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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)
CONTINUED

kits delivered by our Aerospace & Defense Group’s subsidiary located in Phoenix, Arizona. Based on DCAA’s preliminary audit findings, the U.S. Government may seek contract price reductions of approximately $9 million. We expect additional DCAA audits in 2007 regarding this Heavy Truck Vehicle kit program. We believe that most of DCAA’s preliminary audit findings are without merit and intend to vigorously defend any resulting claims, and have established a reserve 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.

Products Group International Sales Investigation

In January 2007, Armor Holdings Products Group (‘‘AHPG’’) received a written request for information from the Office of Internal Oversight Services (‘‘OIOS’’) of the United Nations (‘‘UN’’) regarding IHC Services, Inc. (‘‘IHC’’), a UN-approved vendor-intermediary. Armor Products International, Ltd. (‘‘API’’), a Company subsidiary located in the United Kingdom, had engaged IHC in 2003 to assist API in the preparation of a bid proposal for the supply of body armor to UN personnel and peacekeeping forces. API was awarded the resulting contract in August 2003 (the ‘‘UN Contract’’), which currently runs through July 2007. API also worked with IHC in connection with various other UN purchases.

According to published press reports, a UN investigation has revealed that IHC had close ties to a former UN procurement official who has pled guilty to various federal offenses involving misconduct while in his position at the UN. In 2005, IHC was suspended by the UN. In 2006, when advised about the UN’s suspension of IHC, API terminated its business relationship with IHC. The Company has provided the UN’s OIOS with documents and information concerning the UN Contract and continues to cooperate in the UN’s investigation into IHC.

In February 2007, the Company began an internal investigation into the conduct of several AHPG employees, agents, and distributors relating to international sales. This investigation primarily concerned alleged improper payments received by such persons from various vendors, agents, distributors, and customers of AHPG and related accounting issues at API. As a result of the Company’s investigation, certain employees, agents, and distributors have been terminated or have resigned. The Company is in the process of implementing appropriate corrective actions and does not believe any material adjustments to previously issued financial statements are required.

In response to information developed in responding to the UN inquiry and in the Company’s internal investigation, the Company’s Board of Directors has established a Special Committee of independent directors to oversee an investigation into the circumstances surrounding the UN contract and the Company’s compliance with U.S. and foreign laws relating to sales to foreign governments and international organizations, including without limitation the U.S. Foreign Corrupt Practices Act. The Special Committee has engaged counsel to conduct this investigation and to provide advice to the Special Committee and the Board on these matters.

Counsel for the Special Committee has met with representatives of the U.S. Department of Justice (‘‘DOJ’’) and the U.S. Securities and Exchange Commission (‘‘SEC’’) and disclosed the

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CONTINUED

circumstances leading to the formation of the Special Committee. The Company continues to cooperate with the DOJ and the SEC regarding these matters.

Brazil Tax Dispute

Between 2001 and 2005, O’Gara-Hess & Eisenhardt Armoring do Brasil Ltda. (‘‘OHE Brazil’’) has been assessed 52 Million Reals (US $26 million based on the exchange rate as of April 30, 2007), including interest and penalties, by the Brazilian tax authorities. OHE Brazil has appealed the tax assessments and the cases are pending. To the extent that there may be any liability resulting from such tax assessments, we believe that we are entitled to indemnification from Kroll, Inc. for up to US $8 million under the terms of our purchase agreement dated April 20, 2001, because the events in question with respect to such portion of the tax assessments occurred prior to our purchase of the O’Gara Companies from Kroll, Inc. We do not believe the loss potential is probable and no loss accrual has been recorded.

Other Matters

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

NOTE 12 — GUARANTOR AND NON-GUARANTOR 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.

