.89
Compensation cost recognized $ 559 $ 9,082 $ 10,157

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

Earnings per share. The following details the earnings per share computations on
a basic and diluted basis for the years ended December 31, 2005, 2004 and 2003:

2005 2004 2003
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)

Numerator for basic and diluted earnings per share:
Net income available to common shareholders $132,510 $80,539 $10,886
-------- ------- -------
Denominator:
Basic earnings per share weighted-average
shares outstanding 34,602 31,419 28,175
Effect of dilutive securities:
Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 1,220 1,606 779
-------- ------- -------
Diluted earnings per share
Adjusted weighted-average shares outstanding 35,822 33,025 28,954
-------- ------- -------
Basic earnings per share $ 3.83 $ 2.56 $ 0.39
======== ======= =======
Diluted earnings per share $ 3.70 $ 2.44 $ 0.38
======== ======= =======

As described in Note 1, we will be required to apply the expense recognition
provisions of FAS 123R beginning in the first quarter of 2006. We expect to
incur approximately $1.6 million of expense in the year ended December 31, 2006,
as a result of the adoption of FAS 123R.

Other contingent shares. The dilutive effect of shares issuable under stock
award plans does not include 649,000 stock options awarded that were
anti-dilutive as of December 31, 2005. In addition, certain of our executives
are entitled to receive performance stock bonus awards of 450,000 shares of our
common stock if at any time between January 1, 2005 and December 31, 2007
certain conditions are met as defined in their employment agreements. At our
discretion, we are able to settle these performance stock bonus awards in cash.

Our 2% Convertible Notes include net share settlement of the conversion option
and cash settlement of the par amount. As a result, this requires us to use the
treasury stock method to calculate the dilutive effect of our 2% Convertible
Notes. There was no effect on our diluted share count during the years ended
December 31, 2005 and 2004.

F-36

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

17. SUPPLEMENTAL CASH FLOW INFORMATION

We have revised our 2004 and 2003 Consolidated Statements of Cash Flow to
separately disclose the operating, investing and financing portions of cash
flows attributable to our discontinued operations. We had previously reported
these amounts on a combined basis.

2005 2004 2003
------- ------- ------
(IN THOUSANDS)
Cash paid during the year for:
Interest $17,438 $ 7,668 $1,245
======= ======= ======
Income taxes, net of refunds $79,290 $36,772 $7,886
======= ======= ======

2005 2004 2003
------- -------- -------
(IN THOUSANDS)
Acquisitions of businesses, net of cash acquired:
Fair value of assets acquired $41,186 $118,120 $72,132
Goodwill 7,297 86,073 76,802
Liabilities assumed (1,678) (45,751) (58,422)
Stock issued -- -- --
------- -------- -------
Total cash paid, net of cash acquired $46,805 $158,442 $90,512
======= ======== =======

18. QUARTERLY RESULTS (UNAUDITED)

The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal 2005 and 2004. We believe all necessary
adjustments have been included in the amounts stated below to present fairly the
following selected information when read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein. Future
quarterly operating results may fluctuate depending on a number of factors.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or any other quarter.

FISCAL 2005
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $364,965 $371,642 $447,664 $452,659
Gross profit (a) $ 91,310 $ 95,802 $ 80,026 $101,296
Net income $ 31,029 $ 37,415 $ 26,483 $ 37,583
Basic earnings per share $ 0.90 $ 1.09 $ 0.76 $ 1.07
Diluted earnings per share $ 0.87 $ 1.05 $ 0.74 $ 1.04

(a) Gross profit in the third and fourth quarter of 2005 includes $19.4 million
and $500,000, respectively, related to the Zylon(R) vest exchange program.

FISCAL 2004
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $161,628 $223,704 $256,803 $337,548
Gross profit (b) $ 47,560 $ 66,458 $ 66,346 $ 80,127
Net income $ 12,490 $ 17,821 $ 23,874 $ 26,354
Basic earnings per share $ 0.44 $ 0.60 $ 0.73 $ 0.78
Diluted earnings per share $ 0.42 $ 0.57 $ 0.70 $ 0.74

(b) Gross profit in the third quarter of 2004 includes $5.0 million related to
the Zylon(R) warranty revision program.

F-37

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

19. EMPLOYEE BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

In October 1997, we formed a 401(k) plan, (the "Plan") which provides for
voluntary contributions by employees and allows for a discretionary contribution
by us in the form of cash. We made contributions of approximately $2.5 million,
$520,000 and $332,000 to the Plan in 2005, 2004 and 2003, respectively.

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

On November 18, 2004, we acquired Specialty Defense and the Specialty Plastics
Products, Inc. and Affiliated Companies 401(k) Savings Plan, which provides for
voluntary contributions by employees and allows for a discretionary contribution
by us in the form of cash. We made contributions of approximately $22,000 and
$13,000 to the Specialty Plastics Products, Inc. and Affiliated Companies 401(k)
Savings Plan in 2005 and 2004, respectively. On February 1, 2005, the Specialty
Plastics Products, Inc. and Affiliated Companies 401(k) Savings Plan was
combined into our Plan.

On December 30, 2004, we acquired Bianchi International and the Bianchi
International 401(k) Retirement Savings Plan which provides for voluntary
contributions by employees and allows for a discretionary contribution by us in
the form of cash. We made contributions of $193,000 and $0 to the Bianchi
International 401(k) Retirement Savings Plan in 2005 and 2004, respectively. On
January 1, 2006, the Bianchi International 401(k) Retirement Savings Plan was
combined into our Plan.

