During fiscal 2005, we sold put options in various private transactions covering 3.5 million shares of Company stock for $7 million in premiums. During fiscal 2005, put options covering 2.5 million shares of Company stock expired unexercised leaving outstanding put options covering 1 million shares outstanding (2.8% of outstanding shares at December 31, 2005) at a weighted average strike price of $40.00 per share. In February 2006, the remaining outstanding put options covering 1 million shares expired unexercised. Accordingly, we recognized $710,000 in other income, net, in fiscal 2006. In fiscal 2005, we recognized fair value gains of $6 million recorded in other income, net, of which $5 million was recognized on the 2.5 million previously expired and unexercised put options. The fair values of the put options of Company stock are obtained from our counter-parties and represent the estimated amount we would have received or paid to terminate the put options, taking into account the consideration we received for the sale of the put options. We had no outstanding put options on Company stock remaining as of December 31, 2006.

We expect to continue our policy of repurchasing our Common Stock from time to time, subject to the restrictions contained in our Credit Facility; the indenture governing the 8.25% Notes, the indenture governing the 2% Convertible Notes and applicable law. Our Credit Facility permits us to repurchase shares of our Common Stock with no limitation if, on a pro forma basis (as such term is defined in the Credit Facility) after giving effect to a repurchase, (i) our total leverage ratio (as such term is defined in the Credit Facility) is not more than 4.25 to 1.0, (ii) our senior leverage ratio (as such term is defined in the Credit Facility) is no more than 3.00 to 1.0 and (iii) no default or event of default exists or would exist under the Credit Facility after giving effect to such repurchase. As of December 31, 2006 such ratios were 2.82 and 1.11, respectively. Our existing indentures governing the 8.25% Notes and the 2% Convertible Notes also permit us to repurchase shares of our Common Stock, subject to certain limitations, as long as we satisfy the conditions to such repurchase contained therein.

On June 22, 2005, we implemented the 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan authorizes the issuance of up to 2,500,000 shares of our Common Stock. Any shares of our Common Stock granted as restricted stock, performance stock or other stock-based awards will be counted against the shares authorized as one and eight-tenths (1.8) shares for every one share issued in connection with such award. The 2005 Stock Incentive Plan authorizes the granting of stock options, restricted stock, performance awards and other stock-based awards to employees, officers, directors and consultants, independent contractors and advisors of the Company and its subsidiaries. Upon adoption of our 2005 Stock Incentive Plan, we agreed to not grant awards under any of our pre-existing stock incentive plans.

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

On October 29, 2004, we completed the placement of the 2% Convertible Notes, due November 2024. On November 5, 2004, Goldman, Sachs & Co. exercised its option to purchase an additional $45 million principal amount of the 2% Convertible Notes. The 2% Convertible Notes provide the holders with a seven year put option and are guaranteed by most of our domestic subsidiaries on a senior subordinated basis. The 2% Convertible Notes were initially rated B1/B+ by Moody’s Investors’ Service and Standard & Poor’s Rating Services, respectively. The 2% Convertible Notes provide for interest at a rate of 2.00% per year, payable on November 1 and May 1 of each year beginning on May 1, 2005, and ending on November 1, 2011. The 2% Convertible Notes provide for accretion of the principal amount beginning on November 1, 2011, at a rate that provides holders with an aggregate annual yield to maturity of 2.00%, as defined in the agreement. The 2% Convertible Notes provide for interest during any six-month period beginning November 1, 2011, of 15 basis points paid in cash if the average trading price of the notes is above certain levels. The 2% Convertible Notes are convertible, at the bond holder’s option at any time, initially at a conversion rate of 18.5151 shares of our common stock per $1,000 principal amount of notes, which is the equivalent conversion price of approximately $54.01 per share, subject to adjustment. Upon conversion, we are obligated to satisfy our conversion obligation with respect to the accreted principal amount of the notes to be converted in cash, with any remaining amount to be satisfied in shares of our common stock. The

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conversion rate is subject to adjustment, without duplication, upon the occurrence of any of the following events: (1) stock dividends in common stock, (2) issuance of rights and warrants, (3) stock splits and combinations, (4) distribution of indebtedness, securities or assets, (5) cash distributions, (6) tender or exchange offers, and (7) repurchases of common stock. In accordance with U.S. GAAP, the 2% Convertible Notes are classified as short term debt as they can be converted at any time prior to maturity.

On August 12, 2003, we completed a private placement of $150 million aggregate principal amount of the 8.25% Notes. The 8.25% Notes are guaranteed by most of our domestic subsidiaries on a senior subordinated basis. The 8.25% Notes were sold to qualified institutional investors in reliance on Rule 144A of the Securities Act of 1933, as amended, and to non-U.S. persons in reliance on Regulation S under the Securities Act of 1933, as amended. In 2004, after the completion of the private placement of the 8.25% Notes, we conducted an exchange offer pursuant to which holders of the privately placed 8.25% Notes exchanged such notes for 8.25% Notes registered under the Securities Act of 1933, as amended. The 8.25% Notes were initially rated B1/B+ by Moody’s Investors’ Service and Standard & Poor’s Rating Services, respectively. On March 29, 2004, we completed a registered exchange offer for the 8.25% Notes and exchanged the 8.25% Notes for new 8.25% Notes that were registered under the Securities Act of 1933, as amended.

On September 2, 2003, we entered into interest rate swap agreements, which have been designated as fair value hedges as defined under SFAS 133 with a notional amount totaling $150 million. The agreements were entered into to exchange the fixed interest rate on our 8.25% Notes for a variable interest rate equal to six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth day of February and August. The agreements are subject to other terms and conditions common to transactions of this type. In accordance with SFAS 133, changes in the fair value of the interest rate swap agreements offset changes in the fair value of the fixed rate debt due to changes in the market interest rate. At December 31, 2005, there was a $1 million asset included in other assets, which, as a result of the change in fair value, is a $283,000 hedge asset at December 31, 2006. The agreements are deemed to be a perfectly effective fair value hedge, and, therefore, qualify for the short-cut method of accounting under SFAS 133. As a result, no ineffectiveness is expected to be recognized in our earnings associated with the interest rate swap agreements.

As of December 31, 2006, we were in compliance with all of our negative and affirmative covenants contained in the Credit Facility and the indentures governing the 8.25% Notes and the 2% Convertible Notes.

Working capital was ($95) million and $387 million as of December 31, 2006 and 2005, respectively. The decrease in working capital is a function of the reduction in cash from the purchase of Stewart & Stevenson and the increase in accrued liabilities from unearned revenue at Stewart & Stevenson. In addition, the short-term classification of our $344 million in Convertible Notes due November 1, 2024, in accordance with U.S. GAAP, reduces our working capital at both year ends.

Net cash provided by operating activities was $139 million for fiscal 2006, compared to $135 million for fiscal 2005. Net cash provided by operating activities increased as a result of a reduction in uses of working capital. Net cash used in investing activities was $825 million for fiscal 2006, compared to $102 million for fiscal 2005. The increase was primarily due to the acquisition of Stewart & Stevenson and increased capital expenditures to support the revenue growth in the Aerospace & Defense Group. Net cash provided by financing activities was $254 million for fiscal 2006, compared to $19 million for fiscal 2005. The increase was primarily due to increased borrowings under our new Senior Credit facility.

Our capital expenditures for fiscal 2006, were $34 million. Such expenditures included additional manufacturing, office space, manufacturing machinery and equipment, leasehold improvements, information technology and communications infrastructure equipment. Our fiscal 2007 capital expenditures are expected to be approximately $100 to $120 million.

We anticipate that the cash on hand, cash generated from operations, and available borrowings under the Credit Facility will enable us to meet liquidity, working capital and capital expenditure requirements during the next 12 months. We may, however, require additional financing to pursue our

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strategy of growth through acquisitions, and we are continuously exploring alternatives. If such financing is required, there are no assurances that it will be available, or if available, that it can be obtained on terms favorable to us or on a basis that is not dilutive to our stockholders.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2006, the FASB issued Financial Accounting Standards Board Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes’’ (‘‘ FIN 48’’), an interpretation of FASB Statement of Financial Accounting Standards No. 109 ‘‘Accounting for Income Taxes’’(‘‘SFAS 109’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. Also, the interpretation provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The accounting provisions of FIN 48 will be effective for the Company beginning January 1, 2007. The Company is currently evaluating the effect of FIN 48 on the Company’s Consolidated Financial Statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) 157, ‘‘Fair Value Measurements.’’ SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations.

Recently Adopted Standards.

In September 2006, the FASB issued SFAS 158, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.’’ This Statement, effective for December 2006, requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

This statement results in changes in the balance sheet recognition of defined benefit plans but does not change the measurement of plan assets and obligations and the measurement of benefit expense in the statement of income. In accordance with the Statement, prior period Consolidated Financial Statements were not restated. See Note 19 in our Consolidated Financial Statements for a comparison of assets and liabilities related to defined benefit plans in the Company’s 2006 Consolidated Balance Sheet, compared with their recognition in the 2005 Consolidated Balance Sheet under the prior rules.

Further, under this Statement, before the end of 2008, we must change our current October measurement date for valuation of plan assets and projected benefit obligations to our December fiscal year-end date for one of our noncontributory defined benefit pension plan.

INFLATION

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

OFF BALANCE SHEET ARRANGEMENTS

On September 24, 2004, we entered into an off-balance sheet leasing arrangement for an aircraft for Company use. Upon expiration of this lease on September 24, 2009, a subsidiary of the Company has the option to renew the lease at fair market value subject to approval by the lessor, or, buy the aircraft for approximately $10 million, or return the aircraft to the lessor and, under a guarantee, pay any shortfall in sales proceeds from a third party in an amount not to exceed $8 million. Annual rental expense related to this agreement is approximately $1 million. Excluding this leasing arrangement, we do not have any off balance sheet arrangements.

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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table presents our contractual obligations as of December 31, 2006:

Contractual Obligations			Payment due by period
			(In thousands)
			Total						Less than 1 year						1 – 3 years						3 – 5 years						More than 5 years(1)
Long-term debt obligations				$	423,787					$	4,337					$	19,663					$	250,580					$	149,207
Operating lease obligations					39,865						9,340						12,124						6,490						11,911
Other long-term liabilities					58,027						8,913						19,089						18,537						11,488
Total				$	521,679					$	22,590					$	50,876					$	275,607					$	172,606

(1)	Excludes $342 million of convertible debt outstanding at December 31, 2006. See Note 9 to our Consolidated Financial Statements.

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

MARKET RATE RISK

The following discussion about our market rate risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. For more information see ‘‘Forward Looking Statements’’ contained in Part I of this report. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and equity security price risk as a result of the sale of put options on our Company stock.

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

On September 2, 2003, we entered into interest rate swap agreements in which we effectively exchanged the $150 million fixed rate 8.25% interest on the senior subordinated notes for variable rates in the notional amount of $80 million, $50 million, and $20 million at six-month LIBOR, set in arrears, plus 2.75%, 2.75%, and 2.735%, respectively. The agreements involve receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The variable interest rates are fixed semi-annually on the fifteenth day of February and August each year through maturity. The six-month LIBOR rate was 5.38% on February 22, 2007. The maturity dates of the interest rate swap agreements match those of the underlying debt. Our objective for entering into these interest rate swaps was to reduce our exposure to changes in the fair value of senior subordinated notes and to obtain variable rate financing at an attractive cost. Changes in the six-month LIBOR would affect our earnings either positively or negatively. An assumed 100 basis point increase in the six-month LIBOR would increase

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our interest obligations under the interest rate swaps and Senior Credit facility by approximately $2 million and $3 million, respectively, for a twelve month period.

In accordance with SFAS 133, we designated the interest rate swap agreements as perfectly effective fair value hedges and, accordingly, use the short-cut method of evaluating effectiveness. As permitted by the short-cut method, the change in fair value of the interest rate swaps will be reflected in earnings and an equivalent amount will be reflected as a change in the carrying value of the swaps, with an offset to earnings. There is no ineffectiveness to be recorded. At December 31, 2005, there was a $1 million hedge asset included in other assets, which, as a result of the change in fair value, is a $283,000 hedge asset at December 31, 2006.

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

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

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

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

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is incorporated by reference from our Consolidated Financial Statements and notes thereto which are included in this report beginning on page F-1.

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

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

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ITEM 9A.	CONTROLS AND PROCEDURES

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

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

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

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

As of the end of the Company’s 2006 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2006, is effective.

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

ATTESTATION REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP, our independent registered certified public accounting firm that audited the Company’s Consolidated Financial Statements for the fiscal year ended December 31, 2006, has audited our assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, as stated in their report which appears on page F-2.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS

The table below shows the number of options and range of exercise prices we granted to various employees and directors during our fiscal year ended December 31, 2006 under our 2005 Stock Incentive Plan.

Plan Name			Number of Grants						Grant Price Ranges
2005 Stock Incentive Plan					114,000					$	45.26   -   $57.12

The following table sets forth certain information regarding our equity plans at December 31, 2006.

(A)

(B)

(C)

Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))

Equity compensation plans approved by security holders

3,667,260

$

32.92

2,133,500

Equity compensation plans not approved by security holders

—

N/A

0

Total

3,667,260

We have two non-qualified equity plans, the 2002 Executive Stock Plan and the 1998 Stock Option Plan, that have not been approved by stockholders. The 2002 Executive Stock Plan provides for the grant of a total of 470,000 stock options and stock awards to our key employees. The Board of Directors, or a committee designated by the Board consisting of two or more independent directors, is authorized to set the price and terms and conditions of the options and awards granted under the 2002 Executive Stock Plan. Options under the 2002 Executive Stock Plan are substantially the same as the 2002 Stock Incentive Plan except that we may only grant non-qualified stock options under the 2002 Executive Stock Plan. The 2002 Executive Stock Plan was adopted on March 13, 2002 and all shares available for grant under the 2002 Executive Stock Plan were granted to our executive officers effective March 13, 2002.

The 1998 Stock Option Plan provides for the grant of a total of 725,000 stock options to our key employees. The Board of Directors, or a committee designated by the Board consisting of two or more independent directors, is authorized to set the price and terms and conditions of the options granted under the 1998 Stock Option Plan. Options under the 1998 Stock Option Plan are substantially the same as the Amended and Restated 1996 Stock Option Plan except that we may only grant non-qualified stock options under the 1998 Stock Option Plan. The 1998 Stock Option Plan was adopted on December 7, 1998 and all shares available for grant under the 1998 Stock Option Plan were granted to our executive officers effective January 1, 1999 or, if later, the renewal date of their respective employment agreements.

The information called for pursuant to this Part III, Items 10, 11, 13 and 14 is incorporated by reference from our definitive proxy statement, which we intend to file with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended December 31, 2006.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)	The following Consolidated Financial Statements (which appear sequentially beginning at page number F-1) are included in this report on Form 10-K.

	Report of Independent Registered Certified Public Accounting Firm

	Consolidated Balance Sheets

	Consolidated Statements of Operations

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

	Consolidated Statements of Cash Flow

	Notes to Consolidated Financial Statements

(a)(2)	Financial Statement Schedules

	Schedule II: Valuation and Qualifying Accounts

	Financial statement schedules not listed above have been omitted since they are either not required, not applicable, or the information is otherwise included.

(b)	Exhibits

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

Exhibit No.			Description
+2.1			Stock Purchase Agreement, dated as of April 20, 2001, by and among Armor Holdings, Inc., Bengal Acquisition Corp., The Kroll-O’Gara Company, O’Gara-Hess & Eisenhardt Armoring Company, The O’Gara Company, and O’Gara Security Associates, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K dated April 20, 2001).
+2.2			Amendment dated as of August 20, 2001 to the Stock Purchase Agreement, dated as of April 20, 2001, by and among Armor Holdings, Inc., Bengal Acquisition Corp., The Kroll-O’Gara Company, O’Gara-Hess & Eisenhardt Armoring Company, The O’Gara Company, and O’Gara Security Associates, Inc. (filed as Exhibit 2.2 to our Current Report on Form 8-K dated August 22, 2001).
+2.3			Amendment dated as of August 21, 2001 to the Stock Purchase Agreement, dated as of April 20, 2001, by and among Armor Holdings, Inc., Bengal Acquisition Corp., The Kroll-O’Gara Company, O’Gara-Hess & Eisenhardt Armoring Company, The O’Gara Company, and O’Gara Security Associates, Inc. (filed as Exhibit 2.3 to our Current Report on Form 8-K dated August 23, 2001).
+2.4			Agreement and Plan of Merger dated as of August 29, 2003 by and among Armor Holdings, Inc., AHI Bulletproof Acquisition Corp., and Simula, Inc. (filed as Appendix A to our Registration Statement on Form S-4 filed with the Commission on September 23, 2003).
+2.5			Agreement and Plan of Merger, dated as of September 28, 2004, by and among Armor Holdings, Inc., Specialty Acquisition Corp., The Specialty Group, Inc., and Joseph F. Murray, Jr. and John P. Sweeney, as the Shareholders’ Agent (filed as Exhibit 2.1 to our Current Report on Form 8−K filed on October 4, 2004).