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CONTINUED

The following consolidating financial information presents the condensed consolidating balance sheets as of March 31, 2007 and December 31, 2006, and the related condensed consolidating statements of operations for the three months ended March 31, 2007, and 2006 and the related condensed consolidating statements of cash flows for the three months ended March 31, 2007, and 2006 for:

•    Armor, the parent,

•    the guarantor subsidiaries,

•    the non-guarantor subsidiaries, and

•    Armor, on a consolidated basis

The information includes elimination entries necessary to consolidate Armor, the parent, with the guarantor and non-guarantor subsidiaries.

Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor and non-guarantor 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 non-guarantor 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
Condensed Consolidating Balance Sheets

			March 31, 2007
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
ASSETS
Current assets:
Cash and cash equivalents				$	10,217					$	(1,397	)				$	36,643					$	—					$	45,463
Accounts receivable, net					—						353,448						35,077						—						388,525
Intercompany receivables					477,559						482,743						70,075						(1,030,377	)					—
Inventories					—						291,137						52,605						(1,420	)					342,322
Deferred income taxes					3,984						50,282						2,235						—						56,501
Prepaid expenses and other current assets					19,640						17,358						6,187						(82	)					43,103
Total current assets					511,400						1,193,571						202,822						(1,031,879	)					875,914
Property and equipment, net					1,562						154,109						28,590						—						184,261
Goodwill					94						933,242						42,176						—						975,512
Patents, licenses and trademarks, net					—						321,465						39,876						—						361,341
Other assets					15,587						7,294						736						—						23,617
Investment in subsidiaries					2,198,713						252,747						61,380						(2,512,840	)					—
Total assets				$	2,727,356					$	2,862,428					$	375,580					$	(3,544,719	)				$	2,420,645
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt				$	5,000					$	311					$	290					$	—					$	5,601
Short-term debt					341,967						—						1,722						—						343,689
Accounts payable					5,757						205,120						18,266						—						229,143
Accrued expenses and other current liabilities					44,256						93,631						39,090						(81	)					176,896
Income taxes (receivable) payable					(3,124	)					3,124						4,242						—						4,242
Intercompany payables					837,480						13,494						179,403						(1,030,377	)					—
Total current liabilities					1,231,336						315,680						243,013						(1,030,458	)					759,571
Long-term debt, less current portion					544,548						1,624						178						—						546,350
Other long-term liabilities					54,551						49,833						368						—						104,752
Deferred income taxes					8,761						106,250						6,801						—						121,812
Total liabilities					1,839,196						473,387						250,360						(1,030,458	)					1,532,485
Stockholders’ equity:
Preferred stock					—						1,450						—						(1,450	)					—
Common stock					418						99,086						8,164						(107,250	)					418
Additional paid-in capital					530,549						1,682,941						117,261						(1,800,202	)					530,549
Retained earnings (accumulated deficit)					428,779						605,564						(205	)					(605,359	)					428,779
Accumulated other comprehensive income					731						—						—						—						731
Treasury stock					(72,317	)					—						—						—						(72,317	)
Total stockholders’ equity					888,160						2,389,041						125,220						(2,514,261	)					888,160
Total liabilities & stockholders’ equity				$	2,727,356					$	2,862,428					$	375,580					$	(3,544,719	)				$	2,420,645

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CONTINUED   

Armor Holdings, Inc. and Subsidiaries
Condensed 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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CONTINUED   

Armor Holdings Inc. and Subsidiaries
Condensed Consolidating Statements of Operations