DEFINED BENEFIT PLANS

On January 25, 2006, we formally adopted a supplemental nonqualified defined
benefit pension plan referred to as the Armor Holdings, Inc. Executive
Retirement Plan (the "SERP"). The SERP provides supplemental retirement benefits
for employees of the Company and its subsidiaries who are employed at a job
level of senior vice president or higher and who are selected by our
Compensation Committee of the Board of Directors for participation.

The normal form of payment for a normal retirement at age 62 under the SERP, or
for a late retirement, is a monthly annuity payment for the participant's
lifetime based on 2% of the participant's final average pay multiplied by each
year of service with the Company, as defined in the SERP. A participant will not
receive any credit for pre-acquisition service for a company or business that is
acquired by the Company or its subsidiaries, but a participant may be granted
additional years of credited service at the discretion of the Compensation
Committee. Alternate forms of payment, including various forms of annuity and a
single sum distribution, are available under the SERP. Reduced benefits may be
paid in the case of an early retirement or a pre-retirement death. Early
retirement under the SERP is the earlier of (i) attaining age 60 or (ii)
attaining age 55 and completing 10 years of service with the Company. A
participant is eligible for a deferred vested benefit upon attaining ten years
of credited service. A pre-retirement death benefit is payable if a vested
participant dies before retirement.

We acquired Simula's noncontributory defined benefit pension plan (the "Pension
Plan") for employees on December 9, 2003. The Pension Plan was originally
adopted as of November 1, 1980. Contributions were made to the Pension Plan
based upon actuarially determined amounts. Effective July 1, 1999, Simula froze
the Plan for new participants. Effective December 8, 2003, prior to our
acquisition of the Pension Plan, Simula froze the Pension Plan for future
service for all participants. We elected to payout the Supplemental Retirement
Plan of Simula, representing $1.1 million of the net amount recognized, on
February 25, 2004.

F-38

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

The funded status and amounts recognized in our balance sheet at December 31,
2005 and 2004, for these defined benefit plans, are as follows:

2005 2004
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation $16,400 $ 8,109
Effect of projected future compensation increases 2,528 --
------- -------
Projected benefit obligation 18,928 8,109
Pension Plan assets at fair value (7,258) (6,719)
Contributions after measurement date (70) (58)
------- -------
Unfunded status 11,600 1,332
Unrecognized prior service cost (7,901) --
Unrecognized net actuarial loss (1,115) (324)
Unrecognized transition asset 466 --
------- -------
Net amount recognized $ 3,050 $ 1,008
======= =======

Reconciliation of the projected benefit obligation is as follows:

2005 2004
------- -------
(IN THOUSANDS)
Projected benefit obligation at beginning of year $ 8,109 $ 8,810
Plan amendment for adopting SERP effective
January 1, 2005 8,529 --
Service cost 1,329 --
Interest cost 944 472
Actuarial loss 327 262
Benefits paid (310) (1,435)
------- -------
Projected benefit obligation at end of year $18,928 $ 8,109
======= =======

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

2005 2004
------ -------
(IN THOUSANDS)
Fair value of plan assets at beginning of year $6,719 $ 6,169
Employer contributions 309 1,570
Actual gain 540 415
Benefits paid (310) (1,435)
------ -------
Fair value of plan assets at end of year $7,258 $ 6,719
====== =======

F-39

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

Net periodic pension cost includes the following:

2005 2004 2003
------ ----- ----
(IN THOUSANDS)

Service Cost $1,329 $ -- $ --
Interest Cost 944 472 56
Expected return on assets (539) (504) --
Transition asset recognition -- -- --
Prior service cost 629 -- --
Net loss recognition -- -- --
------ ----- ----
Net periodic pension cost (income) $2,363 $ (32) $ 56
====== ===== ====

Amounts recognized in the Consolidated Balance Sheets consist of the following:

2005 2004
------ ------
(IN THOUSANDS)

Other assets $ 4,906 $ --
Pension liability (9,071) (1,008)
Accumulated other comprehensive loss 1,115
------ -------
Net amount recognized $(3,050) $(1,008)
======= ======

Our weighted-average asset allocations by asset category are as follows (the
SERP plan is currently unfunded):

2005 2004
---- ----
Equity securities 75% 72%
Debt securities 23% 22%
Other 2% 6%
--- ---
Total 100% 100%
=== ===

Our investment strategy is to invest the Pension Plan's assets in a diversified
portfolio of domestic and international equity, fixed income and cash
equivalents to provide long-term growth in plan assets. This strategy, the
resulting allocation of Pension Plan assets and the selection of independent
investment managers are reviewed periodically.

We expect to contribute approximately $275,000 to the Pension Plan in fiscal
2006.

The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:

YEAR (IN THOUSANDS)
---------- --------------
2006 $ 297
2007 323
2008 1,143
2009 475
2010 520
2011-2015 6,051
-------
$8,809
=======

F-40

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

Assumptions used to determine benefit obligations:

2005 2004
---- ----
Discount or settlement rate 5.50% 6.00%
Rate of increase in compensation levels 5.00% 3.25%
Expected long-term rate of return on Plan assets 8.00% 8.00%

Assumptions used to determine net periodic pension costs:

2005 2004 2003
---------- ---- ----
Discount or settlement rate 5.50%-6.00% 6.00% 6.00%
Rate of increase in compensation levels 3.25%-5.00% 3.25% 3.25%
Expected long-term rate of return on Plan assets 8.00% 8.00% 8.00%

The assumptions in the above table were reviewed as of December 31, 2005, and
found to be relevant based on current yields of high quality fixed income
investments with maturities corresponding to the expected duration of the
benefit obligations. We use a measurement date of October 31 for our employee
benefit plans.

