ARMOR HOLDINGS INC - 10-K Annual Report

================================================================================

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

-----------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to __________

COMMISSION FILE NUMBER 0-18863

-------------------

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

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

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

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

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

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

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

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

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

Yes [ x ] No [ ]

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

TABLE OF CONTENTS AND
CROSS REFERENCE SHEET

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

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

PART III 63

PART IV Item 15. Exhibits, Financial Statement Schedules 64

PART I

FORWARD LOOKING STATEMENTS

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

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

o longer payment cycles and foreign currency fluctuations;

o economic downturns; and

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

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

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

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

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

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

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

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

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

o protest or challenge by unsuccessful bidders; and

o unilateral termination, reduction or modification by the government.

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

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

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

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

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

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

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

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

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

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

WE ARE DEPENDENT ON INDUSTRY RELATIONSHIPS.

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

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

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

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

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

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

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

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

DELAWARE LAW MAY LIMIT POSSIBLE TAKEOVERS.

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

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

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

THE MARKET PRICE FOR OUR COMMON STOCK IS VOLATILE.

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

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

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

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

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

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

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

WE HAVE A HIGH LEVEL OF DEBT.

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

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

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

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

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

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

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

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

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

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

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

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

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

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

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

MATERIAL DEVELOPMENTS

Zylon(R) Investigation

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

INDUSTRY OVERVIEW

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

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

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

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

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

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

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

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

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

o Over 155,000 nationally registered emergency medical technicians.

INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

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

BUSINESS STRENGTHS

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

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

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

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

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

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

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

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

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

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

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

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

GROWTH STRATEGY

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

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

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

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

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

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

ACQUISITIONS

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

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

o offers attractive margins;

o is accretive to earnings;

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

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

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

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

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

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

RECENT DEVELOPMENTS

Bianchi International Acquisition

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

The Specialty Group, Inc. Acquisition

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

PRODUCTS

AEROSPACE & DEFENSE GROUP

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

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

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

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

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

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

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

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

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

ARMOR HOLDINGS PRODUCTS

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

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

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

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

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

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

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

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

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

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

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

ARMOR MOBILE SECURITY

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

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

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

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

CUSTOMERS

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

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

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

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

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

MARKETING AND DISTRIBUTION

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

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

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

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

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

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

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

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

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

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

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

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

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

PRODUCT MANUFACTURING AND RAW MATERIALS

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

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

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

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

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

BACKLOG

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

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

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

COMPETITION

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

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

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

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

EMPLOYEES

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

Approximately 27 e