			Three Months Ended March 31, 2007
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Revenues:
Aerospace & Defense				$	—					$	758,982					$	36,035					$	(12,009	)				$	783,008
Products					—						75,085						4,710						—						79,795
Mobile Security					—						5,246						21,930						(790	)					26,386
Total revenues					—						839,313						62,675						(12,799	)					889,189
Costs and Expenses:
Cost of revenues					—						687,086						49,002						(11,725	)					724,363
Cost of vest exchange program/warranty revision					—						2,450						—						—						2,450
Selling, general and administrative expenses					33,881						41,495						8,267						—						83,643
Amortization					—						7,239						854						—						8,093
Integration					597						760						42						—						1,399
Operating (loss) income					(34,478	)					100,283						4,510						(1,074	)					69,241
Interest expense (income), net					11,656						(131	)					36						—						11,561
Other (income) expense, net					(536	)					(8	)					190						—						(354	)
Equity in earnings of subsidiaries					(65,845	)					(2,779	)					—						68,624						—
Related party interest expense (income), net					16						(17	)					1						—						—
Income before (benefit) provision for income taxes					20,231						103,218						4,283						(69,698	)					58,034
(Benefit) provision for income taxes					(15,808	)					36,339						1,464						—						21,995
Net income				$	36,039					$	66,879					$	2,819					$	(69,698	)				$	36,039

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Armor Holdings Inc. and Subsidiaries
Condensed Consolidating Statements of Operations

			Three Months Ended March 31, 2006
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Revenues:
Aerospace & Defense				$	—					$	339,995					$	7,023					$	(1,915	)				$	345,103
Products					—						71,581						5,255						—						76,836
Mobile Security					—						1,454						22,549						(502	)					23,501
Total revenues					—						413,030						34,827						(2,417	)					445,440
Costs and expenses:
Cost of revenues					—						315,578						27,649						(2,417	)					340,810
Selling, general and administrative expenses					5,614						26,854						3,674						—						36,142
Amortization					—						2,257						2						—						2,259
Integration					145						325						—						—						470
Operating (loss) income					(5,759	)					68,016						3,502						—						65,759
Interest expense (income), net					594						(387	)					52						—						259
Other (income) expense, net					(710	)					50						(147	)					—						(807	)
Equity in earnings of subsidiaries					(45,912	)					(1,440	)					—						47,352						—
Related party fees (income)					16						(17	)					1						—						—
Income before (benefit) provision for  income taxes					40,253						69,810						3,596						(47,352	)					66,307
(Benefit) provision for income taxes					(1,156	)					24,690						1,364						—						24,898
Net income				$	41,409					$	45,120					$	2,232					$	(47,352	)				$	41,409

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Armor Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flow

			Three Months Ended March 31, 2007
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Cash flow from operating activities:
Net income:				$	36,039					$	66,879					$	2,819					$	(69,698	)				$	36,039
Adjustments to reconcile income from operations to cash provided by operating activities:
Depreciation and amortization					714						11,813						1,776						—						14,303
Loss on disposal of fixed assets					—						2						171						—						173
Deferred income taxes					2,170						349						483						—						3,002
Non-cash SERP Expense					459						—						—						—						459
Windfall tax benefit of stock options					(52	)					—						—						—						(52	)
Equity in earnings of subsidiaries					(65,845	)					(2,779	)					—						68,624						—
Changes in operating assets and liabilities:
Increase in accounts receivable					—						(50,049	)					(533	)					—						(50,582	)
(Increase) decrease in intercompany receivables & payables					(130,266	)					125,101						5,165						—						—
(Increase) decrease in inventories					—						(40,480	)					(3,509	)					1,074						(42,915	)
(Increase) decrease in prepaid expenses and other assets					(4,971	)					1,184						(2,806	)					—						(6,593	)
Increase in performance based payment					—						(100,013	)					—						—						(100,013	)
Increase in accounts payable, accrued expenses and other current liabilities					23,317						4,916						1,602						—						29,835
Increase (decrease) in income taxes payable					10,991						(3,005	)					843						—						8,829
Net cash (used in) provided by operating activities					(127,444	)					13,918						6,011						—						(107,515	)
Cash flow from investing activities:
Purchase of property and equipment					(15	)					(9,802	)					(357	)					—						(10,174	)
Purchase of patents and trademarks					—						(121	)					(2	)					—						(123	)
Additional consideration for purchased businesses					(120	)					—						—						—						(120	)
Net cash used in investing activities:					(135	)					(9,923	)					(359	)					—						(10,417	)
Cash flow from financing activities:
Proceeds from exercise of stock options					59						—						—						—						59
Taxes paid for withheld shares on restricted stock issuances					(789	)					—						—						—						(789	)
Windfall tax benefit of stock options					52						—						—						—						52
Decrease in bank overdrafts					—						(4,524	)					—						—						(4,524	)
Repayments of long-term debt					—						(180	)					(76	)					—						(256	)
Borrowings under lines of credit					185,000						(1	)					1,323						—						186,322
Repayments under lines of credit					(57,500	)					—						(1,325	)					—						(58,825	)
Net cash provided by (used in) financing activities					126,822						(4,705	)					(78	)					—						122,039
Effect of exchange rate on cash and cash equivalents					—						1,304						(261	)					—						1,043
Net (decrease) increase in cash and cash equivalents					(757	)					594						5,313						—						5,150
Cash and cash equivalents, beginning of period					10,974						(1,991	)					31,330						—						40,313
Cash and cash equivalents, end of period				$	10,217					$	(1,397	)				$	36,643					$	—					$	45,463