20. RELATED PARTY TRANSACTIONS

Effective as of January 1, 2002, Kanders & Company, Inc. ("Kanders & Co."), a
corporation controlled by Warren B. Kanders, the Chairman of our Board of
Directors and our Chief Executive Officer, entered into an agreement with us to
provide certain investment banking, financial advisory and related services for
a five year term which was to expire on December 31, 2006. Under the terms of
the agreement, Kanders & Co. was to receive a mutually agreed upon fee on a
transaction-by-transaction basis during the term of the agreement. The aggregate
fees under this agreement were not to exceed $1,575,000 during any calendar
year. We also agreed to reimburse Kanders & Co. for out-of-pocket expenses
including Kanders & Co.'s expenses for office space, an executive assistant,
furniture and equipment, travel and entertainment, fees and disbursements of
counsel, and consultants retained by Kanders & Co. In April 2003, in connection
with Mr. Kanders being appointed Chief Executive Officer of the Company, the
Company and Kanders & Co. agreed to terminate the agreement pursuant to which
Kanders & Co. provided certain services to the Company. We paid Kanders & Co.
$143,000 for investment banking services during fiscal 2003 (through and
including April 2003 only). We continue to reimburse Kanders & Co. for
out-of-pocket expenses in Mr. Kanders role as Chief Executive Officer. We
reimbursed Kanders & Co. for out-of-pocket expenses in the aggregate amount of
$259,000, $369,000 and $184,000 during the fiscal years ended December 31, 2005,
2004 and 2003, respectively.

Effective as of January 1, 2003, we entered into a Transportation Services
Agreement with Kanders Aviation, LLC, an entity controlled by Mr. Kanders, our
Chairman of the Board and Chief Executive Officer. Pursuant to the terms of the
Transportation Services Agreement and upon our request, Kanders Aviation may, in
its sole discretion, provide us with airport to airport air transportation
services via certain aircraft. The Transportation Services Agreement will remain
in effect indefinitely until terminated by written notice by either party
thereto to the other party thereto. During the term of the Transportation
Services Agreement, we will reimburse Kanders Aviation for services provided by
Kanders Aviation to us and any additional expenses incurred by Kanders Aviation
in connection with such air transportation services. We reimbursed Kanders
Aviation $332,000 for such expenses during the fiscal year ended December 31,
2004. There were no services provided us under this agreement during 2005 and as
such there was no related expense during the fiscal year ended December 31,
2005.

Nicholas Sokolow, one of our directors, is a member of the law firm Sokolow,
Dunaud, Mercadier & Carreras located in Paris, France. We did not retain
Sokolow, Dunaud, Mercadier & Carreras during the fiscal years ended December 31,
2005 or 2004, nor do we expect to in the future. During the fiscal year ended
December 31, 2003, we paid Sokolow, Dunaud, Mercadier & Carreras $124,000 for
legal services in connection with various acquisitions.

F-41

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

21. OPERATING LEASES

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

YEAR (IN THOUSANDS)
---------- --------------
2006 $ 7,401
2007 5,427
2008 3,621
2009 3,044
2010 2,082
Thereafter 13,373
-------
$34,948
=======

We incurred rent expense of approximately $7.5 million, $5.0 million and $1.5
million during the years ended December 31, 2005, 2004 and 2003, respectively.

22. GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS

On August 12, 2003, we sold $150 million of the 8.25% Notes in private
placements pursuant to Rule 144A and Regulation S. The 8.25% Notes are
uncollateralized obligations and rank junior in right of payment to our existing
and future senior debt. On October 29, 2004, we completed the placement of $300
million aggregate principal amount of the 2% Convertible Notes. On November 5,
2004, Goldman, Sachs & Co. exercised its option to purchase an additional $45
million principal amount of the 2% Convertible Notes. The 8.25% Notes and 2%
Convertible Notes are fully and unconditionally guaranteed, jointly and
severally on a senior subordinated and uncollateralized basis, by most of our
domestic subsidiaries. Each of the subsidiary guarantors is a direct or indirect
100% owned subsidiary of the parent.

The following consolidating financial information presents the Consolidating
Balance Sheets as of December 31, 2005 and December 31, 2004, the related
Consolidating Statements of Operations for each of the year ended December 31,
2005, 2004 and 2003, and the related Consolidating Statements of Cash Flows for
the years ended December 31, 2005, 2004 and 2003 for:

o Armor Holdings, Inc., the parent,

o the guarantor subsidiaries,

o the nonguarantor subsidiaries, and

o Armor Holdings, Inc. on a consolidated basis

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

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

F-42

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

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2005
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents $ 423,961 $ 23,879 $ 24,001 $ -- $ 471,841
Accounts receivable, net -- 190,740 20,541 -- 211,281
Costs and earned gross profit in excess
of billings -- 843 -- -- 843
Intercompany receivables 101,956 109,177 39,170 (250,303) --
Inventories -- 185,032 25,485 -- 210,517
Prepaid expenses and other current assets 2,316 32,806 2,965 -- 38,087
---------- ---------- -------- ----------- ----------
Total current assets 528,233 542,477 112,162 (250,303) 932,569
Property and equipment, net 2,052 57,326 20,551 -- 79,929
Goodwill, net -- 271,708 1,988 -- 273,696
Patents, licenses and trademarks, net -- 130,216 404 -- 130,620
Other assets 15,221 2,089 28,738 -- 46,048
Investment in subsidiaries 795,098 117,776 -- (912,874) --
---------- ---------- -------- ----------- ----------
Total assets $1,340,604 $1,121,592 $163,843 $(1,163,177) $1,462,862
========== ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 283 $ 147 $ -- $ 430
Short-term debt 341,752 -- 2,522 -- 344,274
Accounts payable 607 80,300 10,056 -- 90,963
Accrued expenses and other current
liabilities 16,660 65,346 18,918 -- 100,924
Income taxes payable (5,105) 12,257 1,615 -- 8,767
Intercompany payables 115,076 22,682 112,545 (250,303) --
---------- ---------- -------- ----------- ----------
Total current liabilities 468,990 180,868 145,803 (250,303) 545,358
Long-term debt, less current portion 149,528 2,115 267 -- 151,910
Other long-term liabilities 7,333 3,142 -- -- 10,475
Deferred income taxes 4,171 39,390 976 -- 44,537
---------- ---------- -------- ----------- ----------
Total liabilities 630,022 225,515 147,046 (250,303) 752,280
Stockholders' equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 415 3,193 7,852 (11,045) 415
Additional paid-in capital 525,890 533,682 14,778 (548,460) 525,890
Retained earnings (accumulated deficit) 257,991 357,752 (5,833) (351,919) 257,991
Accumulated other comprehensive loss (1,397) -- -- -- (1,397)
Treasury stock (72,317) -- -- -- (72,317)
---------- ---------- -------- ----------- ----------
Total stockholders' equity 710,582 896,077 16,797 (912,874) 710,582
---------- ---------- -------- ----------- ----------
Total liabilities and stockholders' equity $1,340,604 $1,121,592 $163,843 $(1,163,177) $1,462,862
========== ========== ======== =========== ==========

F-43

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

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS

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

ASSETS
Current assets:
Cash and cash equivalents $ 388,727 $ 21,173 $ 11,309 $ -- $ 421,209
Accounts receivable, net -- 155,229 19,330 -- 174,559
Costs and earned gross profit in excess
of billings -- 893 -- -- 893
Intercompany receivables 173,735 108,313 7,045 (289,093) --
Inventories -- 142,362 33,846 -- 176,208
Prepaid expenses and other current assets 1,611 42,023 3,301 -- 46,935
---------- -------- -------- --------- ----------
Total current assets 564,073 469,993 74,831 (289,093) 819,804
Property and equipment, net 5,144 47,968 24,195 -- 77,307
Goodwill, net -- 259,773 2,240 -- 262,013
Patents, licenses and trademarks, net -- 112,288 171 -- 112,459
Other assets 18,410 2,209 149 -- 20,768
Investment in subsidiaries 592,437 12,730 -- (605,167) --
---------- -------- -------- --------- ----------
Total assets $1,180,064 $904,961 $101,586 $(894,260) $1,292,351
========== ======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 457 $ 164 $ -- $ 621
Short-term debt 341,579 -- 2,177 -- 343,756
Accounts payable 640 58,422 10,539 -- 69,601
Accrued expenses and other current
liabilities 11,216 73,314 22,717 -- 107,247
Income taxes payable (6,454) 11,513 3,942 -- 9,001
Intercompany payables 112,741 123,466 52,886 (289,093) --
---------- -------- -------- --------- ----------
Total current liabilities 459,722 267,172 92,425 (289,093) 530,226
Long-term debt, less current portion 153,897 2,377 477 -- 156,751
Other long-term liabilities -- 1,951 -- -- 1,951
Deferred income taxes 1,249 36,077 901 -- 38,227
---------- -------- -------- --------- ----------
Total liabilities 614,868 307,577 93,803 (289,093) 727,155
Stockholders' equity:
Preferred stock -- 1,450 -- (1,450) --
Common stock 402 3,792 7,854 (11,646) 402
Additional paid in capital 504,809 387,229 14,771 (402,000) 504,809
Retained earnings (accumulated deficit) 125,481 204,913 (14,842) (190,071) 125,481
Accumulated other comprehensive income 6,821 -- -- -- 6,821
Treasury stock (72,317) -- -- -- (72,317)
---------- -------- -------- --------- ----------
Total stockholders' equity 565,196 597,384 7,783 (605,167) 565,196
---------- -------- -------- --------- ----------
Total liabilities and stockholders' equity $1,180,064 $904,961 $101,586 $(894,260) $1,292,351
========== ======== ======== ========= ==========

F-44

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

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005
----------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

REVENUES:
Aerospace & Defense $ -- $1,199,262 $ -- $ (10,664) $1,188,598
Products -- 253,862 55,016 -- 308,878
Mobile Security -- 40,302 99,485 (333) 139,454
--------- ---------- -------- --------- ----------
Total revenues -- 1,493,426 154,501 (10,997) 1,636,930
--------- ---------- -------- --------- ----------
COSTS AND EXPENSES:
Cost of revenues -- 1,137,457 122,136 (10,997) 1,248,596
Cost of vest exchange program / warranty
revision -- 19,900 -- -- 19,900
Selling, general and administrative expenses 28,852 94,644 15,808 -- 139,304
Amortization -- 8,621 6 -- 8,627
Integration 625 3,044 -- -- 3,669
Other charges -- -- 1,200 -- 1,200
--------- ---------- -------- --------- ----------
OPERATING (LOSS) INCOME (29,477) 229,760 15,351 -- 215,634
Interest expense (income), net 6,254 (393) 420 -- 6,281
Other income, net (3,962) (49) (14) -- (4,025)
Equity in (earnings) losses of subsidiaries (157,015) (4,833) -- 161,848 --
Related party interest expense (income), net 16 (19) 3 -- --
--------- ---------- -------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 125,230 235,054 14,942 (161,848) 213,378
(BENEFIT) PROVISION FOR INCOME TAXES (7,280) 81,889 6,259 -- 80,868
--------- ---------- -------- --------- ----------
NET INCOME $ 132,510 $ 153,165 $ 8,683 $(161,848) $ 132,510
========= ========== ======== ========= ==========