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Exhibit No.			Description
+2.6			Stock Purchase Agreement, dated as of November 5, 2004, by and among Armor Holdings Products, L.L.C., Jack B. Corwin, as Trustee of the Jack B. Corwin Revocable Trust dated June 26, 1992, Gary W. French, as Trustee of the Gary W. and Carol D. French Revocable Trust dated December 31, 1999, Gary W. French, as Trustee of the French Family Irrevocable Trust dated December 31, 1999, Bianchi International, AccuCase, LLC, Bianchi Gunleather and Leather Products Co., Inc., Armor Holdings, Inc., Jack B. Corwin and Gary W. French (filed as Exhibit 2.1 to our Current Report on Form 8–K filed on November 12, 2004).
+2.7			Agreement and Plan of Merger, dated as of February 27, 2006, by and among Armor Holdings, Inc., Santana Acquisition Corp., Stewart & Stevenson Services, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K dated March 3, 2006).
+2.8			Amendment to Agreement and Plan of Merger, dated as of May 14, 2006, by and among Armor Holdings, Inc., Santana Acquisition Corp., Stewart & Stevenson Services, Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K dated May 17, 2006).
+3.1			Certificate of Incorporation of Armor Holdings, Inc. (filed as Exhibit 3.1 to our Current Report on Form 8−K, dated September 3, 1996).
+3.2			Certificate of Merger of American Body Armor & Equipment, Inc., a Florida corporation, and Armor Holdings, Inc. (filed as Exhibit 3.2 to our Current Report on Form 8−K dated September 3, 1996).
+3.3			Certificate of Amendment of the Certificate of Incorporation of Armor Holdings, Inc., as amended (filed as Exhibit 3.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2004).
+3.4			Amended and Restated Bylaws of Armor Holdings, Inc. (filed as Exhibit 3.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).
+4.1			Indenture, dated as of August 12, 2003, among Armor Holdings, the subsidiary guarantors listed as signatories thereto and Wachovia Bank, National Association, as trustee, and form of Old Note attached as Exhibit A thereto (filed as Exhibit 10.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2003).
+4.2			First Supplemental Indenture, dated as of September 30, 2003, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories to the Indenture, the subsidiaries listed in Schedule I to the First Supplemental Indenture and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.2 to our Registration Statement on Form S-4 filed with the Commission on January 7, 2004).
+4.3			Second Supplemental Indenture, dated as of December 9, 2003, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.3 to our Registration Statement on Form S-4 filed with the Commission on January 7, 2004).
+4.4			Third Supplemental Indenture, dated as of December 24, 2003, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.4 to our Registration Statement on Form S-4 filed with the Commission on January 7, 2004).
+4.5			Fourth Supplemental Indenture, dated as of March 24, 2004, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, ODV Holdings Corp., and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).

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Exhibit No.			Description
+4.6			Fifth Supplemental Indenture, dated as of August 16, 2004, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, Kleen Bore, Inc., and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended September 30, 2004).
+4.7			Sixth Supplemental Indenture, dated as of September 24, 2004, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, Armor Holdings Aircraft, LLC, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended September 30, 2004).
+4.8			Seventh Supplemental Indenture, dated as of December 29, 2004, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.8 to our Form 10-K Annual Report for the fiscal year ended December 31, 2004).
+4.9			Eighth Supplemental Indenture, dated as of May 25, 2005, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
+4.10			Ninth Supplemental Indenture, dated as of August 25, 2005, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended September 30, 2005).
+4.11			Tenth Supplemental Indenture, dated as of December 9, 2005, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2006).
+4.12			Eleventh Supplemental Indenture, dated as of June 30, 2006, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2006).
+4.13			Registration Rights Agreement, dated August 12, 2003, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto and Wachovia Capital Markets, LLC (filed as Exhibit 10.3 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2003).
+4.14			Form of the new 8¼% Senior Subordinated Notes Due 2013 (filed as Exhibit 4.6 to our Registration Statement on Form S-4 filed with the Commission on January 7, 2004).
+4.15			Indenture, dated as of October 29, 2004, among Armor Holdings, Inc. and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Current Report on Form 8−K filed on November 1, 2004).
+4.16			First Supplemental Indenture, dated as of October 29, 2004, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee, together with the form of Note attached thereto (filed as Exhibit 4.2 to our Current Report on Form 8−K filed on November 1, 2004).

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Exhibit No.			Description
+4.17			Second Supplemental Indenture, dated as of December 29, 2004, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.13 to our Form 10-K Annual Report for the fiscal year ended December 31, 2004).
+4.18			Third Supplemental Indenture, dated as of May 25, 2005, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
+4.19			Fourth Supplemental Indenture, dated as of August 25, 2005, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended September 30, 2005).
+4.20			Fifth Supplemental Indenture, dated as of December 9, 2005, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.3 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2006).
+4.21			Sixth Supplemental Indenture, dated as of June 30, 2006, among Armor Holdings, Inc., the subsidiary guarantors named therein, and Wachovia Bank, National Association, as trustee (filed as Exhibit 4.4 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2006).
+10.1			Purchase Agreement, dated August 6, 2003, among Armor Holdings, Inc., the subsidiary guarantors listed as signatories thereto and Wachovia Capital Markets, LLC (filed as Exhibit 10.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2003).
+10.2			Credit Agreement, dated as of May 25, 2006 (‘‘Credit Agreement’’), among Armor Holdings, Inc., as borrower; each of the material domestic subsidiaries of Armor Holdings, Inc. that is a party thereto, as the guarantors; each lender that is a party thereto; Wachovia Bank, National Association, as administrative agent; Bank of America, N.A., and Suntrust Bank, as co-syndication agents; and Key Bank National Association and JPMorgan Chase Bank, as co-documentation agents (filed as Exhibit 2.1 to our Current Report dated June 1, 2006).
+10.3			Pledge Agreement, dated as of May 25, 2006, among Armor Holdings, Inc.; each of the material domestic subsidiaries of Armor Holdings, Inc. that is a party thereto and Wachovia Bank, National Association, as Administrative Agent (filed as Exhibit 2.6 to our Current Report dated June 1, 2006).
+10.4			Security Agreement, dated as of May 25, 2006, among Armor Holdings, Inc.; each of the material domestic subsidiaries of Armor Holdings, Inc. that is a party thereto and Wachovia Bank, National Association, as Administrative Agent (filed as Exhibit 2.7 to our Current Report dated June 1, 2006).
+10.5			Form of Revolving Note under the Credit Agreement (filed as Exhibit 2.2 to our Current Report dated June 1, 2006).
+10.6			Form of Term Loan A Note under the Credit Agreement (filed as Exhibit 2.3 to our Current Report dated June 1, 2006).
+10.7			Form of Interim Term Loan Note under the Credit Agreement (filed as Exhibit 2.4 to our Current Report dated June 1, 2006).

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Exhibit No.			Description
+10.8			Form of Swingline Note under the Credit Agreement (filed as Exhibit 2.5 to our Current Report dated June 1, 2006).
+10.9			First Amendment to Credit Agreement, dated as of June 23, 2006, among Armor Holdings, Inc., as borrower; each of the material domestic subsidiaries of Armor Holdings, Inc. that is a party thereto, as the guarantors; and Wachovia Bank, National Association, as administrative agent (filed as Exhibit 10.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2006).
@+10.14			Amended and Restated Employment Agreement, dated as of January 1, 2005, between Armor Holdings, Inc. and Warren B. Kanders (filed as Exhibit 10.1 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
@+10.15			Amended and Restated Employment Agreement, dated as of January 1, 2005, between Armor Holdings, Inc. and Robert R. Schiller (filed as Exhibit 10.2 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
@+10.16			Employment Agreement, dated as of May 20, 2005, between Armor Holdings, Inc. and Glenn J. Heiar (filed as Exhibit 10.3 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
@+10.17			Employment Agreement, dated as of May 20, 2005, between Armor Holdings, Inc. and Robert F. Mecredy (filed as Exhibit 10.4 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
@+10.18			Non-competition Agreement, dated as of May 20, 2005, between Armor Holdings, Inc. and Scott T. O’Brien (filed as Exhibit 10.6 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
@+10.19			Employment Agreement, dated as of May 20, 2005, between Armor Holdings, Inc. and Scott T. O’Brien (filed as Exhibit 10.5 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
+10.20			Form of Indemnification Agreement for Directors and Officers of Armor Holdings, Inc., (filed as Exhibit 10.4 to our Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).
**+10.21			American Body Armor & Equipment, Inc. 1994 Incentive Stock Plan (incorporated by reference from Form S-8 filed on October 10, 1994, Reg. No. 33-018863).
**+10.22			American Body Armor & Equipment, Inc. 1994 Directors Stock Plan (incorporated by reference from Form S-8 filed on October 31, 1994, Reg. No. 33-018863).
**+10.23			Armor Holdings, Inc. Amended and Restated 1996 Stock Option Plan (incorporated by reference from our 1997 Definitive Proxy Statement with respect to our 1997 Annual Meeting of Stockholders, held June 12, 1997, as filed with the Commission on May 27, 1997).
**+10.24			Armor Holdings Inc. Amended and Restated 1996 Non-Employee Directors Stock Option Plan (incorporated by reference from our 1997 Definitive Proxy Statement with respect to our 1997 Annual Meeting of Stockholders, held June 12, 1997, as filed with the Commission on May 27, 1997).
**+10.25			Armor Holdings, Inc. 1998 Stock Option Plan (filed as Exhibit 10.19 to our Form 10-K Annual Report for the fiscal year ended December 31, 1998).
**+10.26			Armor Holdings, Inc. 1999 Stock Incentive Plan (filed as Appendix A to our 1999 Definitive Proxy Statement with respect to our 1999 Annual Meeting of Stockholders, as filed with the Commission on May 21, 1999).

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Exhibit No.			Description
**+10.27			Armor Holdings, Inc. Amended and Restated 2002 Stock Incentive Plan (filed as Exhibit 10.24 to our Form 10-K Annual Report for the fiscal year ended December 31, 2004).
**+10.28			Armor Holdings, Inc. 2002 Executive Stock Plan (filed as Exhibit 10.6 to our Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 2002).
**+10.29			Armor Holdings, Inc. 2005 Stock Incentive Plan (filed as Appendix A to our 2005 Definitive Proxy Statement with respect to our 2005 Annual Meeting of Stockholders, as filed with the Commission on May 23, 2005).
**+10.30			Form of Stock Option Agreement under the 2005 Stock Incentive Plan (filed as Exhibit 10.7 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
**+10.31			Form of Stock Bonus Award Agreement under the 2005 Stock Incentive Plan (filed as Exhibit 10.8 to our Form 10-Q Quarterly Report for the fiscal quarter ended June 30, 2005).
**+10.32			Armor Holdings, Inc. 2005 Annual Incentive Plan (filed as Appendix B to our 2005 Definitive Proxy Statement with respect to our 2005 Annual Meeting of Stockholders, as filed with the Commission on May 23, 2005).
**+10.33			Executive Deferred Compensation Plan of Armor Holdings, Inc. (incorporated by reference from Form S-8 filed on November 30, 2005, Reg. No. 333-130016).
**+10.34			Amendment No. 1 to the Executive Deferred Compensation Plan of Armor Holdings, Inc. (incorporated by reference from Form S-8 filed on November 30, 2005, Reg. No. 333-130016).
**+10.35			Armor Holdings, Inc., Executive Retirement Plan, dated as of January 25, 2006 (filed as Exhibit 10.35 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
+10.36			Transportation Services Agreement, dated as of December 10, 2003, by and between Kanders Aviation, LLC and Armor Holdings, Inc. (filed as Exhibit 10.3 to our Form 10-Q Quarterly Report for the fiscal quarter ended March 31, 2004).
*21.1			Subsidiaries of the Registrant.
*23.1			Consent of PricewaterhouseCoopers LLP.
*31.1			Certification of Principal Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*31.2			Certification of Principal Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
*32.1			Certification of Principal Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934.
*32.2			Certification of Principal Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934.

*	Filed herewith.

+	Incorporated herein by reference.

@	This Exhibit represents a management contract.

**	This Exhibit represents a compensatory plan.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Armor Holdings, Inc.

Report of Independent Registered Certified Public Accounting Firm			F-2
Consolidated Balance Sheets			F-4
Consolidated Statements Of Operations			F-5
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)			F-6
Consolidated Statements of Cash Flow			F-7
Notes to Consolidated Financial Statements			F-9

F-1

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Report of Independent Registered Certified Public Accounting Firm

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

We have completed integrated audits of Armor Holdings, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Armor Holdings, Inc. and its subsidiaries (‘‘the Company’’) at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Managements Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally

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accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Jacksonville, Florida
February 26, 2007

F-3

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND DECEMBER 31, 2005
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

			December 31, 2006						December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents				$	40,313					$	471,841
Accounts receivable (net of allowance for doubtful accounts of $7,903 and $6,763)					303,103						211,281
Unbilled costs and accrued profits					35,130						843
Inventories					314,126						210,517
Deferred income taxes					55,816						21,382
Prepaid expenses and other current assets					23,985						16,705
Total current assets					772,473						932,569
Property and equipment (net of accumulated depreciation of $54,706 and $37,041)					179,676						79,929
Goodwill					977,739						273,696
Patents, licenses and trademarks (net of accumulated amortization of $37,812 and $15,256)					369,242						130,620
Other assets					18,981						46,048
Total assets				$	2,318,111					$	1,462,862
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt				$	4,337					$	430
Short-term debt					343,627						344,274
Accounts payable					219,784						90,963
Accrued expenses and other current liabilities					285,581						100,924
Income taxes payable					13,818						8,767
Total current liabilities					867,147						545,358
Long-term debt, less current portion					419,450						151,910
Other long-term liabilities					58,027						10,475
Deferred income taxes					122,801						44,537
Total liabilities					1,467,425						752,280
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares issued and outstanding					—						—
Common stock, $.01 par value; 75,000,000 shares authorized; 41,606,499 and 41,347,628 issued; 35,546,277 and 35,287,406 outstanding at December 31, 2006 and December 31, 2005, respectively					417						415
Additional paid-in capital					530,776						525,890
Retained earnings					392,553						257,991
Accumulated other comprehensive loss					(743	)					(1,397	)
Treasury stock, at cost					(72,317	)					(72,317	)
Total stockholders’ equity					850,686						710,582
Total liabilities and stockholders’ equity				$	2,318,111					$	1,462,862

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

			December 31, 2006						December 31, 2005						December 31, 2004
REVENUES:
Aerospace & Defense				$	1,930,359					$	1,213,113					$	626,347
Products					324,214						284,363						228,816
Mobile Security					106,311						139,454						124,520
Total revenues					2,360,884						1,636,930						979,683
COSTS AND EXPENSES:
Cost of revenues					1,897,682						1,248,596						714,192
Cost of vest exchange program/warranty revision					3,600						19,900						5,000
Selling, general and administrative expenses					196,659						139,304						106,555
Amortization					22,484						8,627						4,255
Integration					2,508						3,669						2,558
Other (credits) charges					(1,530	)					1,200						1,408
OPERATING INCOME					239,481						215,634						145,715
Interest expense, net					30,155						6,281						6,776
Other (income) expense, net					(5,012	)					(4,025	)					1,945
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES					214,338						213,378						136,994
PROVISION FOR INCOME TAXES					79,776						80,868						56,417
INCOME FROM CONTINUING OPERATIONS					134,562						132,510						80,577
DISCONTINUED OPERATIONS (NOTE 2):
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX BENEFIT					—						—						(38	)
NET INCOME				$	134,562					$	132,510					$	80,539
NET INCOME PER COMMON SHARE – BASIC
INCOME FROM CONTINUING OPERATIONS				$	3.80					$	3.83					$	2.56
LOSS FROM DISCONTINUED OPERATIONS					0.00						0.00						0.00
BASIC INCOME PER SHARE				$	3.80					$	3.83					$	2.56
NET INCOME PER COMMON SHARE – DILUTED
INCOME FROM CONTINUING OPERATIONS				$	3.64					$	3.70					$	2.44
LOSS FROM DISCONTINUED OPERATIONS					0.00						0.00						0.00
DILUTED INCOME PER SHARE				$	3.64					$	3.70					$	2.44
WEIGHTED AVERAGE SHARES – BASIC					35,453						34,602						31,419
WEIGHTED AVERAGE SHARES – DILUTED					37,018						35,822						33,025