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Armor Holdings, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flow

			Three Months Ended March 31, 2006
			Parent						Guarantor Subsidiaries						Nonguarantor Subsidiaries						Eliminations						Consolidated Total
															(In thousands)
Cash flow from operating activities:
Net income				$	41,409					$	45,120					$	2,232					$	(47,352	)				$	41,409
Adjustments to reconcile net income to cash               provided by operating activities:
Depreciation and amortization					650						4,374						619						—						5,643
Loss on disposal of fixed assets					—						77						47						—						124
Deferred income taxes					2,550						1,447						47						—						4,044
Fair value adjustment for put options					(710	)					—						—						—						(710	)
Non-Cash SERP expense					725						—						—						—						725
Windfall tax benefit of stock options					(312	)					—						—						—						(312	)
Equity in earnings of subsidiaries					(45,912	)					(1,440	)					—						47,352						—
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable					—						(2,762	)					2,368						—						(394	)
Decrease (increase) in intercompany receivables and payables					25,371						(25,811	)					440						—						—
Increase in inventories					—						(20,916	)					(1,220	)					—						(22,136	)
(Increase) decrease in prepaid expenses and other assets					(2,187	)					(2,787	)					248						—						(4,726	)
(Decrease) increase in accounts payable, accrued Expenses and other current liabilities					(3,528	)					11,514						(2,709	)					—						5,277
Increase (decrease) in income taxes payable					301						(6	)					(945	)					—						(650	)
Net cash provided by operating activities					18,357						8,810						1,127						—						28,294
Cash flow from investing activities:
Purchase of property and equipment					(157	)					(7,905	)					(1,137	)					—						(9,199	)
Purchase of patents and trademarks					—						(79	)					(6	)					—						(85	)
Purchases of short-term investment securities					(489,000	)					—						—						—						(489,000	)
Proceeds from sales of short-term investment securities					97,500						—						—						—						97,500
Collection of note receivable					—						252						—						—						252
Costs related to pending acquisitions					(2,849	)					—						—						—						(2,849	)
Additional consideration for purchased businesses					—						(85	)					—						—						(85	)
Net cash used in investing activities					(394,506	)					(7,817	)					(1,143	)					—						(403,466	)
Cash flow from financing activities:
Proceeds from exercise of stock options					724						—						—						—						724
Taxes paid for withheld shares on restricted stock issuances					(430	)					—						—						—						(430	)
Windfall tax benefit of stock options					312						—						—						—						312
Repayments of long-term debt					—						(170	)					(38	)					—						(208	)
Borrowings under lines of credit					—						—						840						—						840
Repayments under lines of credit					—						—						(1,362	)					—						(1,362	)
Net cash provided by (used in) financing activities					606						(170	)					(560	)					—						(124	)
Effect of exchange rate on cash and cash equivalents					—						—						875						—						875
Net (decrease) increase in cash and cash equivalents					(375,543	)					823						299						—						(374,421	)
Cash and cash equivalents, beginning of period					423,961						23,879						24,001						—						471,841
Cash and cash equivalents, end of period				$	48,418					$	24,702					$	24,300					$	—					$	97,420