F-45

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

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

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

REVENUES:
Aerospace & Defense $ -- $605,398 $ -- $ -- $605,398
Products -- 204,122 45,643 -- 249,765
Mobile Security -- 25,531 102,224 (3,235) 124,520
--------- -------- -------- --------- --------
Total revenues -- 835,051 147,867 (3,235) 979,683
--------- -------- -------- --------- --------
COSTS AND EXPENSES:
Cost of revenues -- 599,505 117,922 (3,235) 714,192
Cost of vest exchange program /
warranty revision -- 5,000 -- -- 5,000
Selling, general and administrative
expenses 17,455 69,122 13,684 -- 100,261
Amortization -- 4,243 12 -- 4,255
Integration 529 2,029 -- -- 2,558
Other charges 7,702 -- -- -- 7,702
Related party management fees (income),
net -- (15) 15 -- --
--------- -------- -------- --------- --------
OPERATING (LOSS) INCOME (25,686) 155,167 16,234 -- 145,715
Interest expense, net 6,511 103 162 -- 6,776
Other expense (income), net 1,917 421 (393) -- 1,945
Equity in earnings of subsidiaries (108,631) (2,691) -- 111,322 --
Related party interest expense
(income), net 16 (18) 2 -- --
--------- -------- -------- --------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE (BENEFIT) PROVISION FOR INCOME
TAXES 74,501 157,352 16,463 (111,322) 136,994
(BENEFIT) PROVISION FOR INCOME TAXES (6,038) 56,030 6,425 -- 56,417
--------- -------- -------- --------- --------
INCOME FROM CONTINUING OPERATIONS 80,539 101,322 10,038 (111,322) 80,577
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS, NET
OF INCOME TAX BENEFIT -- (38) -- -- (38)
--------- -------- -------- --------- --------
NET INCOME $ 80,539 $101,284 $ 10,038 $(111,322) $ 80,539
========= ======== ======== ========= ========

F-46

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

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF OPERATIONS

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

REVENUES:
Aerospace & Defense $ -- $ 91,673 $ -- $ -- $ 91,673
Products -- 157,984 35,976 -- 193,960
Mobile Security -- 15,029 62,853 1,657 79,539
-------- -------- -------- -------- --------
Total revenues -- 264,686 98,829 1,657 365,172
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Cost of revenues -- 172,089 79,840 1,657 253,586
Selling, general and administrative
expenses 11,602 40,598 10,595 -- 62,795
Amortization -- 478 11 -- 489
Integration 367 1,687 -- -- 2,054
Other charges 10,519 -- -- -- 10,519
Related party management fees (income),
net 12,823 -- 7,598 (20,421) --
-------- -------- -------- -------- --------
OPERATING (LOSS) INCOME (35,311) 49,834 785 20,421 35,729
Interest expense, net 3,313 497 202 -- 4,012
Other expense, net -- 117 391 -- 508
Equity in losses (earnings) of
subsidiaries (42,600) 38,790 -- 3,810 --
Related party interest expense
(income), net 16 (255) -- 239 --
-------- -------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
(BENEFIT) PROVISION FOR INCOME TAXES 3,960 10,685 192 16,372 31,209
(BENEFIT) PROVISION FOR INCOME TAXES (6,926) 18,399 2,730 -- 14,203
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 10,886 (7,714) (2,538) 16,372 17,006
DISCONTINUED OPERATIONS:
NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAX
BENEFIT -- 34,882 (20,820) (20,182) (6,120)
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 10,886 $ 27,168 $(23,358) $ (3,810) $ 10,886
======== ======== ======== ======== ========