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(IN THOUSANDS)

			COMMON STOCK												ADDITIONAL PAID-IN CAPITAL						RETAINED EARNINGS						ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME						TREASURY STOCK						TOTAL
			SHARES						PAR VALUE
Balance, December 31, 2003					28,277					$	344					$	318,460					$	44,942					$	3,936					$	(72,317	)				$	295,365
Exercise of stock options and distribution of stock awards					1,797						18						40,582																								40,600
Tax benefit from exercises of stock options																	4,646																								4,646
Issuance of common stock					4,000						40						141,121																								141,161
Comprehensive income:
Net income																							80,539																		80,539
Foreign currency translation adjustments, net of taxes of $642																													2,885												2,885
Total comprehensive income																																									83,424
Balance, December 31, 2004					34,074						402						504,809						125,481						6,821						(72,317	)					565,196
Exercise of stock options and distribution of stock awards					1,213						13						16,289																								16,302
Tax benefit from exercises of stock options																	4,792																								4,792
Comprehensive income:
Net income																							132,510																		132,510
Foreign currency translation adjustments, net of taxes of ($728)																													(5,022	)											(5,022	)
Minimum pension liability adjustment, net of taxes of $403																													(712	)											(712	)
Unrealized loss on equity investment																													(2,484	)											(2,484	)
Total comprehensive income																																									124,292
Balance, December 31, 2005					35,287						415						525,890						257,991						(1,397	)					(72,317	)					710,582
Exercise of stock options and distribution of stock awards					259						2						1,882																								1,884
Tax benefit from exercises of stock options																	3,004																								3,004
Comprehensive income:
Net income																							134,562																		134,562
Foreign currency translation adjustments, net of taxes of $910																													7,704												7,704
Minimum pension liability adjustment, net of taxes of $4,110																													(6,602	)											(6,602	)
Elimination of unrealized gain on equity securities upon consolidation																													2,475												2,475
Total comprehensive income																																									138,139
Adjustment to initially apply FASB Statement 158, net of tax $1,731																													(2,923	)											(2,923	)
Balance, December 31, 2006					35,546					$	417					$	530,776					$	392,553					$	(743	)				$	(72,317	)				$	850,686

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(IN THOUSANDS)

			Year Ended
			December 31, 2006						December 31, 2005						December 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations				$	134,562					$	132,510					$	80,577
Adjustments to reconcile income from continuing operations to cash provided by operating activities:
Depreciation and amortization					47,042						22,408						15,051
Loss on disposal of fixed assets					307						934						864
Gain on sale of land					(2,206	)					—						—
Deferred income taxes					9,271						(3,411	)					4,006
Non-cash termination charge					—						—						1,408
Non-cash restricted stock charges					—						—						6,294
Non-cash SERP expense					2,900						2,427						—
Windfall tax benefit of stock options					(3,005	)					—						—
Fair value gain on put options					(710	)					(5,905	)					—
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable					(17,962	)					(35,390	)					(89,603	)
(Increase) decrease in unbilled costs and accrued profits					(34,287	)					50						(893	)
Increase in inventories					(16,625	)					(31,135	)					(73,106	)
Increase in performance based payment					(46,601	)					—						—
Decrease (increase) in prepaid expenses and other assets					517						23,541						(22,075	)
Increase in accounts payable, accrued expenses and other current liabilities					66,884						24,288						77,418
(Decrease) increase in income taxes payable					(1,556	)					4,558						17,324
Net cash provided by operating activities from continuing operations					138,531						134,875						17,265
Net cash used in operating activities from discontinued operations					—						—						(407	)
Net cash provided by operating activities					138,531						134,875						16,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment					(34,049	)					(15,593	)					(19,419	)
Proceeds from the sale of land					3,440						—						—
Purchase of patents and trademarks					(96	)					(1,053	)					(112	)
Purchase of equity investment					(57	)					(31,082	)					(5,275	)
Proceeds from sale of equity investment					—						—						5,823
Purchase of short-term investment securities					(538,310	)					(754,300	)					(286,430	)
Proceeds from sales of short-term investment securities					538,310						754,300						286,430
Collection of note receivable					428						—						2,175
Financing lease receivable					—						(1,187	)					—
Decrease in restricted cash					—						—						2,600
Sale of businesses, net of cash disposed					—						—						125
Additional cash received from sale of business					—						300						—

The accompanying notes are an integral part of these Consolidated Financial Statements.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(IN THOUSANDS)
(Continued)

			Year Ended
			December 31, 2006						December 31, 2005						December 31, 2004
Additional consideration for purchased businesses					(243	)					(6,528	)					(2,808	)
Purchase of businesses, net of cash acquired					(794,739	)					(46,805	)					(158,442	)
Net cash used in investing activities from continuing operations					(825,316	)					(101,948	)					(175,333	)
Net cash used in investing activities from discontinued operations					—						—						(263	)
Net cash used in investing activities					(825,316	)					(101,948	)					(175,596	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options					2,156						18,902						25,192
Proceeds from sale of put options					—						6,614						—
Proceeds from the issuance of common stock					—						—						142,500
Cash paid for common stock offering costs					—						—						(1,339	)
Taxes paid for withheld shares on restricted stock issuances					(430	)					(5,642	)					(2,585	)
Windfall tax benefit of stock options					3,005						—						—
Cash paid for financing costs					(7,232	)					—						(6,156	)
Increase in bank overdrafts					10,280						—						—
Borrowings of short-term debt					—						—						341,550
Borrowings of long-term debt					100,000						—						—
Repayments of long-term debt					(25,464	)					(585	)					(34,516	)
Borrowings under lines of credit					848,001						13,649						24,588
Repayments under lines of credit					(676,389	)					(13,635	)					(23,049	)
Net cash provided by financing activities from continuing operations					253,927						19,303						466,185
Net cash used in financing activities from discontinued operations					—						—						(125	)
Net cash provided by financing activities					253,927						19,303						466,060
Effect of exchange rate changes on cash and cash equivalents					1,330						(1,598	)					1,961
Net (decrease) increase in cash and cash equivalents					(431,528	)					50,632						309,283
Cash and cash equivalents, beginning of period					471,841						421,209						111,926
Cash and cash equivalents, end of period				$	40,313					$	471,841					$	421,209

The accompanying notes are an integral part of these Consolidated Financial Statements.

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

1.	BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY OVERVIEW

We are one of three major original equipment manufacturers (‘‘OEM’’) of tactical wheeled vehicles (‘‘TWV’’) and a leading diversified manufacturer vehicle armoring systems and life safety and survivability products for the military, law enforcement and commercial markets. We are a prime aerospace and defense contractor on a number of key U.S. military programs, and we also provide a broad portfolio of branded security products. Our customers include domestic and international militaries, law enforcement, security and corrections personnel, government agencies, multinational corporations and individuals. In May 2006, we acquired Stewart & Stevenson Services, Inc. (‘‘Stewart & Stevenson’’), which positions us as the leading manufacturer of the Family of Medium Tactical Vehicles (‘‘FMTV’’) for the U.S. military. The acquisition of Stewart & Stevenson also adds over $1.7 billion to our total backlog of $2.6 billion as of December 31, 2006, which enhances our future sales visibility. Our business consists of three principal segments: our Aerospace & Defense Group, our Products Group and our Mobile Security Division.

Aerospace & Defense Group.    The most significant operations within the Aerospace & Defense Group are the manufacturing of FMTV and the armoring of a variety of light, medium and heavy TWV for the military. For example, we design, develop and manufacture ballistic and blast protection armoring systems for a variety of military ground vehicles, including such programs as the ‘‘Up-Armored’’ High Mobility Multi-purpose Wheeled Vehicle (‘‘HMMWV,’’ commonly known as the Humvee) and the Armored Security Vehicle (‘‘ASV’’). The Aerospace & Defense Group also supplies life safety and survivability 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 Aerospace & Defense Group develops and supplies personnel equipment, including Small Arms Protective Inserts (‘‘SAPI’’) and other engineered ceramic body armor, helmets, shields and other similar protective and duty equipment. Our products include, among others, Modular Lightweight Load-Carrying Equipment (‘‘MOLLE’’) systems, Outer Tactical Vests (‘‘OTVs’’) and Advanced Combat Helmets (‘‘ACH’’). We are currently the largest supplier of MOLLE systems for the U.S. Army, which is a modular rucksack that can be configured in a number of ways depending on the needs of the military mission. We also manufacture OTVs which, when used with SAPI plates, provide enhanced protection against bullets, mines, grenades and mortar and artillery shells. SAPI plates have been adopted by the U.S. military as a key element of the protective equipment worn by U.S. troops.

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

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

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

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Discontinued Operations

On July 2, 2004, we sold the security consulting division of our subsidiary New Technology Armor, Inc. (‘‘NTI’’) previously presented in discontinued operations. The remaining division in NTI, consisting primarily of training services, is included as part of the Products Group segment.

Prior to our acquisition of Stewart & Stevenson, it completed the sale of substantially all operating assets and business of its Power Products and Engineered Products segments in January 2006. All remaining costs related to these sales at the time of our acquisition of Stewart & Stevenson have been considered in purchase accounting for the acquisition.

Significant Accounting Policies

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

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

Concentration of credit risk.    Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. We maintain our cash and cash equivalents with what we believe to be high quality banks. During the year, we make periodic investments in AAA rated auction rate securities, which are held in these same banks. There were no investments in auction rate securities at December 31, 2006 or 2005. Amounts held in individual banks may exceed federally insured amounts. Our accounts receivable consist of amounts due from customers and distributors located throughout the world. International product sales generally require cash in advance or confirmed letters of credit on U.S. banks. We maintain reserves for potential credit losses. As of December 31, 2006 and 2005, management believes that, excluding the U.S. military, we have no significant concentrations of credit risk.

Receivables.    Receivables consist of amounts billed and currently due from customers.

Allowance for Doubtful Accounts.    We evaluate the collectibility of accounts receivable based on numerous factors, including past transaction history with customers and their creditworthiness. This estimate is periodically adjusted when we become aware of specific customers’ inability to meet their financial obligations (e.g., bankruptcy filing or other evidence of liquidity problems). As we determine that specific balances will be ultimately uncollectible, we remove them from our aged trial balance.

Unbilled costs and accrued profits.    Unbilled costs and accrued profits comprise principally amounts of revenue recognized on contracts for which billings had not been presented to the contract owners because the amounts were not billable as of December 31, 2006. All of the December 31, 2006 unbilled costs and accrued profits are with the U.S. Government and are expected to be billed during the first quarter of 2007.

Inventories.    Inventories are stated at the lower of cost or market determined on the actual cost method. Pursuant to contract provisions, agencies of the U.S. Government have title to, or a security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress payments. Such advances and payments are reflected as an offset against the related inventory balances.

Fair value of financial instruments.    The carrying value of cash and cash equivalents, accounts receivable, accounts payable and the debt outstanding under our Credit Facility approximates fair value at December 31, 2006 and 2005. The fair value of public debt was estimated based on quoted

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

market prices. See the table below for the carrying amount and fair value of our debt as at December 31, 2006 and 2005, respectively.

			December 31, 2006												December 31, 2005
			Carrying Amount						Fair Value						Carrying Amount						Fair Value
			(In thousands)
8.25% Senior Subordinated Notes due 2013				$	148,349					$	156,000					$	148,099					$	161,250
2.00% Senior Subordinated Convertible Notes due November 1, 2024					341,924						417,678						341,751						341,550
Revolving facility					172,500						172,500						—						—
Term loan					100,000						100,000						—						—

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

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

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

We assess the recoverability of the carrying amount of our property and equipment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If we determine that the carrying amount of an asset or asset group is not recoverable based upon expected undiscounted future cash flows of the asset or asset group, we record an impairment loss equal to the excess of the carrying amount over the estimated fair value of the asset or asset group.

Goodwill.    Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill and other intangible assets are stated on the basis of cost. In addition to the unamortized goodwill at December 31, 2000, the $890 million in goodwill resulting from acquisitions made by us subsequent to June 30, 2001 was immediately subjected to the non-amortization provisions of Statement of Financial Accounting Standards No. 142, ‘‘Goodwill and Other Intangible Assets’’ (‘‘SFAS 142’’). The purchase method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill is tested for impairment annually, or when a possible impairment is indicated, using the fair value based test prescribed by SFAS 142. We performed our annual assessment of goodwill and determined that no impairment existed as of June 30, 2006.

Patents, licenses and trademarks.    Patents, licenses and trademarks were primarily acquired through acquisitions accounted for by the purchase method of accounting. Such assets are amortized

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

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

Research and development.    Our research and development occurs primarily under fixed-price or cost-plus, government funded contracts as well as Company-sponsored efforts. Research and development costs incurred under contracts with customers are expensed as incurred and are reported as a component of cost of revenues. Revenue from such contracts is recognized as revenue when earned. We recorded revenue of $23 million, $4 million and $8 million from government funded research and development in the years ended December 31, 2006, 2005 and 2004, respectively.

Research and development costs include salaries and benefits of research and development personnel, testing and certification, and other research and development related costs. Research and development costs are included in selling, general and administrative expenses as incurred and for the years ended December 31, 2006, 2005 and 2004, approximated $28 million, $15 million and $9 million, respectively.

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

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

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

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

capital loss carryforwards will be utilized. A valuation allowance is recorded for those deferred tax assets for which it is more likely than not that the realization will not occur.

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

We record revenue of the remaining Aerospace & Defense Group, Products Group and Mobile Security Division when the product is shipped, except for larger commercial contracts typically longer than four months in length. Revenue from large commercial contracts is recognized on the percentage of completion, units-of-work performed method. Should large commercial contracts be in a loss position, the entire estimated loss would be recognized for the balance of the contract at each period end. Current contracts are profitable and returns are minimal and do not materially affect the Consolidated Financial Statements.

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

Warranty.    Warranty costs are generally recorded as a component of cost of revenues and accrued expenses in our Consolidated Financial Statements. The amount recognized is based on historical claims cost experience. See Note 23 regarding our Zylon^® Vest Exchange (‘‘ZVE’’) Program/warranty revision and product exchange program related to our Zylon^®-containing vests.

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

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

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

In accordance with Statement of Financial Accounting Standard No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’ (‘‘SFAS 115’’), we classify our investments in certain equity-based securities as available-for-sale, with unrealized gains and losses excluded from earnings and recorded as a component of comprehensive income or loss. The unrealized holding loss on equity-based securities classified as available-for-sale was $9,000 and $2 million at December 31, 2006 and 2005, respectively. These investments are classified in other assets on the Consolidated Balance Sheets. Declines in fair value below the amortized cost basis of an investment that are determined to be other than temporary are charged to earnings. There were no such other than temporary declines in the years ended December 31, 2006 or 2005.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Recently Adopted Standards.

Defined Benefit Pension and Other Postretirement Plans.    In September 2006, the FASB issued SFAS 158, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.’’ (‘‘SFAS 158’’) This Statement, effective for December 2006, requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

This statement results in changes in the balance sheet recognition of defined benefit plans but does not change the measurement of plan assets and obligations and the measurement of benefit expense in the statement of income. In accordance with SFAS 158, prior period Consolidated Financial Statements were not restated. See Note 19 for a comparison of assets and liabilities related to defined benefit plans in the Company’s 2006 Consolidated Balance Sheet, compared with their recognition in the 2005 Consolidated Balance Sheet under the prior rules.

Further, under SFAS 158, before the end of 2008, we must change our current October measurement date for valuation of plan assets and projected benefit obligations to our December fiscal year-end date for the Simula noncontributory defined benefit pension plan.

Stock options and grants.    We recognize the cost of equity classified share-based awards on a straight-line basis over the vesting period of the award. Prior to January 1, 2006, we accounted for our stock option plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’) and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, ‘‘Accounting for Stock-Based Compensation’’ (‘‘SFAS 123’’). Excluding modification to stock option agreements, no stock option-based employee compensation cost was recognized in the income statement, as all stock options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payments’’ (‘‘FAS 123(R)’’), requiring us to recognize expense related to the fair value of our stock option awards. We adopted the fair value recognition provisions of FAS 123(R), using the modified prospective transition method. Under this transition method, compensation cost recognized during 2006 includes: (a) compensation cost for all equity classified share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). Results for prior periods have not been restated. As a result of adopting FAS 123(R) on January 1, 2006, our income before income taxes for the year ended December 31, 2006, was $4 million lower than if we had continued to account for share-based compensation under ABP 25.