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)
CONTINUED   

NOTE 13 — 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 $2.45 million in the quarter ended March 31, 2007. The $2.45 million charge incurred in 2007 resulted from revised assumptions, including higher redemption rates on our Zylon^® vest replacement program that ended December 31, 2006. We did not record a Zylon related charge in the quarter ended March 31, 2006. We have a remaining liability of $1.73 million at March 31, 2007. This liability has been classified in accrued expenses and other current liabilities on the condensed consolidated balance sheet.

NOTE 14 — PUT OPTION TRANSACTIONS

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

During the year ended December 31, 2005, we sold put options on Company stock in various private transactions covering 3.5 million shares of Company stock for $7 million in premiums. In February 2006, outstanding put options covering 1 million shares expired unexercised. Accordingly, we recognized $710,000 in other income, net, in the three months ended March 31, 2006. 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 put options on Company stock remaining as of March 31, 2007.

NOTE 15 — INTEREST EXPENSE, NET

Interest expense, net is comprised of the following:

			Three Months Ended
			March 31, 2007						March 31, 2006
			(In thousands)
Interest expense				$	11,869					$	5,531
Interest income					(308	)					(5,272	)
Interest expense, net				$	11,561					$	259

NOTE 16 — STOCK BASED COMPENSATION

A summary of the status of stock option grants outstanding as of March 31, 2007, and changes during the three months ended March 31, 2007 is presented below:

			Options						Weighted Average Exercise Price
Outstanding at December 31, 2006					3,667,260					$	32.92
Granted					2,000					$	54.85
Exercised					(3,151	)				$	21.00
Forfeited					(19,800	)				$	42.65
Outstanding at March 31, 2007					3,646,309					$	32.89
Options exercisable at March 31, 2007					3,433,442					$	32.12

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (UNAUDITED)
CONTINUED   

The aggregate intrinsic value of options outstanding and options exercisable at March 31, 2007 is $126 million and $121 million, respectively.

Other contingent shares.    Due to the anti-dilutive nature of some of the Company’s stock options, for the three months ended March 31, 2007, 13,742 securities have been excluded from the calculation of the weighted average shares for diluted earnings per share. Certain of our executives are 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 2007. 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.

NOTE 17 — IMPLEMENTATION OF FIN 48

We adopted FIN 48 on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, ‘‘Accounting for Income Taxes,’’ and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48 an entity may only recognize or continue to recognize tax positions that meet a ‘‘more likely than not’’ threshold.

As a result of the implementation of FIN 48, we recorded an immaterial adjustment to the opening balance of retained earnings. The amount of unrecognized tax benefits at January 1, 2007 was $41 million, of which $27 million will reduce the Company’s effective tax rate if recognized.

Included in the balance of unrecognized tax benefits at January 1, 2007, is $9 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to anticipated settlements with tax authorities and expiring statute of limitations.

As of March 31, 2007, there have been no material changes to the liability for uncertain tax positions. The liability for uncertain tax positions is carried in Other Long-Term Liabilities in the condensed consolidated balance sheet as of March 31, 2007.

The Company’s continuing practice is to recognize interest related to income tax matters as a component of Provision for Income Taxes in the consolidated statement of operations. Accrued interest as of January 1, 2007, and March 31, 2007 was $4 million and $5 million, respectively.

The Company files income tax returns in the U.S. federal jurisdiction, and various state, local, and foreign jurisdictions. The Internal Revenue Service (IRS) is currently examining the Company’s U.S. income tax returns for 2003 – 2004. The Company reasonably anticipates that the IRS examination will be completed during the next 12 months. Generally, our state, local and foreign jurisdiction income tax returns for 2002 – 2006 remain subject to examination by various tax authorities, depending on the specific tax jurisdiction.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the results of operations and analysis of financial condition for the three months ended March 31, 2007. The following discussion may be understood more fully by reference to the consolidated financial statements, notes to the consolidated financial statements, and management’s discussion and analysis contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.