F-47

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

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

YEAR ENDED DECEMBER 31, 2005
---------------------------------------------------------------------
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from operations: $ 132,510 $ 153,165 $ 8,683 $(161,848) $ 132,510
Adjustments to reconcile income from operations
to cash provided by operating activities:
Depreciation and amortization 2,694 16,960 2,754 -- 22,408
Loss on disposal of fixed assets 52 402 480 -- 934
Deferred income taxes 4,265 (7,588) (88) -- (3,411)
Fair value gain on put options (5,905) -- -- -- (5,905)
Non-cash SERP expense 2,427 -- -- -- 2,427
Changes in operating assets and liabilities, net
of acquisitions:
Increase in accounts receivable -- (32,335) (3,005) -- (35,340)
Decrease (increase) in intercompany
receivables & payables 71,573 (107,672) 36,099 -- --
(Increase) decrease in inventories -- (36,805) 5,670 -- (31,135)
Decrease in prepaid expenses and other assets 642 22,391 508 -- 23,541
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 7,904 17,306 (922) -- 24,288
Increase (decrease) in income taxes payable 6,141 744 (2,327) -- 4,558
--------- --------- -------- --------- ---------
Net cash provided by operating activities 222,303 26,568 47,852 (161,848) 134,875
--------- --------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,195) (11,292) (2,106) -- (15,593)
Purchase of patents and trademarks -- (814) (239) -- (1,053)
Purchase of equity investment -- -- (31,082) -- (31,082)
Purchase of short-term investment securities (754,300) -- -- -- (754,300)
Proceeds from sales of short-term investment
securities 754,300 -- -- -- 754,300
Financing lease receivable -- (1,187) -- -- (1,187)
Additional cash received from sale of business -- 300 -- -- 300
Additional consideration for purchased businesses (826) (5,702) -- -- (6,528)
Investment in subsidiaries (202,661) 40,813 -- 161,848 --
Purchase of businesses, net of cash acquired (1,261) (45,544) -- -- (46,805)
--------- --------- -------- --------- ---------
Net cash used in investing activities: (206,943) (23,426) (33,427) 161,848 (101,948)
--------- --------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 18,902 -- -- -- 18,902
Proceeds from the sale of put options 6,614 -- -- -- 6,614
Taxes paid for withheld shares on restricted
stock issuances (5,642) -- -- -- (5,642)
Repayments of long-term debt -- (436) (149) -- (585)
Borrowings under lines of credit 6,973 -- 6,676 -- 13,649
Repayments under lines of credit (6,973) -- (6,662) -- (13,635)
--------- --------- -------- --------- ---------
Net cash provided by (used in) financing
activities 19,874 (436) (135) -- 19,303
--------- --------- -------- --------- ---------
Effect of exchange rate on cash and cash
equivalents -- -- (1,598) -- (1,598)
--------- --------- -------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 35,234 2,706 12,692 -- 50,632
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 388,727 21,173 11,309 -- 421,209
--------- --------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 423,961 $ 23,879 $ 24,001 $ -- $ 471,841
========= ========= ======== ========= =========

F-48

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

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

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations: $ 80,539 $ 101,322 $ 10,038 $(111,322) $ 80,577
Adjustments to reconcile income from continuing
operations to cash provided by operating
activities:
Depreciation and amortization 1,744 10,042 3,265 -- 15,051
Loss on disposal of fixed assets -- 446 418 -- 864
Deferred income taxes 3,025 1,299 (318) -- 4,006
Non-cash termination charge 1,408 -- -- -- 1,408
Non-cash restricted stock unit award 6,294 -- -- -- 6,294
Changes in operating assets and liabilities,
net of acquisitions:
Decrease (increase) in accounts receivable 1,201 (84,331) (7,366) -- (90,496)
(Increase) decrease in intercompany
receivables & payables (10,834) 8,432 2,402 -- --
Increase in inventories -- (58,293) (14,813) -- (73,106)
Increase in prepaid expenses and other assets (1,397) (20,321) (357) -- (22,075)
Increase in accounts payable, accrued expenses
and other current liabilities 2,302 68,341 6,775 -- 77,418
Increase (decrease) in income taxes payable 17,080 (3,350) 3,594 -- 17,324
--------- --------- -------- --------- ---------
Net cash provided by operating activities from
continuing operations 101,362 23,587 3,638 (111,322) 17,265
Net cash used in operating activities from
discontinued operations -- (407) -- -- (407)
--------- --------- -------- --------- ---------
Net cash provided by operating activities 101,362 23,180 3,638 (111,322) 16,858
--------- --------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,615) (10,125) (5,679) -- (19,419)
Purchase of patents and trademarks -- (112) -- -- (112)
Purchase of equity investment -- (5,275) -- -- (5,275)
Proceeds from sale of equity investment -- 5,823 -- -- 5,823
Purchase of short-term investment securities (286,430) -- -- -- (286,430)
Proceeds from sales of short-term investment
securities 286,430 -- -- -- 286,430
Collection of note receivable 2,175 -- -- -- 2,175
Decrease in restricted cash 2,600 -- -- -- 2,600
Sale of business, net of cash disposed -- 125 -- -- 125
Additional consideration for purchased businesses -- (2,808) -- -- (2,808)
Investment in subsidiaries (303,721) 192,399 -- 111,322 --
Purchase of businesses, net of cash acquired -- (158,442) -- -- (158,442)
--------- --------- -------- --------- ---------
Net cash (used in) provided by investing
activities from continuing operations (302,561) 21,585 (5,679) 111,322 (175,333)
Net cash used in investing activities from
discontinued operations -- (263) -- -- (263)
--------- --------- -------- --------- ---------
Net cash (used in) provided by investing
activities: (302,561) 21,322 (5,679) 111,322 (175,596)
--------- --------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 25,192 -- -- -- 25,192
Proceeds from the issuance of common stock 142,500 -- -- -- 142,500
Cash paid for common stock offering costs (1,339) -- -- -- (1,339)
Taxes paid for withheld shares on restricted
stock issuances (2,585) -- -- -- (2,585)
Cash paid for financing costs (6,156) -- -- -- (6,156)
Borrowings of short-term debt 341,550 -- -- -- 341,550
Repayments of long-term debt -- (34,371) (145) -- (34,516)
Borrowings under lines of credit 22,700 5 1,883 -- 24,588
Repayments under lines of credit (22,700) -- (349) -- (23,049)
--------- --------- -------- --------- ---------
Net cash provided by (used in) financing
activities from continuing operations 499,162 (34,366) 1,389 -- 466,185
Net cash used in financing activities from
discontinued operations -- (125) -- -- (125)
--------- --------- -------- --------- ---------
Net cash provided by (used in) financing
activities 499,162 (34,491) 1,389 -- 466,060
--------- --------- -------- --------- ---------
Effect of exchange rate on cash and cash
equivalents -- -- 1,961 -- 1,961
--------- --------- -------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 297,963 10,011 1,309 -- 309,283
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 90,764 11,160 10,002 -- 111,926
--------- --------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 388,727 $ 21,171 $ 11,311 $ -- $ 421,209
========= ========= ======== ========= =========