Prior to the adoption of FAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. Beginning on January 1, 2006, we changed our cash flow presentation in accordance with FAS 123(R), which requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (windfall tax benefits) to be classified as financing cash flows.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

We have estimated the fair value of our option awards granted after January 1, 2006, using a Black-Scholes option pricing model. The expected life of the options granted is management’s estimate and represents the period of time that options granted are expected to be outstanding. We currently do not pay dividends. Volatility is based on the historical volatility of our stock price. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair value of each option grant during the years ended December 31, 2006, 2005 and 2004, is estimated on the date of grant with the following weighted-average assumptions:

			2006						2005						2004
Expected life of option			4.5 yrs						5.2 yrs						4.7 yrs
Dividend yield					0	%					0	%					0	%
Volatility					43.6	%					48.5	%					50.0	%
Risk free interest rate					4.72	%					4.03	%					3.36	%

The weighted average fair value of options granted during the years ended December 31, 2006, 2005 and 2004, are as follows:

			2006						2005						2004
			(In thousands, except per share data)
Fair value of each option granted				$	22.81					$	19.23					$	15.57
Total number of options granted					114						1,728						979
Total fair value of all options granted				$	2,601					$	33,229					$	15,243

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

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

			2005						2004
			(In thousands, except per share data)
Net income as reported				$	132,510					$	80,539
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					(37,305	)					(6,717	)
Add: Employee compensation expense for modification of stock option awards included in reported net income, net of income taxes					118						57
Pro-forma net income				$	95,323					$	73,879
Earnings per share:
Basic – as reported				$	3.83					$	2.56
Basic – pro forma				$	2.75					$	2.35
Diluted – as reported				$	3.70					$	2.44
Diluted – pro forma				$	2.66					$	2.24

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

$15 million of the stock-based employee compensation expense determined under the fair value based method for fiscal 2005 is related to accelerated vesting of certain existing stock options and $22 million is related to certain stock options issued in fiscal 2005.

In November 2005, the FASB issued FASB Staff Position (‘‘FSP’’) FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. FSP FAS 123(R)-3 provides an alternative transition method for establishing the beginning balance of the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS  123(R) (the ‘‘APIC Pool’’). The Company has elected to adopt the alternative transition method provided in FSP FAS 123(R)-3 for establishing the beginning balance of the APIC Pool. This method consists of a computational component that establishes a beginning balance of the APIC Pool related to employee compensation and a simplified method to determine the subsequent impact on the APIC Pool of employee awards that are fully vested and outstanding upon the adoption of FAS  123(R).

Discontinued Operations.    In accordance with Statement of Financial Accounting Standards No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’ (‘‘SFAS 144’’), a component classified as held for sale is reported in discontinued operations when the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement for current and prior periods reports the results of operations of the component, including any estimated impairment loss, in discontinued operations. The results of discontinued operations, less applicable income tax expense (benefit), is reported as a separate component of income before extraordinary items and the cumulative effect of accounting changes (if applicable). The assets and liabilities of a disposal group classified as held for sale are presented separately in the asset and liability sections, respectively, of the statement of financial position. We had no discontinued operations at December 31, 2006 and 2005. See Note 2 for information related to discontinued operations during 2004.

Reclassifications.    Certain reclassifications have been made to the 2004 and 2005 Consolidated Financial Statements in order to conform to the presentation adopted for 2006. These reclassifications had no effect on net income or retained earnings.

Recent accounting pronouncements.

In June 2006, the FASB issued Financial Accounting Standards Board Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes’’ (‘‘ FIN 48’’), an interpretation of FASB Statement of Financial Accounting Standards No. 109 ‘‘Accounting for Income Taxes’’(‘‘SFAS 109’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. Also, the interpretation provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The accounting provisions of FIN 48 will be effective for the Company beginning January 1, 2007. The Company is currently evaluating the effect of FIN 48 on the Company’s Consolidated Financial Statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (‘‘SFAS’’) 157, ‘‘Fair Value Measurements.’’ SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

2.	DISCONTINUED OPERATIONS

See Note 1 for information related to discontinued operations. The following is a summary of the operating results of the discontinued operations for the year ended December 31, 2004. There were no discontinued operations in the years ended December 31, 2006 and 2005.

			December 31, 2004
			(In thousands)
Revenue				$	1,733
Cost of revenues					697
Gross profit					1,036
Selling, general and administrative expenses					821
Operating income					215
Interest expense, net					2
Other expense, net					273
Loss from discontinued operations before income tax benefit					(60	)
Income tax benefit					(22	)
Loss from discontinued operations				$	(38	)

3.	ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive loss, net of tax benefit of $7 million and $325,000 as of December 31, 2006 and 2005, respectively, are listed below:

			December 31, 2006						December 31, 2005
			(In thousands)
Foreign currency translations, net of tax				$	9,503					$	1,799
Additional minimum pension plan liability, net of tax					—						(712	)
Unrecognized pension actuarial loss and prior service cost, net of tax					(10,237	)					—
Unrealized loss on equity investment					(9	)					(2,484	)
Accumulated other comprehensive loss				$	(743	)				$	(1,397	)

4.	BUSINESS COMBINATIONS

We have completed numerous purchase business combinations for cash and assumption of liabilities in certain cases. In the three years ended December 31, 2006, the following acquisitions were completed:

			Total Consideration						Shares Issued						Value of Shares
			(In thousands, except shares issued)
2006
Aggregate 2006 acquisitions, net of cash (1) (2)				$	825,821						—						—
Additional purchase price paid or deferred consideration					243						—						—
				$	826,064						—						—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

			Total Consideration						Shares Issued						Value of Shares
			(In thousands, except shares issued)
2005
Aggregate 2005 acquisitions, net of cash (3)				$	46,992						—						—
Additional purchase price paid or deferred consideration					6,528						—						—
				$	53,520						—						—
2004
Aggregate 2004 acquisitions, net of cash (4)				$	158,442						—						—
Additional purchase price paid or deferred consideration					2,808						—						—
				$	161,250						—						—

(1)	Includes Swiss-Photonics AG, Stewart & Stevenson Services, Inc., Integrated Textile Systems, Inc., Hiatt & Company, Ltd and Schroth Safety Products.

(2)	Includes $31 million related to shares of Stewart & Stevenson purchased in 2005.

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

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

2006 Acquisitions

On April 6, 2006, we acquired 100% of the stock of Swiss-Photonics AG (‘‘Projectina’’). Projectina manufactures, markets and distributes highly specialized document examination equipment used in verifying document authenticity and detecting counterfeit currency and crime lab microscopes used to evaluate ballistics and bullet casings. The results of Projectina have been included in the results of our Products Group since the date of acquisition and the purchase price is immaterial to our Consolidated Financial Statements.

On May 25, 2006, we completed the acquisition of Stewart & Stevenson for approximately $769 million in cash, excluding transaction costs and after deducting Stewart & Stevenson’s net cash balance. Stewart & Stevenson designs and manufactures TWV used by the U.S. and international militaries, and is one of the three major OEMs of TWV sold to the U.S. military. Stewart & Stevenson is the sole manufacturer of the U.S. Army’s FMTV and is currently under contract to produce the FMTV through September 2008. The results of Stewart & Stevenson have been included in the results of our Aerospace and Defense Group since the date of acquisition. Stewart & Stevenson derived approximately 93% of its revenues of $726 million for the fiscal year ended January 31, 2006, from the production of FMTV trucks, trailers, vehicle cabs, spare parts, service and other components.

A primary strategic benefit of our acquisition of Stewart & Stevenson is our new position as an OEM of the TWV fleet. As the U.S. Army transitions its long-term armoring strategy, TWV OEMs are expected to gain contracting authority for all ballistic and blast protection armoring systems, giving us the ability to better position our armoring technology and survivability systems on the FMTV. We believe that the combination of our core competency in vehicle armoring and Stewart & Stevenson’s leading design and fabrication operations will allow us to capitalize on the U.S. military’s evolving needs for its TWV fleet. These primary factors led to the $682 million of goodwill recorded as a result of the purchase of Stewart & Stevenson.

On June 30, 2006, we acquired 100% of the stock of Integrated Textile Systems, Inc. (‘‘ITS’’), a Monroe, North Carolina-based manufacturer of the high-strength material, Tensylon(TM).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Tensylon(TM), derived from an ultra-high molecular weight polyethylene polymer, has a wide variety of applications, including advanced fiber composites for use in ballistic products. The results of ITS have been included in the results of our Aerospace and Defense Group since the date of acquisition and the purchase price is immaterial to our Consolidated Financial Statements.

On July 10, 2006, we acquired 100% of the stock of Hiatt & Company, Ltd (‘‘Hiatts’’). Hiatts is a high end manufacturer of steel handcuffs, expandable friction lock batons, handcuff pouches and baton holders whose primary customers are military and law enforcement agencies in the U.K. and Europe. The results of Hiatts have been included in the results of our Products Group since the date of acquisition and the purchase price is immaterial to our Consolidated Financial Statements.

On October 19, 2006, we acquired Schroth Safety Products (‘‘Schroth’’). Schroth is a supplier of advanced occupant retention and safety restraint systems for vehicle and aviation platforms serving military, commercial and professional racing markets. These systems are used in military tactical wheeled vehicles, or military and commercial rotary wing and fixed wing aviation platforms, and professional auto racing vehicles for both the NASCAR and Formula 1 racing circuits. Schroth will be integrated into our Aerospace & Defense Group. The results of Schroth have been included in the results of our Aerospace and Defense Group since the date of acquisition and the purchase price is immaterial to our Consolidated Financial Statements.

These five acquisitions were accounted for as purchase business combinations, and accordingly, the results of operations were included in our Consolidated Financial Statements from the acquisition dates. The costs to acquire the stock of Projectina, ITS, Hiatts and Schroth were not considered material to our financial position. The costs to acquire the stock of Stewart & Stevenson, have been allocated to the assets acquired and liabilities assumed according to their estimated fair values at the time of the acquisition as follows:

			Stewart & Stevenson
			(In thousands)
Working capital, net of cash				$	(86,509	)
Property and equipment					77,124
Other long-term assets					5,295
Long-term debt					(25,227	)
Other long-term liabilities					(33,622	)
Deferred tax liability					(74,823	)
Customer-related intangibles					230,445
Marketing-related intangibles					8,158
Goodwill					682,161
				$	783,002

The customer-related intangible assets relate to acquired customer relationships and are being amortized over an eleven year weighted-average useful life on a straight-line basis. The marketing-related intangible assets relate to acquired trade names and trademarks, which have an indefinite useful life. The allocations of the purchase prices to the assets acquired and liabilities assumed are preliminary and subject to change pending final purchase accounting. The goodwill acquired in the acquisitions of Stewart & Stevenson, Projectina, Hiatts and Schroth are not deductible for tax purposes. The goodwill acquired in the acquisition of ITS is tax deductible.

2005 Acquisitions

On July 27, 2005, we acquired substantially all of the domestic assets of Second Chance Body Armor, Inc. (‘‘Second Chance’’) for $45 million. Second Chance manufactures concealable and tactical

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

body armor for the law enforcement and military markets worldwide. The Second Chance law enforcement business is included in the Products Group and their military business is included in the Aerospace & Defense Group. As a result of the Second Chance acquisition, we expect to: (1) strengthen our position as a leading supplier of body armor to the law enforcement and military markets; (2) achieve cross-selling opportunities by leveraging our global sales force and relationships; and (3) offer opportunities for cost reduction through integration savings and rationalization of operations.

The 2005 acquisition of Second Chance was accounted for as a purchase business combinations, and accordingly, the results of operations were included in our Consolidated Financial Statements after the acquisition dates. The costs to acquire substantially all of the assets of Second Chance have been allocated to the assets acquired and liabilities assumed according to their estimated fair values at the time of the acquisition as follows:

			Second Chance
			(In thousands)
Working capital, net of cash				$	8,442
Property and equipment					2,560
Customer-related intangibles					5,160
Technology-related intangibles					4,761
Marketing-related intangibles					18,966
Goodwill					5,841
				$	45,730

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

2004 Acquisitions

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

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

As a result of the Bianchi acquisition, we expect to: (1) strengthen our position as a leading supplier of holsters, belts and accessories; (2) achieve cross-selling opportunities by leveraging our

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

global sales force and relationships; and (3) offer opportunities for cost reduction through integration savings and rationalization of operations.

The 2004 acquisitions were accounted for as purchase business combinations, and accordingly, the results of operations were included in our Consolidated Financial Statements after the acquisition dates. The costs to acquire Specialty Defense and Bianchi have been allocated to the assets acquired and liabilities assumed according to their estimated fair values at the time of the acquisition as follows:

			Specialty Defense						Bianchi
			(In thousands)
Working capital, net of cash				$	15,801					$	5,604
Property and equipment					7,860						1,033
Other long-term assets					541						32
Assumed notes payable					(983	)					—
Deferred tax liability					(14,170	)					(13,098	)
Customer-related intangibles					12,200						19,671
Technology-related intangibles					1,900						2,777
Marketing-related intangibles					16,300						15,830
Goodwill					50,243						28,528
				$	89,692					$	60,377

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

Unaudited Pro forma Results.    Businesses acquired are included in consolidated results from the date of acquisition. Pro forma results of the 2006 acquisitions of Swiss-Photonics, Integrated Textile Systems, Hiatts and Schroth; the 2005 acquisition of Optemize.com, Inc.; and the 2004 acquisitions of Vector Associates, Inc. (dba ODV, Inc.) and Kleen-Bore, Inc. are not presented, as they would not differ by a material amount from actual results. The following unaudited pro forma consolidated results are presented to show the results on a pro forma basis as if the 2006 acquisition of Stewart & Stevenson, the 2005 acquisition of Second Chance and the 2004 acquisitions of Specialty Defense and Bianchi had been completed as of January 1, 2004:

			2006						2005						2004
			(In thousands, except per share data)
Revenues				$	2,660,640					$	2,340,930					$	1,684,206
Net income from continuing operations				$	112,899					$	103,265					$	82,048
Basic earnings per share from continuing operations				$	3.18					$	2.98					$	2.61
Diluted earnings per share from continuing operations				$	3.05					$	2.88					$	2.48

The pro forma results were negatively impacted by the acquisitions of Stewart & Stevenson, due to increased interest and amortization expenses, and Second Chance, which was purchased out of bankruptcy and had experienced legal and financial troubles.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

5.	GOODWILL AND IDENTIFIED INTANGIBLE ASSETS

Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are tested for impairment at least annually or more often if indicators of impairment arise. The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005, are as follows:

			Aerospace & Defense						Products						Mobile Security						Corporate						Total
			(In thousands)
Balance at December 31, 2004				$	154,313					$	101,292					$	6,408					$	—					$	262,013
Goodwill acquired during year					—						5,841						—						1,643						7,484
Finalization of purchase price allocation					1,459						2,842						150						—						4,451
Foreign currency translation and other adjustments					—						(184	)					(68	)					—						(252	)
Balance at December 31, 2005					155,772						109,791						6,490						1,643						273,696
Goodwill acquired during year					680,950						2,892						29						—						683,871
Adjustments to/finalization of purchase price allocation					17,983						337						—						(27	)					18,293
Foreign currency translation and other adjustments					1,449						380						50						—						1,879
Balance at December 31, 2006				$	856,154					$	113,400					$	6,569					$	1,616					$	977,739

The adjustment to/finalization of purchase price allocation for Aerospace & Defense in 2006 of approximately $18 million is primarily related to the receipt of the final tangible and identifiable intangible asset valuations for Stewart & Stevenson subsequent to the initial purchase price allocation. These adjustments did not result in a material adjustment to previously recorded depreciation or amortization expense related to the acquisition.

The purchase price allocations for the acquisitions of Bianchi International and Specialty Defense, acquired in the fourth quarter of 2004, were completed during 2006 and 2005, respectively.

Included in patents, licenses and trademarks in the accompanying Consolidated Balance Sheets are the following intangible assets as of December 31, 2006 and 2005:

			Customer Relationships						Technology						Marketing						Total
			(In thousands)
Gross amount at December 31, 2006				$	304,078					$	25,232					$	77,744					$	407,054
Accumulated amortization					(28,260	)					(6,426	)					(3,126	)					(37,812	)
Net amount at December 31, 2006				$	275,818					$	18,806					$	74,618					$	369,242
Gross amount at December 31, 2005				$	60,351					$	20,070					$	65,455					$	145,876
Accumulated amortization					(8,769	)					(3,608	)					(2,879	)					(15,256	)
Net amount at December 31, 2005				$	51,582					$	16,462					$	62,576					$	130,620

Included in Marketing are approximately $73 million and $61 million of marketing-related intangible assets that have indefinite lives as of December 31, 2006 and 2005, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

We anticipate recording related amortization expense in future periods:

YEAR			(In thousands)
2007				$	32,375
2008					32,336
2009					30,936
2010					28,779
2011					28,577
Thereafter					143,479
Total				$	296,482

6.	INVENTORIES

The components of inventory as of December 31, 2006 and 2005, are as follows:

			2006						2005
			(In thousands)
Raw materials				$	266,293					$	127,465
Work-in-process					108,759						48,900
Finished goods					37,735						34,152
Less customer advances and performance – based payments					(98,661	)					—
Total inventory				$	314,126					$	210,517

At December 31, 2006 and 2005, our inactive inventory reserves totaled $31 million and $18 million respectively.