CONSOLIDATED RESULTS OF OPERATIONS

Total revenues.    Total revenues increased $444 million, or 100%, to $889 million in the three months ended March 31, 2007, compared to $445 million in the three months ended March 31, 2006. For the three months ended March 31, 2007, total revenue increased 54% internally, including period-over-period changes in acquired businesses and increased 0.5% due to foreign currency movements. Internal revenue growth represents period-over-period increases or decreases in acquired companies’ current year revenues since the date of acquisition (or up to the anniversary date in the year subsequent to acquisition) versus the comparable prior year period from businesses that were either owned or acquired by us during the periods presented. Our calculation of internal revenue growth takes into consideration pro-forma revenue for relevant periods of acquired entities in determining period-over-period growth.

Aerospace & Defense revenues.    Aerospace & Defense revenues increased $438 million, or 127%, to $783 million for the quarter ended March 31, 2007, compared to $345 million for the quarter ended March 31, 2006. Aerospace & Defense revenues increased 68% internally, or $234 million, including period-over-period changes in acquired businesses and increased $204 million, or 59%, from 2006 acquisitions, most notably Stewart & Stevenson in May 2006. Internal growth was primarily due to the following factors:

(1) We experienced strong demand in a number of programs including the M1151 Up-Armored HMMWV business; supplemental armor components supporting other vehicle types; spare parts for the military tactical truck fleet; and delivery of over 6,000 Frag 5 door sets for deployment to the war zone.

(2) During the quarter ended March 31, 2007, we shipped 1,725 FMTV trucks. This compares with 933 FMTV trucks shipped by Stewart & Stevenson in the same period last year as we continue to increase production to meet customer demand.

(3) Individual equipment sales (i.e. body armor plates, OTV, combat helmets, and load carrying equipment, or MOLLE) continued to grow as a result of increasing requirements by the U.S. military.

Products revenues.    Products revenues increased $3 million, or 4%, to $80 million for the quarter ended March 31, 2007, compared to $77 million for the quarter ended March 31, 2006. Revenue increased 2% internally, including period-over-period changes in acquired businesses and increased 2%, from the 2006 acquisitions of Projectina and Hiatts. Internal growth was primarily driven by strong domestic sales of law enforcement soft body armor resulting primarily from our investment in an expanded sales force. This overall growth was offset in part by declining international sales of soft body armor.

Mobile Security revenues.    Mobile Security revenues increased $3 million, or 12%, to $26 million for the quarter ended March 31, 2007, compared to $24 million for the quarter ended March 31, 2006. Commercial vehicle shipments increased 14%, to 360 vehicles for the quarter ended March 31, 2007, compared to 317 vehicles for the quarter ended March 31, 2006. Mobile Security’s internal revenue increase was primarily the result of increased availability of key base unit chassis for the new Suburban and the S-Class Mercedes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  — CONTINUED

Gross margins.    Margins increased $60 million, or 58%, to $165 million for the quarter ended March 31, 2007, compared to $105 million for the quarter ended March 31, 2006. As a percentage of total revenues, margins decreased to 18.5% of total revenues for the quarter ended March 31, 2007, from 23.5% for the quarter ended March 31, 2006.

Gross margins in Aerospace & Defense were 16.4% for the quarter ended March 31, 2007, compared to 20.1% for the quarter ended March 31, 2006. This reduction was primarily due to the 2006 acquisition of Stewart & Stevenson, which operates at lower gross margins. The acquisition of Stewart & Stevenson reduced gross margins for the quarter ended March 31, 2007 by 4.7%.