F-49

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

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

CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations: $ 10,886 $ (7,714) $ (2,538) $ 16,372 $ 17,006
Adjustments to reconcile income (loss) from
continuing operations to cash provided by
(used in) operating activities:
Depreciation and amortization 1,326 4,270 2,012 -- 7,608
Deferred income taxes (3,008) 5,389 2,644 -- 5,025
Loss on disposal of fixed assets -- 68 259 -- 327
Non-cash termination charge 2,093 -- -- -- 2,093
Non-cash restricted stock unit award 7,266 -- -- -- 7,266
Changes in operating assets and liabilities,
net of acquisitions:
(Increase) decrease in accounts receivable -- (2,680) 1,685 -- (995)
Decrease (increase) in intercompany
receivables & Payables 83,092 (41,667) (21,243) (20,182) --
Decrease (increase) in inventories -- 793 (3,294) -- (2,501)
Decrease (increase) in prepaid expenses and
other assets 12,267 (13,758) (890) -- (2,381)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 10,792 (1,020) 7,288 -- 17,060
(Decrease) increase in income taxes payable (22,583) 23,826 (882) -- 361
--------- -------- -------- -------- ---------
Net cash provided by (used in) operating
activities from continuing operations 102,131 (32,493) (14,959) (3,810) 50,869
Net cash provided by (used in) operating
activities from discontinued operations -- 3,369 (9,798) -- (6,429)
--------- -------- -------- -------- ---------
Net cash provided by (used in) operating
activities 102,131 (29,124) (24,757) (3,810) 44,440
--------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (200) (5,894) (2,590) -- (8,684)
Purchase of patents and trademarks -- (185) -- -- (185)
Purchase of short-term investment securities (143,400) -- -- -- (143,400)
Proceeds from sales of short-term investment
securities 143,400 -- -- -- 143,400
Increase in restricted cash (2,600) -- -- -- (2,600)
Additional consideration for purchased
businesses -- (1,026) -- -- (1,026)
Investment in subsidiaries (85,243) 45,403 36,030 3,810 --
Sale of businesses, net of cash disposed 31,361 -- -- -- 31,361
Purchase of businesses, net of cash acquired (90,512) -- -- -- (90,512)
--------- -------- -------- -------- ---------
Net cash (used in) provided by investing
activities from continuing operations (147,194) 38,298 33,440 3,810 (71,646)
Net cash used in investing activities from
discontinued operations -- (2,469) (5,758) -- (8,227)
--------- -------- -------- -------- ---------
Net cash (used in) provided by investing
activities: (147,194) 35,829 27,682 3,810 (79,873)
--------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 8,471 -- -- -- 8,471
Taxes paid for withheld shares on restricted
stock issuances (17) -- -- -- (17)
Cash paid for financing costs (4,599) -- -- -- (4,599)
Repurchase of treasury stock (22,684) -- -- -- (22,684)
Borrowings of long-term debt 147,504 -- 774 -- 148,278
Repayments of long-term debt -- (1,688) -- -- (1,688)
Borrowings under lines of credit 30,406 -- 1,424 -- 31,830
Repayments under lines of credit (30,406) (114) (1,578) -- (32,098)
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities from continuing operations 128,675 (1,802) 620 -- 127,493
Net cash used in financing activities from
discontinued operations -- (125) (103) -- (228)
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities 128,675 (1,927) 517 -- 127,265
--------- -------- -------- -------- ---------
Effect of exchange rate on cash and cash
equivalents -- -- 3,543 -- 3,543
--------- -------- -------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 83,612 4,778 6,985 -- 95,375
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,152 6,382 3,017 -- 16,551
--------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 90,764 $ 11,160 $ 10,002 $ -- $ 111,926
========= ======== ======== ======== =========

F-50

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

23. VEST EXCHANGE PROGRAM/WARRANTY REVISION

As discussed in Note 13, as a result of our voluntary Zylon(R) vest Supplemental
Relief (renamed the ZVE) Program relating to our Zylon(R) - containing vests, we
recorded a pre-tax charge of $19.9 million in the year ended December 31, 2005,
which is net of the remaining $1.1 million liability from the previously
announced Exchange Program announced in the third quarter of 2004. Through
December 31, 2005, we have incurred $2.5 million and have a remaining liability
of $18.5 million, which includes $1.1 million carryover from the superseded 2004
warranty revision and product exchange program. The liability has been
classified in accrued expenses and other current liabilities on the accompanying
Consolidated Balance Sheet at December 31, 2005.

ZYLON(R) VEST EXCHANGE PROGRAM (IN THOUSANDS)

Program cost $17,391
Inventory write-offs 3,624
-------
Total cost of ZVE 21,015
Reversal of accrual from 2004 Exchange Program (1,115)
-------
Net cost of ZVE $19,900
=======

The above costs were estimated based on the expected cost to be incurred under
the ZVE for the physical replacement or compensation for qualifying vests
surrendered under the program, including administrative costs. This may be in
the form of cash or the expected cost of replacement products. Inventory
write-offs represents the cost of existing on-hand, unusable Zylon(R) inventory.
As the charge has been based upon various estimates, differences in actual
return rates and program costs could result in material adjustments to the
recorded charge.