7.	PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2006 and 2005, are summarized as follows:

			2006						2005
			(In thousands)
Land				$	9,219					$	5,315
Buildings and improvements					92,649						45,398
Machinery and equipment					127,149						63,978
Construction in process					5,365						2,279
Total					234,382						116,970
Accumulated depreciation					(54,706	)					(37,041	)
Total property and equipment, net				$	179,676					$	79,929

Depreciation expense for the years ended December 31, 2006, 2005 and 2004, was approximately $18 million, $12 million and $10 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

8.	ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities as of December 31, 2006 and 2005, are summarized as follows:

			2006						2005
			(In thousands)
Accrued expenses				$	149,444					$	75,505
Vest exchange program/warranty revision accrual (See Note 23)					4,259						18,511
Performance based payments and customer deposits					131,050						5,837
Deferred consideration for acquisitions					828						1,071
				$	285,581					$	100,924

9.	SHORT AND LONG TERM DEBT

Short Term Debt

			2006						2005
			(In thousands)
2% Convertible Notes(a)				$	341,924					$	341,751
Credit facility – Colombia(b)					1,703						1,565
Credit facility – Brazil(c)					—						958
				$	343,627					$	344,274

(a)

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

(b)	On March 12, 2003, we entered into a collateralized revolving credit facility with Corporaciòn Financiera to provide for working capital needs for our Colombia facility. In 2004, we expanded

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

the collateralized revolving credit facility with four additional Colombian banks. The Colombian credit facility is a one-year revolving credit facility and, among other things, provides for total maximum borrowings of 6.5 billion Colombian Pesos (U.S. $3 million based on the exchange rate as of December 31, 2006). All borrowings under the credit facility bear interest at a rate equal to the Colombian Central Bank rate based on averages of 30 day loans, plus an applicable margin ranging from 3.5% to 4.0%.

(c)	In February 2005, we entered into a collateralized revolving credit facility with Itaú S.A. to provide working capital funds for our Brazilian facility. The Brazilian credit facility expired in March 2006 and was not renewed.

Long Term Debt

			2006						2005
			(In thousands)
Revolving facility(a)				$	172,500					$	—
Term loan(a)					100,000						—
8.25% Senior Subordinated Notes due 2013(b)(d)					148,349						148,099
7.38% Senior Notes due May 2006(c)					—						—
Other long term debt					2,655						2,814
Plus fair value of interest rate swaps(d)					283						1,427
					423,787						152,340
Less current portion					(4,337	)					(430	)
				$	419,450					$	151,910

(a)

On May 25, 2006, we terminated our prior senior secured credit facility and entered into a new senior secured credit facility (the ‘‘Credit Facility’’) with Wachovia Bank, National Association, as administrative agent, Bank of America, N.A., and Suntrust Bank, as co-syndication agents, Key Bank National Association and JPMorgan Chase Bank, as co-documentation agents, and the other lenders party thereto.

		The Credit Facility establishes a commitment to the Company to provide up to $825 million in the aggregate of loans and other financial accommodations consisting of (i) a five year senior secured revolving credit facility in an aggregate principal amount of up to $425 million (the ‘‘Revolving Facility’’), (ii) a five year senior secured term loan in an aggregate principal amount of $100 million (the ‘‘Term Loan’’), and (iii) a thirty day senior secured interim term loan in aggregate principal amount of $300 million (the ‘‘Interim Term Loan’’). The Revolving Facility, Term Loan and Interim Term Loan make up the ‘‘Senior Secured Facilities’’. The Revolving Facility includes a sublimit of up to an aggregate amount of $75 million in letters of credit and a sublimit of up to an aggregate of $20 million in swing line loans. As of December 31, 2006, we had $253 million in availability under our Credit Facility excluding $23 million in outstanding letters of credit.

		All borrowings under the Credit Facility will bear interest at either (i) a rate equal to LIBOR, plus an applicable margin ranging from 0.875% to 1.5%, depending on certain conditions, or (ii) an alternate base rate which will be the higher of (a) the Federal Funds rate plus 0.50% or (b) the Wachovia prime rate, plus an additional margin ranging from 0.0% to 0.25% depending on certain conditions. On December 31, 2006 the interest rate for borrowings under our Credit Facility was 6.62%.

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		The Credit Facility is guaranteed by certain of our direct and indirect domestic subsidiaries and is secured by, among other things, (a) a pledge of (i) all of the issued and outstanding shares of stock or other equity interests of certain of our direct and indirect domestic subsidiaries, (ii) 65% of the issued and outstanding shares of voting stock or other voting equity interests of certain of our direct and indirect foreign subsidiaries, and (iii) 100% of the issued and outstanding shares of nonvoting stock or other nonvoting equity interests of certain of our direct and indirect foreign subsidiaries pursuant to a pledge agreement delivered in connection with the Credit Facility (the ‘‘Pledge Agreement’’) and (b) a first priority perfected security interest on certain of our domestic assets and certain domestic assets of certain of our direct and indirect domestic subsidiaries pursuant to a security agreement delivered in connection with the Credit Facility (the ‘‘Security Agreement’’).

		We have made customary representations, warranties and covenants in the Credit Agreement, Pledge Agreement and Security Agreement. The Credit Facility is subject to customary rights of the lenders and the administrative agent upon the occurrence and during the continuance of an Event of Default, including, under certain circumstances, the right to accelerate payment of the loans made under the Credit Facility and the right to charge a default rate of interest on amounts outstanding under the Credit Facility.

		The Interim Term Loan was paid in full in the quarter ended June 30, 2006.

(b)

On August 12, 2003, we completed a private placement of $150 million aggregate principal amount of 8.25% Senior Subordinated Notes due 2013 (the ‘‘8.25% Notes’’). The 8.25% Notes are guaranteed by most of our domestic subsidiaries on a senior subordinated basis (see Note 22). The 8.25% Notes were sold to qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended, and to non-U.S. persons in reliance on Regulation S under the Securities Act of 1933, as amended. In 2004, after the completion of the private placement of the 8.25% Notes, we conducted an exchange offer pursuant to which holders of the privately placed 8.25% Notes exchanged such notes for 8.25% Notes registered under the Securities Act of 1933, as amended. During 2003, we used a portion of the funds to fund acquisitions, including Simula and Hatch, repay a portion of our outstanding debt and for general corporate and working capital purposes, including the funding of capital expenditures. Interest on the 8.25% Notes is payable semiannually on the fifteenth of February and August of each year. The 8.25% Notes were issued at a discount of approximately $3 million to investors. The 8.25% Notes may be redeemed at our option in whole or in part on a pro-rata basis, on and after August 15, 2008, at certain specified redemption prices plus accrued interest payable to the redemption date.

(c)	In connection with our May 25, 2006, acquisition of Stewart & Stevenson, we assumed $25 million of 7.38% Senior Notes due May 31, 2006. We paid these notes in full on May 31, 2006.

(d)

On September 2, 2003, we entered into interest rate swap agreements, which have been designated as fair value hedges as defined under SFAS 133 with a notional amount totaling $150 million. The agreements were entered into to exchange the fixed interest rate on our 8.25% Notes for a variable interest rate equal to six-month LIBOR, set in arrears, plus a spread ranging from 2.735% to 2.75% fixed semi-annually on the fifteenth day of February and August. The agreements are subject to other terms and conditions common to transactions of this type. In accordance with SFAS 133, changes in the fair value of the interest rate swap agreements offset changes in the fair value of the fixed rate debt due to changes in the market interest rate. At December 31, 2005, there was a $1 million asset included in other assets, which, as a result of the change in fair value, is a $283,000 hedge asset at December 31, 2006. The agreements are deemed to be a perfectly effective fair value hedge, and, therefore, qualify for the short-cut method of accounting under SFAS 133. As a result, no ineffectiveness is expected to be recognized in our earnings associated with the interest rate swap agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Maturities of long-term debt are as follows:

YEAR			(In thousands)
2007				$	4,337
2008					9,288
2009					10,375
2010					59,032
2011					191,548
Thereafter					149,207
				$	423,787

10.	DERIVATIVE FINANCIAL INSTRUMENTS

As defined in SFAS 133, ‘‘Accounting for Derivative Instruments and Hedge Activities’’ the contingent interest feature of the 2% Convertible Notes is an embedded derivative that is not considered clearly and closely related to the host contract. The fair value of this bifurcated derivative at December 31, 2006 and 2005 is immaterial to our financial position.

We hedge the fair value of our 8.25% Notes using interest rate swaps. We enter into these derivative contracts to manage fair value changes which could be caused by our exposure to interest rate changes. These fair value hedges qualify for hedge accounting using the short-cut method since the swap terms match the critical terms of the 8.25% Notes. Accordingly, changes in the fair value of the interest rate swap agreements offset changes in the fair value of the 8.25% Notes due to changes in the market interest rate. As a result, no ineffectiveness is expected to be recognized in our earnings associated with the interest rate swap agreements on the 8.25% Notes. The fair value of the interest rate swap agreements was approximately $283,000 and $1 million at December 31, 2006 and 2005, respectively, and is included in other assets and long-term debt on the accompanying Consolidated Balance Sheets.

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

11.	INTEGRATION

We incurred integration expenses of approximately $3 million, $4 million and $3 million for the years ending December 31, 2006, 2005 and 2004, respectively. Integration expenses include costs related to integrating new acquisitions and costs associated with unsuccessful acquisitions. Integration expenses in fiscal 2006 related primarily to the integration of Stewart & Stevenson. Integration expenses in fiscal 2005 related primarily to the integration of Second Chance, Specialty Defense and Bianchi. Integration expenses in fiscal 2004 related primarily to the integration of Simula and Hatch.

12.	OTHER CHARGES

We incurred other income of $2 million and other charges of approximately $1 million and $1 million for the years ending December 31, 2006, 2005 and 2004, respectively. Other income in fiscal 2006 includes a reversal of a previously recorded accrual relating to an export fine that we settled in 2006 for an inconsequential amount.

13.	COMMITMENTS AND CONTINGENCIES

Employment contracts.    We are party to several employment contracts as of December 31, 2006, with certain members of management. Such contracts are for varying periods and include restrictions

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

on competition after termination. These agreements provide for salaries, bonuses and other benefits and also specify and delineate the granting of various stock options.

Legal/litigation matters.

Zylon^® Matters

In connection with the Florida court-approved settlements in 2004 and 2005 of class action lawsuits filed by police organizations and individual police officers regarding the warranty performance of ballistic-resistant soft body armor (vests) containing Zylon^®, and the Third Status Report to the Attorney General on Body Armor Safety Initiative Testing and Activities issued by the United States Department of Justice, National Institute of Justice (‘‘NIJ’’) in August 2005, which substantially modified compliance standards for all ballistic-resistant vests, the Company halted all sales or shipment of any Zylon^®-containing vest models effective August 25, 2005 and established a Zylon^® Vest Exchange (‘‘ZVE’’) Program to provide a cash or voucher option to those who purchased any Zylon^®-containing vests from us through August 29, 2005. Vest exchanges under the ZVE program are continuing, and Note 23 to our Consolidated Financial Statement included elsewhere in this report sets forth information regarding the estimated cost of the ZVE program.

We are also voluntarily cooperating with a request for documents and data received from the Department of Justice, which is reviewing the body armor industry’s use of Zylon^®, and a subpoena served by the General Services Administration for information relating to Zylon^®. On March 27, 2006, we entered into a tolling agreement with the Department of Justice to toll the statute of limitations until September 30, 2006, with regard to possible civil claims the United States could assert against the Company with respect to certain body armor products made by us which contain Zylon^®. On September 26, 2006, we entered into an amendment to this tolling agreement with the Department of Justice that extends the period of the tolling agreement through January 31, 2007. On January 29, 2007, we entered into a second amendment to this tolling agreement with the DOJ that extends the period of the tolling agreement through July 31, 2007.

Administrative Actions

In August 2006 and January 2007, respectively, the U.S. Defense Contract Audit Agency (‘‘DCAA’’) conducted two post-award pricing audits in connection with certain Heavy Truck Vehicle kits delivered by our Aerospace & Defense Group’s subsidiary located in Phoenix, Arizona. As a result, the U.S. Government has submitted administrative claims for approximately $6 million. We also expect subsequent claims in 2007. We believe that these actions are without merit and intend to vigorously defend the claims, and have established a reserve for these claims that we believe to be adequate.

In December 2006, we were notified by the U.S. Department of Commerce, Bureau of Industry and Security (‘‘BIS’’), of potential claims relating to certain exports made by our Products Group between 2002 and 2004 that lacked the appropriate licenses and associated documentation. Discussions with BIS are continuing and are expected to result in a settlement of these claims, which we do not believe will have a material impact on our financial position, operations, and liquidity.

In February 2007, Simula, Inc. entered into an Order of Abatement by Consent (‘‘Consent Order’’) with the Maricopa County Air Quality Department (‘‘MCAQD’’). The Consent Order states that the MCAQD has reason to believe that Simula is operating in violation of Maricopa County Air Pollution Control Regulations. Pursuant to the Consent Order, MCAQD agreed to not seek closure of a Simula facility located in Phoenix, Arizona (the ‘‘Facility’’) and accepted Simula’s updated air permit application and compliance plan with respect to the Facility.

Other Matters

In addition to the above, in the normal course of business and as a result of previous acquisitions, we are subjected to various types of claims and currently have on-going litigation in the areas of

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

product liability, product warranty, general liability, intellectual property, and employment. We are periodically audited by U.S. government personnel for contract and other regulatory compliance, and seek to pro-actively identify, address, and (where appropriate) self-report any governmental compliance issues.

Our products are used in a wide variety of military and law enforcement situations and environments. Some of our products can cause serious personal or property injury or death if not carefully and properly used by adequately trained personnel. We believe that we have adequate insurance coverage for most third-party damage claims that are incurred in the normal course of business. In such cases, the effect on our Consolidated Financial Statements is generally limited to the amount of our insurance deductible or self-insured retention. Our annual insurance premiums and self-insured retention amounts have risen significantly over the past several years and may continue to do so to the extent we are able to purchase insurance coverage.

At this time, except as otherwise provided herein, we do not believe any existing claims or pending litigation will have a material impact on our financial position, operations, and liquidity.

14.	INFORMATION CONCERNING BUSINESS SEGMENTS AND GEOGRAPHICAL REVENUES

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

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

			2006						2005						2004
			(In thousands)
Revenues:
Aerospace & Defense(1)				$	1,930,359					$	1,213,113					$	626,347
Products					324,214						284,363						228,816
Mobile Security					106,311						139,454						124,520
Total revenues				$	2,360,884					$	1,636,930					$	979,683
Ground Vehicle Survivability				$	921,532					$	895,786					$	439,188
Tactical Vehicle Systems					644,556						36,819						27,262
Individual Equipment Systems					364,271						280,508						159,897
Total Aerospace & Defense(1)				$	1,930,359					$	1,213,113					$	626,347
Operating income:
Aerospace & Defense				$	221,718					$	208,338					$	130,055
Products(a)					48,355						22,861						30,184
Mobile Security					5,518						14,066						11,168
Corporate					(36,110	)					(29,631	)					(25,692	)
Total operating income				$	239,481					$	215,634					$	145,715

(a)	The Products Group operating income for fiscal 2006 and 2005 includes a pre-tax charge of $4 million and $20 million, respectively for the cost of the ZVE Program. The Products Group operating income for fiscal 2004 includes a pre-tax charge of $5 million for the cost of the warranty revision and product exchange program (see Notes 13 and 23).