Gross margins in Products were 39.9% for the quarter ended March 31, 2007, compared to 39.0% for the quarter ended March 31, 2006. Gross margin improvement reflects select selling price increases, continued expansion of lean manufacturing initiatives, increased utilization of our lower-cost manufacturing plants, and improved outsourcing of externally manufactured products.

Gross margins in Mobile Security were 16.2% in the quarter ended March 31, 2007, compared to 22.8% for the quarter ended March 31, 2006. The decrease in margins was primarily due to a less profitable sales mix.

Costs of 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 $2.5 million for the quarter ended March 31, 2007. The $2.5 million charge incurred in 2007 resulted from revised assumptions, including higher redemption rates on our Zylon^® vest replacement program that ended December 31, 2006. We did not record a Zylon related charge in the quarter ended March 31, 2006.

Selling, general and administrative expenses.    Selling, general and administrative expenses increased $48 million, or 131%, to $84 million (9.4% of total revenues) for the quarter ended March 31, 2007, compared to $36 million (8.1% of total revenues) for the quarter ended March 31, 2006. The increase was primarily due to a long term performance based compensation charge for the Company’s CEO and its President of $23 million, the acquisition of Stewart & Stevenson resulting in an increase of $9 million; increased selling and marketing expenses; increased research and development expense; and increased professional related expenses.

Aerospace & Defense selling, general and administrative expenses increased $16 million, or 175%, to $25 million (3.2% of Aerospace & Defense revenues) for the quarter ended March 31, 2007, compared to $9 million (2.7% of Aerospace & Defense revenues) for the quarter ended March 31, 2006. The increase in selling, general and administrative expenses was primarily due to the acquisitions of Stewart and Stevenson and Schroth, increased research and development expense, increased professional related expenses, and other administrative expenses as a result of the increased size of the business.

Products selling, general and administrative expenses increased $4 million, or 23%, to $21 million (26% of Products revenues) for the quarter ended March 31, 2007, compared to $17 million (22% of Products revenues) for the quarter ended March 31, 2006. This increase reflects the impact of acquisitions, increased research and development expenses, increased marketing expenses to support our new brand strategy launched during the fourth quarter of 2006 and other legal related expenses.

Mobile Security selling, general and administrative expenses decreased $0.6 million to $3.9 million (15% of Mobile Security revenues) for the quarter ended March 31, 2007, compared to $4.5 million (19% of Mobile Security revenues) for the quarter ended March 31, 2006. The decrease in selling, general and administrative expenses was due primarily to increased revenue and a decrease in spending related to global marketing programs launched with the 2006 introduction of the Centigon brand.

Corporate general and administrative expenses increased $28 million to $34 million (3.8% of total revenues) for the quarter ended March 31, 2007, compared to $6 million (1.3% of total revenues) for

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  — CONTINUED

the quarter ended March 31, 2006. This increase in general and administrative expenses was primarily associated with increased compensation related charges, including the long term performance based compensation charge, higher professional fees, and other administrative expenses associated with the increased size and complexity of our business.

Amortization.    Amortization expense increased $6 million, to $8 million for the quarter ended March 31, 2007, compared to $2 million for the quarter ended March 31, 2006, primarily due to the acquisition of Stewart and Stevenson in 2006. Amortization expense is related to patents and trademarks with finite lives, and acquired amortizable intangible assets that meet the criteria for recognition as an asset apart from goodwill under SFAS 141.

Integration.    Integration expense increased $0.9 million, to $1.4 million for the quarter ended March 31, 2007, compared to $0.5 million for the quarter ended March 31, 2006. This increase related to the integration of Stewart & Stevenson and costs related to accounting, legal, and other due diligence costs associated with mergers and acquisitions that were not consummated.

Operating income.    Operating income increased $3 million, or 5%, to $69 million for the quarter ended March 31, 2007, compared to $66 million in the quarter ended March 31, 2006, due to the factors discussed above.