24. CONCENTRATION OF REVENUES

Approximately 75.7%, 65.3% and 38.3% of our consolidated revenues were from our
ten largest customers for the years ended December 31, 2005, 2004 and 2003,
respectively. Our largest customer, the U.S. Federal Government, accounted for
approximately 59.3%, 57.8% and 26.6% of our consolidated revenues for the years
ended December 31, 2005, 2004 and 2003, respectively. Approximately 72.7%, 60.7%
and 21.0% of our consolidated revenues came from direct or indirect U.S.
military contracts for the years ended December 31, 2005, 2004 and 2003,
respectively.

Our Aerospace & Defense Group's ten largest customers accounted for
approximately 98.3%, 93.9% and 92.3% of segment revenues for the years ended
December 31, 2005, 2004 and 2003, respectively. The Aerospace & Defense Group's
largest customer, the U.S. Federal Government, accounted for approximately
79.3%, 87.1% and 79.9% of the segments revenue for the years ended December 31,
2005, 2004 and 2003, respectively.

The Products Group's ten largest customers accounted for approximately 25.3%,
26.6% and 29.2% of segment revenues of the Products Division for the years ended
December 31, 2005, 2004 and 2003, respectively. The Product Division's largest
customer, the U.S. Federal Government, accounted for approximately 9.0%, 12.2%
and 10.7% of the segments revenue for the years ended December 31, 2005, 2004
and 2003, respectively.

The Mobile Security Division's ten largest customers accounted for approximately
52.6%, 43.6% and 28.8% of segment revenues for the years ended December 31,
2005, 2004 and 2003, respectively. Mobile Security's largest customer accounted
for approximately 12.5% and 11.6% of segment revenue for the years ended
December 31, 2005 and 2004. There were no customers who accounted for more than
10% of Mobile Security revenue in 2003.

Military and governmental contracts generally are awarded on a periodic or
sporadic basis. If the Aerospace & Defense Group were to lose the Up-Armored
HMMWV related contracts, our financial performance would experience a material
adverse effect.

F-51

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

25. OFF BALANCE SHEET ARRANGEMENTS

26. PUT OPTION TRANSACTIONS

We account for put option transactions on Company stock in accordance with
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
("SFAS 150"). SFAS 150 requires put options to be measured at fair value and
recognized on the balance sheet as liabilities.

During the year ended December 31, 2005, we sold put options on Company stock in
various private transactions covering 3.5 million shares of Company stock for
$6.6 million in premiums. During the year ended December 31, 2005, put options
covering 2.5 million shares expired unexercised leaving outstanding put options
covering 1 million shares outstanding (2.8% of outstanding shares at December
31, 2005) at a weighted average strike price of $40.00 per share. In February
2006, the outstanding put options covering 1 million shares expired unexercised.
Accordingly, we recorded an additional $0.7 million in other income in the first
quarter of fiscal 2006. The fair values of the put options of Company stock are
obtained from our counter-parties and represent the estimated amount we would
receive or pay to terminate the put options, taking into account the
consideration we received for the sale of the put options. In fiscal 2005, we
recognized fair value gains of $5.9 million recorded in other income, net, of
which $4.8 million was recognized on 2.5 million previously expired put options.

27. INTEREST EXPENSE, NET

Interest expense, net is comprised of the following:

2005 2004 2003
-------- ------- ------
(IN THOUSANDS)
Interest expense $ 20,541 $10,535 $4,800
Interest income (14,260) (3,759) (788)
-------- ------- ------
Interest expense, net $ 6,281 $ 6,776 $4,012
======== ======= ======

28. OTHER ASSETS

Other assets are comprised of the following:

2005 2004
--------------------- ---------------------
(IN THOUSANDS)

Fair value of available-for-sale securities $ 28,597 $ -
Deferred charges 8,871 11,494
Pension asset 4,906 -
Fair value of interest rate swaps 1,427 6,046
Other 2,247 3,228
--------------------- ---------------------
Total other assets $ 46,048 $ 20,768
===================== =====================

F-52

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

29. SUBSEQUENT EVENT

F-53

SIGNATURES

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

ARMOR HOLDINGS, INC.

/s/ Warren B. Kanders
----------------------------------------
Warren B. Kanders
Chairman of the Board of Directors and
Chief Executive Officer
Dated: March 14, 2006

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

/s/ Warren B. Kanders /s/ Robert R. Schiller
---------------------------------------- -------------------------------------
Warren B. Kanders Robert R. Schiller
Chairman of the Board of Directors President and Chief Operating Officer
and Chief Executive Officer March 14, 2006
March 14, 2006

/s/ Glenn J. Heiar /s/ Nicholas Sokolow
---------------------------------------- -------------------------------------
Glenn J. Heiar Nicholas Sokolow
Chief Financial Officer Director
(Principal Financial Officer and March 14, 2006
Principal Accounting Officer)
March 14, 2006

/s/ Burtt R. Ehrlich /s/ Thomas W. Strauss
---------------------------------------- -------------------------------------
Burtt R. Ehrlich Thomas W. Strauss
Director Director
March 14, 2006 March 14, 2006

/s/ David R. Haas /s/ Deborah A. Zoullas
---------------------------------------- -------------------------------------
David R. Haas Deborah A. Zoullas
Director Director
March 14, 2006 March 14, 2006

EXHIBIT INDEX