			2006						2005
			(In thousands)
Total assets, net:
Aerospace & Defense				$	1,833,576					$	546,617
Products					360,193						347,456
Mobile Security					91,624						87,866
Corporate					32,718						480,923
Total assets, net				$	2,318,111					$	1,462,862

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

			2006						2005						2004
			(In thousands)
Revenues:
United States of America				$	2,161,969					$	1,452,098					$	778,052
North America (excluding the United States of America)					21,194						10,404						50,614
South America					24,869						21,995						16,317
Africa					13,728						14,400						4,693
Europe/Asia					139,124						138,033						130,007
Total revenues				$	2,360,884					$	1,636,930					$	979,683
Property and equipment, net:
North America				$	152,897					$	60,573
South America					1,305						1,419
Europe/Asia					25,474						17,937
Property and equipment, net:				$	179,676					$	79,929

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

15.	INCOME TAXES

Provision for income taxes from continuing operations for the years ended December 31, 2006, 2005 and 2004 consisted of the following:

			2006						2005						2004
			(In thousands)
Current
U.S. Federal				$	60,052					$	71,062					$	42,552
State					7,227						8,148						4,322
Foreign					3,226						5,069						5,537
Total current					70,505						84,279						52,411
Deferred
U.S. Federal					10,940						(3,164	)					3,328
State					1,576						(296	)					989
Foreign					(3,245	)					49						(311	)
Total deferred					9,271						(3,411	)					4,006
Total provision for income taxes				$	79,776					$	80,868					$	56,417

Significant components of our net deferred tax liability as of December 31, 2006 and 2005, are as follows:

			2006						2005
			(In thousands)
Deferred tax assets:
Reserves not currently deductible				$	43,394					$	20,404
Capital loss					9,619						11,469
Operating loss carryforwards					20,380						2,851
Accrued expenses					24,410						3,140
Foreign tax credits					—						729
State research and development and other credits					750						959
Other					—						97
					98,553						39,649
Deferred tax asset valuation allowance					(10,680	)					(12,569	)
Deferred tax asset, net of valuation allowance					87,873						27,080
Deferred tax liability:
Goodwill not amortized for financial statement purposes under SFAS 142					(14,527	)					(10,734	)
Patents, trademarks and purchased intangibles					(111,085	)					(23,969	)
Interest on 2% Convertible Notes					(14,961	)					(7,732	)
Property and equipment					(13,726	)					(7,800	)
Other					(559	)					—
Net deferred tax liability				$	(66,985	)				$	(23,155	)

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

Our valuation allowance at December 31, 2006, consisted of approximately $1 million related to net operating loss and tax credit carryforwards which are allocated to goodwill and approximately

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

$10 million related to capital loss carryforwards. The decrease in our valuation allowance was primarily attributable to certain capital gains realized in 2006.

As of December 31, 2006, we have U.S. federal, state, and foreign net operating losses (‘‘NOLs’’) providing a tax effected benefit of approximately $20 million. The federal and state NOLs expire in varying amounts in fiscal years 2011 through 2026 and are subject to limitations under Internal Revenue Code (‘‘IRC’’) Section 382. The majority of the Company’s foreign NOLs have an indefinite carryforward period. At December 31, 2006, we also have certain state research and development and other state income tax credits of approximately $1 million that are subject to limitations under IRC Section 383.

In connection with our acquisitions of Hiatts, Projectina, Stewart & Stevenson, and Schroth, we recorded additional net deferred tax liabilities of approximately $1 million, $1 million, $32 million, and $5 million, respectively, relating primarily to identifiable intangibles, which are not deductible for tax purposes. These net deferred tax liabilities were offset as an increase to goodwill. Additionally, in 2005, in connection with our acquisitions of Specialty Defense and Bianchi, we recorded additional net deferred tax liabilities of approximately $12 million and $13 million, respectively, relating primarily to identifiable intangibles, which was an offset as in increase to goodwill.

On February 9, 2006, we were notified by the IRS that our tax returns for the taxable years ended December 31, 2003 and 2004 had been selected for examination. We do not expect this examination will have a material impact on our financial position, operations or liquidity.

United States income taxes have not been provided on certain undistributed earnings of non-U.S. subsidiaries of approximately $14 million. These earnings are considered to be permanently reinvested in non-U.S. operations. The determination of the U.S. tax liability related to these earnings is not practicable.

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

			2006						2005						2004
			(In thousands)
Domestic				$	213,312					$	200,683					$	123,050
Foreign					1,026						12,695						13,944
Total				$	214,338					$	213,378					$	136,994

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

The following reconciles the provision for income taxes computed at the Federal statutory income tax rate to the provision for income taxes recorded in the Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004:

			2006						2005						2004
Provision for income taxes at statutory federal rate					35.0	%					35.0	%					35.0	%
State and local income taxes, net of Federal benefit					2.7						2.4						2.5
Compensation subject to IRC Section 162(m)					0.0						0.0						2.5
Foreign income taxes					(0.2	)					0.3						0.3
Other permanent items					(0.3	)					0.2						0.9
					37.2	%					37.9	%					41.2	%

16.	STOCKHOLDERS’ EQUITY

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

Common stock.    On June 15, 2004, we sold 4,000,000 primary shares of common stock at a price of $37.50 per share, raising $143 million of net proceeds after deducting the underwriter discounts and commissions. In addition, our board of directors granted the underwriters a 30-day option to purchase up to 600,000 shares. The 30-day option expired unexercised on July 15, 2004. We used the net proceeds from the offering to primarily fund the acquisitions of Specialty Defense and Bianchi International in the fourth quarter of 2004.

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

Treasury stock.    We had 6,060,222 shares in treasury as of December 31, 2006 and 2005.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

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

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

A summary of the status of stock option grants as of December 31, 2006, and changes during the three years ending December 31, 2006, is presented below:

									Weighted Average Exercise Price
			Options
Outstanding at December 31, 2003					3,890,921					$	17.00
Granted					979,000					$	33.95
Exercised					(1,642,195	)				$	15.36
Forfeited					(69,210	)				$	17.26
Outstanding at December 31, 2004					3,158,516					$	23.15
Granted					1,727,500					$	40.54
Exercised					(975,189	)				$	19.61
Forfeited					(100,270	)				$	39.15
Outstanding at December 31, 2005					3,810,557					$	31.51
Granted					114,000					$	54.03
Exercised					(125,697	)				$	15.70
Forfeited					(131,600	)				$	27.51
Outstanding at December 31, 2006					3,667,260					$	32.92
Options exercisable at December 31, 2006					3,444,926					$	32.15

The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2006 is $80 million and $78 million, respectively.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

The following table summarizes information about stock options outstanding at December 31, 2006:

Exercise Price Range			Options Outstanding						Options Exercisable						Remaining Life In Years
$7.50 – $11.19					34,009						34,009						2.5
13.19 – 13.98					40,129						40,129						5.2
14.00 – 14.55					359,589						359,589						6.4
15.05 – 17.12					265,822						265,822						6.3
23.09 – 23.26					43,117						43,117						5.1
24.07 – 25.07					281,634						281,634						5.5
25.69 – 28.90					363,334						361,667						7.1
33.04 – 36.05					418,626						316,959						7.6
37.90 – 38.99					938,000						938,000						8.1
39.20 – 45.93					834,000						804,000						7.0
51.37 – 57.12					89,000						—						6.5
Total					3,667,260						3,444,926						7.0

Remaining non-exercisable options as of December 31, 2006, become exercisable as follows:

2007					70,665
2008					54,999
2009					55,002
2010					21,668
Thereafter					20,000

The fair value of nonvested shares is determined based on the market price of our shares on the grant date. A summary of the status of our nonvested shares as of December 31, 2006, and changes during the year ended December 31, 2006, is as follows:

			Shares						Fair Value
			(In thousands, except share data)
Nonvested at December 31, 2005					178,906					$	2,415
Granted					114,000						2,601
Vested					(51,972	)					(1,213	)
Forfeited					(18,600	)					(305	)
Nonvested at December 31, 2006					222,334					$	3,498

As of December 31, 2006, there was $3 million of unrecognized compensation cost related to nonvested stock options that is expected to be recognized over a weighted average period of 3.6 years.

Restricted stock and stock bonuses.    We granted the following restricted stock and stock bonuses during the years ended December 31, 2006, 2005 and 2004:

			2006						2005						2004
			(In thousands, except share data)
Restricted stock and stock bonus shares granted					12,000						59,116						70,534
Weighted-average fair value per share at grant date				$	56.57					$	43.18					$	38.58
Compensation cost recognized				$	573					$	559					$	9,082

In the year ended December 31, 2004, we recorded a $6 million non-cash charge for the acceleration of performance-based, long-term restricted stock awards granted to certain executives in 2002.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Earnings per share.    The following details the earnings per share computations on a basic and diluted basis for the years ended December 31, 2006, 2005 and 2004:

			2006						2005						2004
			(In thousands, except per share data)
Numerator for basic and diluted earnings per share:
Net income available to common shareholders				$	134,562					$	132,510					$	80,539
Denominator:
Basic earnings per share weighted-average shares outstanding					35,453						34,602						31,419
Effect of dilutive securities:
Effect of shares issuable under stock option and stock grant plans, based on the treasury stock method					1,462						1,220						1,606
Effect of shares issuable under the net share settlement option of the conversion option of our 2% Convertible Notes, based on the treasury stock method					103						—						—
Diluted earnings per share
Adjusted weighted-average shares outstanding					37,018						35,822						33,025
Basic earnings per share				$	3.80					$	3.83					$	2.56
Diluted earnings per share				$	3.64					$	3.70					$	2.44

Our 2% Convertible Notes include net share settlement of the conversion option and cash settlement of the par amount of $345 million. As a result, this requires us to use the treasury stock method to calculate the dilutive effect of our 2% Convertible Notes. As a result, we included 102,983 shares in our diluted share count during the year ended December 31, 2006, and there was no effect on our diluted share count during the years ended December 31, 2005 and 2004.

Other contingent shares.    Due to the anti-dilutive nature of some of the Company’s stock options, for the year ended December 31, 2006, 13,055 dilutive securities have been excluded from the calculation of the weighted average shares for diluted earnings per share. Certain of our executives were entitled to receive stock bonus awards of 53,500 shares of our common stock based on the performance of our Company’s common stock in 2006. These awards were settled in cash in January 2007 and have no effect on our dilutive share count. In addition, certain of our executives are entitled to receive performance stock bonus awards of 450,000 shares of our common stock if at any time between January 1, 2005 and December 31, 2007, certain conditions are met as defined in their employment agreements. At the Compensation Committee of the Board of Director’s discretion, we are able to settle these performance stock bonus awards in cash.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

17.	SUPPLEMENTAL CASH FLOW INFORMATION

			2006						2005						2004
			(In thousands)
Cash paid during the year for:
Interest				$	30,309					$	17,438					$	7,668
Income taxes, net of refunds				$	71,979					$	79,290					$	36,772

			2006						2005						2004
			(In thousands)
Acquisitions of businesses, net of cash acquired:
Fair value of assets acquired				$	472,263					$	41,186					$	118,120
Goodwill					702,164						7,297						86,073
Liabilities assumed					(379,688	)					(1,678	)					(45,751	)
Total cash paid, net of cash acquired				$	794,739					$	46,805					$	158,442

The 2006 total cash paid, net of cash acquired for businesses excludes $31 million related to shares of Stewart & Stevenson purchased in 2005.

18.	QUARTERLY RESULTS (UNAUDITED)

The following table presents summarized unaudited quarterly results of operations for the Company for fiscal 2006 and 2005. We believe all necessary adjustments have been included in the amounts stated below to present fairly the following selected information when read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein. Future quarterly operating results may fluctuate depending on a number of factors. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or any other quarter.

			FISCAL 2006
			First Quarter						Second Quarter						Third Quarter						Fourth Quarter
			(In thousands, except per share data)
Revenues				$	445,440					$	551,926					$	562,805					$	800,713
Gross profit(a)					104,630						112,631						101,784						140,557
Net income					41,407						34,060						21,282						37,813
Basic earnings per share				$	1.17					$	0.96					$	0.60					$	1.06
Diluted earnings per share				$	1.11					$	0.92					$	0.58					$	1.02

(a)	Gross profit in the third and fourth quarter of 2006 includes $3 million and $650,000, respectively, related to the ZVE program.

			FISCAL 2005
			First Quarter						Second Quarter						Third Quarter						Fourth Quarter
			(In thousands, except per share data)
Revenues				$	364,965					$	371,642					$	447,664					$	452,659
Gross profit(a)					91,310						95,802						80,026						101,296
Net income					31,029						37,415						26,483						37,583
Basic earnings per share				$	0.90					$	1.09					$	0.76					$	1.07
Diluted earnings per share				$	0.87					$	1.05					$	0.74					$	1.04

(a)	Gross profit in the third and fourth quarter of 2005 includes $19 million and $500,000, respectively, related to the ZVE program.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

19.	EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

In October 1997, we formed a 401(k) plan, (the ‘‘Plan’’) which provides for voluntary contributions by employees and allows for a discretionary contribution by us in the form of cash. We made contributions of approximately $3 million, $3 million and $520,000 to the Plan in 2006, 2005 and 2004, respectively.

On May 25, 2006, we acquired all of the outstanding stock of Stewart & Stevenson (See Note 4) and the Stewart & Stevenson 401(k) Savings Plan. We made contributions of approximately $577,000 to Stewart & Stevenson‘s 401(k) Savings Plan in 2006. On January 1, 2007, the Stewart & Stevenson 401(k) Savings Plan was combined into our Plan.

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

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

On December 30, 2004, we acquired Bianchi International and the Bianchi International 401(k) Retirement Savings Plan which provides for voluntary contributions by employees and allows for a discretionary contribution by us in the form of cash. We made contributions of $193,000 to the Bianchi International 401(k) Retirement Savings Plan in 2005. We did not make any contributions to the Bianchi International 401(k) Retirement Savings Plan in 2004. On January 1, 2006, the Bianchi International 401(k) Retirement Savings Plan was combined into our Plan.

Defined Benefit Plans

On May 25, 2006, we acquired all of the outstanding stock of Stewart & Stevenson (See Note 4). Included in Stewart & Stevenson’s liabilities that we acquired was $31 million related to the following: (1) a frozen noncontributory defined benefit pension plan covering substantially all of Stewart & Stevenson’s full-time employees; (2) an unfunded defined benefit supplemental executive retirement plan covering certain highly compensated employees; (3) an unfunded defined benefit postretirement medical benefit plan; and (4) an unfunded defined benefit retirement plan for non-employee directors.

Effective July 1, 2003, Stewart & Stevenson froze the benefits earned under its defined benefit pension plans and its defined benefit postretirement medical plan, with the exception of a small transition group. 

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the ‘‘Act’’) was signed into law. The Act introduced a prescription drug benefit under Medicare (‘‘Medicare Part D’’) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The defined benefit postretirement medical plan was amended by Stewart & Stevenson prior to our acquisition such that, effective January 1, 2006, prescription medication coverage was discontinued for all participants who are both eligible for prescription drug benefits under Medicare and for whom Medicare is the primary payor.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

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

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

The following tables include pension benefits information for the noncontributory defined benefit pension plans and the postretirement medical plan discussed above.

The funded status and amounts recognized in our balance sheet at December 31, 2006 and 2005, for these defined benefit plans, are as follows:

			Pension Benefits												Other Postretirement Benefits
			2006						2005						2006						2005
			(In thousands)												(In thousands)
Actuarial present value of benefit obligation:
Accumulated benefit obligation				$	165,427					$	16,400					$	1,352					$	—
Effect of projected future compensation increases					1,682						2,528						—						—
Projected benefit obligation					167,109						18,928						1,352						—
Pension Plan assets at fair value					(116,515	)					(7,258	)					—						—
Contributions after measurement date					(66	)					(70	)					—						—
Unfunded status				$	50,528						11,600					$	1,352						—
Unrecognized prior service cost											(7,901	)											—
Unrecognized net actuarial loss											(1,115	)											—
Unrecognized transition asset											466												—
Net amount recognized										$	3,050											$	—

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Reconciliation of the projected benefit obligation is as follows:

			Pension Benefits												Other Postretirement Benefits
			2006						2005						2006						2005
			(In thousands)												(In thousands)
Projected benefit obligation at beginning of year				$	18,928					$	8,109					$	—					$	—
Plan amendment for SERP					762						8,529						—						—
Service cost					1,401						1,329						—						—
Interest cost					6,625						944						104						—
Net transfer in (due to acquisition)					138,898						—						2,177						—
Plan participants’ contributions					—						—						243						—
Actuarial loss					7,260						327						(648	)					—
Benefits paid					(6,765	)					(310	)					(524	)					—
Projected benefit obligation at end of year				$	167,109					$	18,928					$	1,352					$	—

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

			Pension Benefits												Other Postretirement Benefits
			2006						2005						2006						2005
			(In thousands)												(In thousands)
Fair value of plan assets at beginning of year				$	7,258					$	6,719					$	—					$	—
Employer contributions					547						309						281						—
Net transfer in (due to acquisition)					110,586						—						—						—
Actual gain					4,889						540						—						—
Plan participants’ contributions					—						—						243						—
Benefits paid					(6,765	)					(310	)					(524	)					—
Fair value of plan assets at end of year				$	116,515					$	7,258					$	—					$	—

Net periodic pension cost includes the following:

			Pension Benefits
			2006						2005						2004
			(In thousands)
Service Cost				$	1,401					$	1,329					$	—
Interest Cost					6,625						944						472
Expected return on assets					(6,276	)					(539	)					(504	)
Prior service cost					978						629						—
Net loss recognition					38						—						—
Net periodic pension cost (income)				$	2,766					$	2,363					$	(32	)

The net periodic pension cost for the other postretirement benefit plan was made up of $104,000 of interest cost in 2006. For the fiscal years ended 2005 and 2004, there were no net periodic pension costs for the other postretirement benefit plan. We expect to recognize as components of net periodic benefit (gains) in accumulated other comprehensive income of $979,000 and $(281,000) related to prior service costs and actuarial gains, respectively, in 2007.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

			Pension Benefits												Other Postretirement Benefits
			2006						2005						2006						2005
			(In thousands)												(In thousands)
Other assets				$	—					$	4,906					$	—					$	—
Pension liability					(50,528	)					(9,071	)					(1,352	)					—
Accumulated other comprehensive loss					17,145						1,115						(664	)					—
Net amount recognized				$	(33,383	)				$	(3,050	)				$	(2,016	)				$	—

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

			2006						2005						Target Allocation
Equity securities					54	%					75	%					65	%
Debt securities					27	%					23	%					35	%
Other					20	%					2	%					0	%
Total					100	%					100	%					100	%

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

We expect to contribute approximately $7 million and $210,000 to the Pension Benefit Plans and Other Postretirement Benefit Plan, respectively, in 2007.

The assumed healthcare cost trend rate, used to calculate the Company’s obligations and cost under its postretirement medical plan, is an annual rate of increase of approximately 10% of pre-age 65 covered healthcare benefits, eventually and gradually decreasing to 5% by 2016 and remaining at that level thereafter, based on the assumption that the rate of healthcare cost increases would level off and eventually approximate the overall growth in gross domestic product. A one percentage point change in the healthcare cost trend rate assumption in each future year would have the following effects:

			One Percentage Point Increase						One Percentage Point Decrease
			(In thousands)
Increase (decrease) in total service and interest cost				$	3					$		(3)
Increase (decrease) in postretirement benefit obligation				$	6					$		(4)

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

			Pension Benefits						Other Postretirement Benefits
YEAR			(In thousands)						(In thousands)
2007				$	8,703					$	210
2008					10,281						140
2009					8,538						130
2010					8,937						130
2011					9,340						130
2012 – 2016					55,523						570

Weighted average assumptions used to determine benefit obligations:

			2006						2005
Discount or settlement rate					5.75	%					5.50	%
Rate of increase in compensation levels					5.00	%					5.00	%
Expected long-term rate of return on Plan assets					8.00	%					8.00	%

Weighted average assumptions used to determine net periodic pension costs:

			2006						2005						2004
Discount or settlement rate					6.12	%					5.50	%					6.00	%
Rate of increase in compensation levels					5.00	%					4.16	%					3.25	%
Expected long-term rate of return on Plan assets					8.00	%					8.00	%					8.00	%

The assumptions in the above table were reviewed as of December 31, 2006, and found to be relevant based on current yields of high quality fixed income investments with maturities corresponding to the expected duration of the benefit obligations. We use a measurement date of December 31 for all of our employee benefit plans with the exception of the Simula Pension Plan, for which we used a measurement date of October 31.

The incremental effect of applying FAS 158 on individual line items in our Consolidated Balance Sheets:

			Before Application of FAS 158						Adjustments						After Application of FAS 158
			(In thousands)
Other assets				$	21,283					$	(2,302	)				$	18,981
Other long term liabilities					60,379						(2,352	)					58,027
Deferred income taxes					121,070						1,731						122,801
Accumulated other comprehensive income					(3,666	)					2,923						(743	)

20.	RELATED PARTY TRANSACTIONS

We reimburse Kanders & Company, Inc. (‘‘Kanders & Co.’’), a corporation controlled by Warren B. Kanders, the Chairman of our Board of Directors and our Chief Executive Officer, for out-of-pocket expenses in Mr. Kanders role as Chief Executive Officer. We reimbursed Kanders & Co. for out-of-pocket expenses in the aggregate amount of $242,000, $259,000 and $369,000 during the fiscal years ended December 31, 2006, 2005 and 2004, respectively.

Effective as of January 1, 2003, we entered into a Transportation Services Agreement with Kanders Aviation, LLC, an entity controlled by Mr. Kanders. Pursuant to the terms of the Transportation Services Agreement and upon our request, Kanders Aviation may, in its sole

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

discretion, provide us with airport to airport air transportation services via certain aircraft. The Transportation Services Agreement will remain in effect indefinitely until terminated by written notice by either party thereto to the other party thereto. During the term of the Transportation Services Agreement, we will reimburse Kanders Aviation for services provided by Kanders Aviation to us and any additional expenses incurred by Kanders Aviation in connection with such air transportation services. We reimbursed Kanders Aviation $332,000 for such expenses during the fiscal year ended December 31, 2004. There were no services provided us under this agreement during 2006 and 2005 and as such there was no related expense during the fiscal years ended December 31, 2006 and 2005.

21.	OPERATING LEASES

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

YEAR			(In thousands)
2007				$	9,340
2008					6,894
2009					5,230
2010					3,757
2011					2,733
Thereafter					11,911

We incurred rent expense of approximately $9 million, $8 million and $5 million during the years ended December 31, 2006, 2005 and 2004, respectively.

22.	GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS

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

The following consolidating financial information presents the Consolidating Balance Sheets as of December 31, 2006 and December 31, 2005, the related Consolidating Statements of Operations for each of the year ended December 31, 2006, 2005 and 2004, and the related Consolidating Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 for:

	•	Armor Holdings, Inc., the parent,

	•	the guarantor subsidiaries,

	•	the nonguarantor subsidiaries, and

	•	Armor Holdings, Inc. on a consolidated basis

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

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

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

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Armor Holdings, Inc. and Subsidiaries
Consolidating Balance Sheets

			December 31, 2006
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
ASSETS
Current assets:
Cash and cash equivalents				$	10,974					$	(1,991	)				$	31,330						—					$	40,313
Accounts receivable, net					—						268,269						34,834						—						303,103
Unbilled costs and accrued profits					—						35,130						—						—						35,130
Intercompany receivables					607,923						609,449						38,402						(1,255,774	)					—
Inventories					—						265,915						48,554						(343	)					314,126
Deferred income taxes					464						53,307						2,045						—						55,816
Prepaid expenses and other current assets					1,668						18,952						3,447						(82	)					23,985
Total current assets					621,029						1,249,031						158,612						(1,256,199	)					772,473
Property and equipment, net					1,663						148,883						29,130						—						179,676
Goodwill, net					—						935,340						42,399						—						977,739
Patents, licenses and trademarks, net					—						328,584						40,658						—						369,242
Other assets					11,546						6,765						670						—						18,981
Investment in subsidiaries					2,132,872						249,886						61,379						(2,444,137	)					—
Total assets				$	2,767,110					$	2,918,489					$	332,848					$	(3,700,336	)				$	2,318,111
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt				$	3,750					$	301					$	286						—					$	4,337
Short-term debt					341,924						—						1,703						—						343,627
Accounts payable					7,407						198,384						13,993						—						219,784
Accrued expenses and other current liabilities					26,444						217,703						41,434												285,581
Income taxes payable					2,283						8,104						3,431						—						13,818
Intercompany payables					1,099,716						13,494						142,564						(1,255,774	)					—
Total current liabilities					1,481,524						437,986						203,411						(1,255,774	)					867,147
Long-term debt, less current portion					417,382						1,815						253						—						419,450
Other long-term liabilities					10,238						47,424						365						—						58,027
Deferred income taxes					7,280						109,103						6,418						—						122,801
Total liabilities					1,916,424						596,328						210,447						(1,255,774	)					1,467,425
Stockholders’ equity:
Preferred stock					—						1,450						—						(1,450	)					—
Common stock					417						99,086						8,164						(107,250	)					417
Additional paid – in capital					530,776						1,682,940						117,261						(1,800,201	)					530,776
Retained earnings (accumulated deficit)					392,553						538,685						(3,024	)					(535,661	)					392,553
Accumulated other comprehensive loss					(743	)					—						—						—						(743	)
Treasury stock					(72,317	)					—						—						—						(72,317	)
Total stockholders’ equity					850,686						2,322,161						122,401						(2,444,562	)					850,686
Total liabilities and stockholders’ equity				$	2,767,110					$	2,918,489					$	332,848					$	(3,700,336	)				$	2,318,111

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Balance Sheets

			December 31, 2005
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
ASSETS
Current assets:
Cash and cash equivalents				$	423,961					$	23,879					$	24,001					$	—					$	471,841
Accounts receivable, net					—						190,740						20,541						—						211,281
Unbilled costs and accrued profits					—						843						—						—						843
Intercompany receivables					101,956						109,177						39,170						(250,303	)					—
Inventories					—						185,032						25,485						—						210,517
Prepaid expenses and other current assets					2,316						32,806						2,965						—						38,087
Total current assets					528,233						542,477						112,162						(250,303	)					932,569
Property and equipment, net					2,052						57,326						20,551						—						79,929
Goodwill, net					—						271,708						1,988						—						273,696
Patents, licenses and trademarks, net					—						130,216						404						—						130,620
Other assets					15,221						2,089						28,738						—						46,048
Investment in subsidiaries					795,098						117,776						—						(912,874	)					—
Total assets				$	1,340,604					$	1,121,592					$	163,843					$	(1,163,177	)				$	1,462,862
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt				$	—					$	283					$	147					$	—					$	430
Short-term debt					341,752						—						2,522						—						344,274
Accounts payable					607						80,300						10,056						—						90,963
Accrued expenses and other current liabilities					16,660						65,346						18,918						—						100,924
Income taxes payable					(5,105	)					12,257						1,615						—						8,767
Intercompany payables					115,076						22,682						112,545						(250,303	)					—
Total current liabilities					468,990						180,868						145,803						(250,303	)					545,358
Long-term debt, less current portion					149,528						2,115						267						—						151,910
Other long-term liabilities					7,333						3,142						—						—						10,475
Deferred income taxes					4,171						39,390						976						—						44,537
Total liabilities					630,022						225,515						147,046						(250,303	)					752,280
Stockholders’ equity:
Preferred stock					—						1,450						—						(1,450	)					—
Common stock					415						3,193						7,852						(11,045	)					415
Additional paid – in capital					525,890						533,682						14,778						(548,460	)					525,890
Retained earnings (accumulated deficit)					257,991						357,752						(5,833	)					(351,919	)					257,991
Accumulated other comprehensive loss					(1,397	)					—						—						—						(1,397	)
Treasury stock					(72,317	)					—						—						—						(72,317	)
Total stockholders’ equity					710,582						896,077						16,797						(912,874	)					710,582
Total liabilities and stockholders’ equity				$	1,340,604					$	1,121,592					$	163,843					$	(1,163,177	)				$	1,462,862

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Operations

			Year ended December 31, 2006
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Revenues:
Aerospace & Defense				$	—					$	1,899,991					$	51,239					$	(20,871	)				$	1,930,359
Products					—						297,390						26,824						—						324,214
Mobile Security					—						20,765						89,820						(4,274	)					106,311
Total revenues					—						2,218,146						167,883						(25,145	)					2,360,884
Costs and Expenses:
Cost of revenues					—						1,787,515						134,966						(24,799	)					1,897,682
Cost of vest exchange program/ warranty revision					—						3,600						—						—						3,600
Selling, general and administrative expenses					34,600						133,281						28,778						—						196,659
Amortization					—						20,641						1,843						—						22,484
Integration					532						1,767						209						—						2,508
Other charges					—						—						(1,530	)					—						(1,530	)
Operating (loss) income					(35,132	)					271,342						3,617						(346	)					239,481
Interest expense (income), net					31,207						(1,050	)					(2	)					—						30,155
Other income, net					(2,232	)					(2,183	)					(597	)					—						(5,012	)
Equity in earnings of subsidiaries					(178,970	)					(4,426	)					—						183,396						—
Related party interest expense (income), net					22						18						(40	)					—						—
Income before (benefit) provision for income taxes					114,841						278,983						4,256						(183,742	)					214,338
(Benefit) provision for income taxes					(19,721	)					98,050						1,447						—						79,776
Net income				$	134,562					$	180,933					$	2,809					$	(183,742	)				$	134,562

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Operations

			Year ended December 31, 2005
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
			(In thousands)
Revenues:
Aerospace & Defense				$	—					$	1,199,262					$	24,515					$	(10,664	)				$	1,213,113
Products					—						253,862						30,501						—						284,363
Mobile Security					—						40,302						99,485						(333	)					139,454
Total revenues					—						1,493,426						154,501						(10,997	)					1,636,930
Costs and Expenses:
Cost of revenues					—						1,137,457						122,136						(10,997	)					1,248,596
Cost of vest exchange program/ warranty revision					—						19,900						—						—						19,900
Selling, general and administrative expenses					28,852						94,644						15,808						—						139,304
Amortization					—						8,621						6						—						8,627
Integration					625						3,044						—						—						3,669
Other charges					—						—						1,200						—						1,200
Operating (loss) income					(29,477	)					229,760						15,351						—						215,634
Interest expense (income), net					6,254						(393	)					420						—						6,281
Other income, net					(3,962	)					(49	)					(14	)					—						(4,025	)
Equity in earnings of subsidiaries					(157,015	)					(4,833	)					—						161,848						—
Related party interest expense (income), net					16						(19	)					3						—						—
Income before (benefit) provision for income taxes					125,230						235,054						14,942						(161,848	)					213,378
(Benefit) provision for income taxes					(7,280	)					81,889						6,259						—						80,868
Net income				$	132,510					$	153,165					$	8,683					$	(161,848	)				$	132,510

F-49

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Table of Contents

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Operations

			Year ended December 31, 2004
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Revenues:
Aerospace & Defense				$	—					$	605,399					$	20,948					$	—					$	626,347
Products					—						204,121						24,695						—						228,816
Mobile Security					—						25,531						102,224						(3,235	)					124,520
Total revenues					—						835,051						147,867						(3,235	)					979,683
Costs and Expenses:
Cost of revenues					—						599,505						117,922						(3,235	)					714,192
Cost of vest exchange program/ warranty revision					—						5,000						—						—						5,000
Selling, general and administrative expenses					23,749						69,122						13,684						—						106,555
Amortization					—						4,243						12						—						4,255
Integration					529						2,029						—						—						2,558
Other charges					1,408						—						—						—						1,408
Related party management fees (income), net					—						(15	)					15						—						—
Operating (loss) income					(25,686	)					155,167						16,234						—						145,715
Interest expense, net					6,511						103						162						—						6,776
Other expense (income), net					1,917						421						(393	)					—						1,945
Equity in earnings of subsidiaries					(108,631	)					(2,691	)					—						111,322						—
Related party interest expense (income), net					16						(18	)					2						—						—
Income from continuing operations before (benefit) provision for income taxes					74,501						157,352						16,463						(111,322	)					136,994
(Benefit) provision for income taxes					(6,038	)					56,030						6,425						—						56,417
Income from continuing operations					80,539						101,322						10,038						(111,322	)					80,577
Discontinued Operations:
Loss from discontinued operations, net of income tax benefit					—						(38	)					—						—						(38	)
Net income				$	80,539					$	101,284					$	10,038					$	(111,322	)				$	80,539

F-50

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Table of Contents

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Cash Flows

			Year ended December 31, 2006
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Cash flows from continuing operating activities:
Income from continuing operations:				$	134,562					$	180,933					$	2,809					$	(183,742	)				$	134,562
Adjustments to reconcile income from operations to cash provided by operating activities:
Depreciation and amortization					7,110						34,362						5,570						—						47,042
Loss on disposal of fixed assets					(1,234	)					1,368						173						—						307
Gain on sale of land					(2,206	)					—						—						—						(2,206	)
Deferred income taxes					4,378						8,087						(3,194	)					—						9,271
Non-cash SERP expense					2,900						—						—						—						2,900
Windfall tax benefit of stock options					(3,005	)					—						—						—						(3,005	)
Fair value gain on put options					(710	)					—						—						—						(710	)
Equity in earnings of subsidiaries					(168,089	)					(15,307	)					—						183,396						—
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable					—						(15,438	)					(2,524	)					—						(17,962	)
Decrease (increase) in intercompany receivables & payables					108,253						(124,143	)					15,890						—						—
Increase in unbilled costs and accrued profits					—						(34,287	)					—						—						(34,287	)
(Increase) decrease in inventories					—						(10,664	)					(6,307	)					346						(16,625	)
Increase in progress based payment					—						(46,601	)					—						—						(46,601	)
(Increase) decrease in prepaid expenses and other assets					(770	)					484						803						—						517
Increase in accounts payable, accrued expenses and other current liabilities					18,900						43,768						4,216						—						66,884
Increase (decrease) in income taxes payable					8,949						(9,864	)					(641	)					—						(1,556	)
Net cash provided by operating activities					109,038						12,698						16,795						—						138,531
Cash flows from investing activities:
Purchase of property and equipment					(423	)					(29,690	)					(3,936	)					—						(34,049	)
Proceeds from the sale of land					3,440						—						—						—						3,440
Purchase of patents and trademarks					—						(82	)					(14	)					—						(96	)
Purchase of equity investment					(57	)					—						—						—						(57	)
Purchase of short-term investment securities					538,310						—						—						—						538,310
Proceeds from sales of short-term investment securities					(538,310	)					—						—						—						(538,310	)
Financing lease receivable					—						428						—						—						428
Additional consideration for purchased businesses					(243	)					—						—						—						(243	)
Purchase of businesses, net of cash acquired					(794,739	)					—						—						—						(794,739	)
Net cash used in investing activities:					(792,022	)					(29,344	)					(3,950	)					—						(825,316	)
Cash flows from financing activities:
Proceeds from exercise of stock options					2,156						—						—						—						2,156
Taxes paid for withheld shares on restricted stock issuances					(430	)					—						—						—						(430	)
Windfall tax benefit of stock options					3,005						—						—						—						3,005
Cash paid for financing costs					(7,232	)					—						—						—						(7,232	)
Increase in bank overdrafts					—						10,280						—						—						10,280
Borrowings of long-term debt					100,000						—						—						—						100,000
Repayments of long-term debt					—						(25,282	)					(182	)					—						(25,464	)
Borrowings under lines of credit					844,775						—						3,226						—						848,001
Repayments under lines of credit					(672,277	)					61						(4,173	)					—						(676,389	)
Net cash provided by (used in) financing activities					269,997						(14,941	)					(1,129	)					—						253,927
Effect of exchange rate on cash and cash      equivalents
					—						5,717						(4,387	)					—						1,330
Net increase in cash and cash equivalents					(412,987	)					(25,870	)					7,329						—						(431,528	)
Cash and cash equivalents, beginning of period					423,961						23,879						24,001						—						471,841
Cash and cash equivalents, end of period				$	10,974					$	(1,991	)				$	31,330					$	—					$	40,313

F-51

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Table of Contents

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Cash Flows

			Year ended December 31, 2005
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Cash flows from continuing operating activities:
Income from continuing operations:				$	132,510					$	153,165					$	8,683					$	(161,848	)				$	132,510
Adjustments to reconcile income from operations to cash provided by operating activities:
Depreciation and amortization					2,694						16,960						2,754						—						22,408
Loss on disposal of fixed assets					52						402						480						—						934
Deferred income taxes					4,265						(7,588	)					(88	)					—						(3,411	)
Non-cash SERP expense					2,427						—						—						—						2,427
Fair value gain on put options					(5,905	)					—						—						—						(5,905	)
Equity in earnings of subsidiaries					(202,661	)					40,813						—						161,848						—
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable					—						(32,385	)					(3,005	)					—						(35,390	)
(Increase) decrease in unbilled costs and        accrued profits					—						50						—						—						50
Decrease (increase) in intercompany receivables & payables					71,573						(107,672	)					36,099						—						—
(Increase) decrease in inventories					—						(36,805	)					5,670						—						(31,135	)
Decrease in prepaid expenses and other assets					642						22,391						508						—						23,541
Increase (decrease) in accounts payable, accrued expenses and other current liabilities					7,904						17,306						(922	)					—						24,288
Increase (decrease) in income taxes payable					6,141						744						(2,327	)					—						4,558
Net cash provided by operating activities					19,642						67,381						47,852						—						134,875
Cash flows from investing activities:
Purchase of property and equipment					(2,195	)					(11,292	)					(2,106	)					—						(15,593	)
Purchase of patents and trademarks					—						(814	)					(239	)					—						(1,053	)
Purchase of equity investment					—						—						(31,082	)					—						(31,082	)
Purchase of short-term investment securities					(754,300	)					—						—						—						(754,300	)
Proceeds from sales of short-term investment securities					754,300						—						—						—						754,300
Financing lease receivable					—						(1,187	)					—						—						(1,187	)
Additional cash received from sale of business					—						300						—						—						300
Additional consideration for purchased businesses					(826	)					(5,702	)					—						—						(6,528	)
Purchase of businesses, net of cash acquired					(1,261	)					(45,544	)					—						—						(46,805	)
Net cash used in investing activities:					(4,282	)					(64,239	)					(33,427	)					—						(101,948	)
Cash flows from financing activities:
Proceeds from exercise of stock options					18,902						—						—						—						18,902
Proceeds from the sale of put options					6,614						—						—						—						6,614
Taxes paid for withheld shares on restricted stock issuances					(5,642	)					—						—						—						(5,642	)
Repayments of long-term debt					—						(436	)					(149	)					—						(585	)
Borrowings under lines of credit					6,973						—						6,676						—						13,649
Repayments under lines of credit					(6,973	)					—						(6,662	)					—						(13,635	)
Net cash provided by (used in) financing activities					19,874						(436	)					(135	)					—						19,303
Effect of exchange rate on cash and cash equivalents
					—						—						(1,598	)					—						(1,598	)
Net increase in cash and cash equivalents					35,234						2,706						12,692						—						50,632
Cash and cash equivalents, beginning of period					388,727						21,173						11,309						—						421,209
Cash and cash equivalents, end of period				$	423,961					$	23,879					$	24,001					$	—					$	471,841

F-52

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Table of Contents

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)   

Armor Holdings, Inc. and Subsidiaries
Consolidating Statements of Cash Flows

			Year ended December 31, 2004
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
			(In thousands)
Cash flows from operating activities:			(Revised – See Note 17)
Income from continuing operations:				$	80,539					$	101,322					$	10,038					$	(111,322	)				$	80,577
Adjustments to reconcile income from continuing operations to cash provided by operating activities:
Depreciation and amortization					1,744						10,042						3,265						—						15,051
Loss on disposal of fixed assets					—						446						418						—						864
Deferred income taxes					3,025						1,299						(318	)					—						4,006
Equity in earnings of subsidiaries					(303,721	)					192,399						—						111,322						—
Non-cash termination charge					1,408						—						—						—						1,408
Non-cash restricted stock charges					6,294						—						—						—						6,294
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable					1,201						(83,438	)					(7,366	)					—						(89,603	)
(Increase) decrease in unbilled costs and        accrued profits					—						(893	)					—						—						(893	)
(Increase) decrease in intercompany receivables & payables					(10,834	)					8,432						2,402						—						—
Increase in inventories					—						(58,293	)					(14,813	)					—						(73,106	)
Increase in prepaid expenses and other assets					(1,397	)					(20,321	)					(357	)					—						(22,075	)
Increase in accounts payable, accrued expenses and other current liabilities					2,302						68,341						6,775						—						77,418
Increase (decrease) in income taxes payable					17,080						(3,350	)					3,594						—						17,324
Net cash (used in) provided by operating activities from continuing operations					(202,359	)					215,986						3,638						—						17,265
Net cash used in operating activities from discontinued operations					—						(407	)					—						—						(407	)
Net cash (used in) provided by operating activities					(202,359	)					215,579						3,638						—						16,858
Cash flows from investing activities:
Purchase of property and equipment					(3,615	)					(10,125	)					(5,679	)					—						(19,419	)
Purchase of patents and trademarks					—						(112	)					—						—						(112	)
Purchase of equity investment					—						(5,275	)					—						—						(5,275	)
Proceeds from sale of equity investment					—						5,823						—						—						5,823
Purchase of short-term investment securities					(286,430	)					—						—						—						(286,430	)
Proceeds from sales of short-term investment securities					286,430						—						—						—						286,430
Collection of note receivable					2,175						—						—						—						2,175
Decrease in restricted cash					2,600						—						—						—						2,600
Sale of business, net of cash disposed					—						125						—						—						125
Additional consideration for purchased businesses					—						(2,808	)					—						—						(2,808	)
Purchase of businesses, net of cash acquired					—						(158,442	)					—						—						(158,442	)
Net cash provided by (used in) investing activities from continuing operations					1,160						(170,814	)					(5,679	)					—						(175,333	)
Net cash used in investing activities from discontinued operations					—						(263	)					—						—						(263	)
Net cash provided by (used in) investing activities:					1,160						(171,077	)					(5,679	)					—						(175,596	)
Cash flows from financing activities:
Proceeds from exercise of stock options					25,192						—						—						—						25,192
Proceeds from the issuance of common stock					142,500						—						—						—						142,500
Cash paid for common stock offering costs					(1,339	)					—						—						—						(1,339	)
Taxes paid for withheld shares on restricted stock issuances					(2,585	)					—						—						—						(2,585	)
Cash paid for financing costs					(6,156	)					—						—						—						(6,156	)
Borrowings of short-term debt					341,550						—						—						—						341,550
Repayments of long-term debt					—						(34,371	)					(145	)					—						(34,516	)
Borrowings under lines of credit					22,700						5						1,883						—						24,588
Repayments under lines of credit					(22,700	)					—						(349	)					—						(23,049	)
Net cash provided by (used in) financing activities from continuing operations					499,162						(34,366	)					1,389						—						466,185
Net cash used in financing activities from discontinued operations					—						(125	)					—						—						(125	)
Net cash provided by (used in) financing activities					499,162						(34,491	)					1,389						—						466,060
Effect of exchange rate on cash and cash equivalents					—						—						1,961						—						1,961
Net increase in cash and cash equivalents					297,963						10,011						1,309						—						309,283
Cash and cash equivalents, beginning of period					90,764						11,160						10,002						—						111,926
Cash and cash equivalents, end of period				$	388,727					$	21,171					$	11,311					$	—					$	421,209

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Table of Contents

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

23.	VEST EXCHANGE PROGRAM/WARRANTY REVISION

As a result of our voluntary Zylon^® Vest Exchange Program relating to our Zylon^®-vests, we recorded a pre-tax charge of $4 million and $20 million in the years ended December 31, 2006 and 2005, respectively. The $4 million charge incurred in 2006 resulted from higher redemption rate estimates on our existing Zylon^® vest replacement program. The $20 million charge incurred in 2005 includes originally estimated exchange program costs and inventory write-offs. This liability has been classified in accrued expenses and other current liabilities on the Consolidated Balance Sheet.

Zylon® Vest Exchange Program			2006						2005
			(In thousands)
Program cost				$	3,600					$	17,391
Inventory write-offs					—						3,624
Total cost of ZVE					3,600						21,015
Reversal of accrual from 2004 Exchange Program					—						(1,115	)
Net cost of ZVE				$	3,600					$	19,900

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

24.	CONCENTRATION OF REVENUES

Approximately 79.5%, 75.7% and 65.3% of our consolidated revenues were from our ten largest customers for the years ended December 31, 2006, 2005 and 2004, respectively. Our largest customer, the U.S. Federal Government, accounted for approximately 64.2%, 59.3% and 57.8% of our consolidated revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Approximately 77.5%, 72.7% and 60.7% of our consolidated revenues came from direct or indirect U.S. military contracts for the years ended December 31, 2006, 2005 and 2004, respectively.

Our Aerospace & Defense Group’s ten largest customers accounted for approximately 95.1%, 98.3% and 93.9% of segment revenues for the years ended December 31, 2006, 2005 and 2004, respectively. The Aerospace & Defense Group’s largest customer, the U.S. Federal Government, accounted for approximately 77.6%, 79.3% and 87.1% of the segments revenue for the years ended December 31, 2006, 2005 and 2004, respectively.

The Products Group’s ten largest customers accounted for approximately 21.0%, 25.3% and 26.6% of segment revenues of the Products Division for the years ended December 31, 2006, 2005 and 2004, respectively. The Product Division’s largest customer, the U.S. Federal Government, accounted for approximately 5.6%, 9.0% and 12.2% of the segments revenue for the years ended December 31, 2006, 2005 and 2004, respectively.

The Mobile Security Division’s ten largest customers accounted for approximately 39.4%, 52.6% and 43.6% of segment revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Mobile Security’s largest customer accounted for approximately 8.0%, 12.5% and 11.6% of segment revenue for the years ended December 31, 2006, 2005 and 2004.

Military and governmental contracts generally are awarded on a periodic or sporadic basis. If the Aerospace & Defense Group were to lose the FMTV contract, which continues through September 2008, or additional orders for next-generation Humvees known as the M1151/52 Up-Armored HMMWVs, our financial performance would experience a material adverse effect.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

25.	OFF BALANCE SHEET ARRANGEMENTS

On September 24, 2004, we entered into an off-balance sheet leasing arrangement for an aircraft for Company use. Upon expiration of this lease on September 24, 2009, a subsidiary of the Company has the option to renew the lease at fair market value subject to approval by the lessor, or, buy the aircraft for approximately $10 million, or return the aircraft to the lessor and, under a guarantee, pay any shortfall in sales proceeds from a third party in an amount not to exceed $8 million. Annual rental expense related to this agreement is approximately $1 million. Excluding this leasing arrangement, we do not have any off balance sheet arrangements.

26.	PUT OPTION TRANSACTIONS

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

During fiscal 2005, we sold put options in various private transactions covering 3.5 million shares of Company stock for $7 million in premiums. During fiscal 2005, put options covering 2.5 million shares of Company stock expired unexercised leaving outstanding put options covering 1 million shares outstanding (2.8% of outstanding shares at December 31, 2005) at a weighted average strike price of $40.00 per share. In February 2006, the remaining outstanding put options covering 1 million shares expired unexercised. Accordingly, we recognized $710,000 in other income, net, in fiscal 2006. In fiscal 2005, we recognized fair value gains of $6 million recorded in other income, net, of which $5 million was recognized on the 2.5 million previously expired and unexercised put options. The fair values of the put options of Company stock are obtained from our counter-parties and represent the estimated amount we would have received or paid to terminate the put options, taking into account the consideration we received for the sale of the put options. We had no outstanding put options on Company stock remaining as of December 31, 2006.

27.	INTEREST EXPENSE, NET

Interest expense, net is comprised of the following:

			2006						2005						2004
			(In thousands)
Interest expense				$	40,296					$	20,541					$	10,535
Interest income					(10,141	)					(14,260	)					(3,759	)
Interest expense, net				$	30,155					$	6,281					$	6,776

28.	OTHER ASSETS

Other assets are comprised of the following:

			2006						2005
			(In thousands)
Fair value of available-for-sale securities				$	48					$	28,597
Deferred costs related to issuance of debt					9,505						8,871
Net amount recognized for defined benefit plans					—						4,906
Fair value of interest rate swaps					283						1,427
Other					9,145						2,247
Total other assets				$	18,981					$	46,048

F-55

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SIGNATURES

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

ARMOR HOLDINGS, INC.

/s/ Warren B. Kanders

Warren B. Kanders

Chairman of the Board of Directors and Chief Executive Officer

Dated: February 26, 2007

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

/s/ Warren B. Kanders			/s/ Robert R. Schiller
Warren B. Kanders			Robert R. Schiller
Chairman of the Board of Directors and Chief Executive Officer			President and Chief Operating Officer February 26, 2007
February 26, 2007
/s/ Glenn J. Heiar			/s/ Nicholas Sokolow
Glenn J. Heiar			Nicholas Sokolow
Chief Financial Officer			Director
(Principal Financial Officer and Principal Accounting Officer)			February 26, 2007
February 26, 2007
/s/ Burtt R. Ehrlich			/s/ Deborah A. Zoullas
Burtt R. Ehrlich			Deborah A. Zoullas
Director			Director
February 26, 2007			February 26, 2007
/s/ David R. Haas
David R. Haas
Director
February 26, 2007

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Table of Contents

INDEX TO FINANCIAL STATEMENT SCHEDULES

Schedule II — Valuation and Qualifying Accounts and Reserves

All other schedules have been omitted because they are not applicable, not required or the information is included elsewhere herein.

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Table of Contents

ARMOR HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)

COLUMN A			COLUMN B						COLUMN C						COLUMN C						COLUMN D						COLUMN E
Description			Balance at beginning of period						Additions – Charged to expense						Additions – Acquisitions						Deductions – Write-offs and other						Balance at end of period
Allowance for doubtful accounts:
2006					6,763						1,150						4,767						(4,777	)					7,903
2005					3,077						680						—						3,006						6,763
2004					1,726						1,925						—						(574	)					3,077

The 2006 allowance for doubtful accounts addition related to acquisitions is a result of our acquisition of Stewart & Stevenson. The additions to the allowance for doubtful accounts related to the other acquisitions we made in 2005 and 2004, are immaterial for presentation.

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