Interest expense, net.    Interest expense, net increased $11 million, or 4,364%, to $12 million for the quarter ended March 31, 2007, compared to $0.3 million for the quarter ended March 31, 2006. This increase was primarily due to the use of the majority of our investment balances to acquire Stewart & Stevenson thus reducing related interest income and adding additional borrowings under our new Credit Facility for the acquisition.

Other income, net.    Other income decreased $0.5 million, or 56%, to $0.4 million for the quarter ended March 31, 2007, compared to $0.8 million for the quarter ended March 31, 2006. The decrease relates primarily to the favorable expiration of unexercised put option contracts on the Company during the quarter ended March 31, 2006.

Provision for income taxes.    Income tax expense was $22 million for the quarter ended March 31, 2007, compared to $25 million for the quarter ended March 31, 2006. The effective tax rate was 37.9% for the quarter ended March 31, 2007, compared to 37.5% for the quarter ended March 31, 2006. The increased tax rate relates primarily to the increase in non-deductible accruals in the quarter ended March 31, 2007, compared to the non-taxable benefit of the fair value gain on put options in the quarter ended March 31, 2006. The increase in non-deductible accruals was partially offset by an increase in the U.S. manufacturing deduction in the quarter ended March 31, 2007.

Net income.    Net income decreased $5 million, or 13%, to $36 million in the quarter ended March 31, 2007, compared to $41 million in the quarter ended in March 31, 2006, due to the factors discussed above.

CAPITAL RESOURCES

Total debt was $896 million at March 31, 2007 and $767 million at December 31, 2006. Our debt is primarily made up of $342 million of 2.00% Senior Subordinated Convertible Notes (‘‘2% Convertible Notes’’), $400 million under our credit facility, discussed in detail below, and $148 million of 8.25% Senior Subordinated Notes (‘‘8.25% Notes’’) at March 31, 2007. Cash and cash equivalents at March 31, 2007 and December 31, 2006 were $45 million and $40 million, respectively.

On May 25, 2006, we entered into a new senior secured credit facility (the ‘‘Credit Facility’’). 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  — CONTINUED

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 Interim Term Loan was paid in full in 2006. 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 March 31, 2007, we had $125 million in availability under our credit facility excluding $20 million in outstanding letters of credit.

We had no outstanding put options on Company stock remaining as of March 31, 2007 and 2006. We recognized $710,000 in other income, in the quarter ended March 31, 2006, relating to the expiration of unexercised put options.

We entered into interest rate swap agreements that correspond to our 8.25% Notes in order to effectively hedge interest rate risk. The $150 million notional value of the interest rate swaps that are outstanding at March 31, 2007, effectively converted our fixed-rate 8.25% Notes to variable-rate debt based on LIBOR.

As of March 31, 2007, we were in compliance with all of our negative and affirmative covenants contained in the Credit Facility and the indentures governing the 8.25% and the 2% Convertible Notes.

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

LIQUIDITY AND CASH FLOWS

Working capital was $116 million and negative $(95) million as of March 31, 2007, and December 31, 2006, respectively. The increase in working capital is a function of the reduction of the performance based payment liability at Stewart & Stevenson.

Cash Flow Summary

			Three Months Ended
			March 31, 2007						March 31, 2006
			(In thousands)
Net income				$	36,039					$	41,409
Non-cash items					17,885						9,514
Changes in working capital					(161,439	)					(22,629	)
Net cash (used in) provided by operating activities					(107,515	)					28,294
Net cash used in investing activities					(10,417	)					(403,466	)
Net cash provided by (used in) financing activities					122,039						(124	)
Effect of exchange rate changes on cash and cash equivalents					1,043						875
Net increase (decrease) in cash and cash equivalents					5,150						(374,421	)
Cash and cash equivalents, beginning of period					40,313						471,841
Cash and cash equivalents, end of period				$	45,463					$	97,420

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  — CONTINUED

Operating Activities — Net cash (used in)/provided by operating activities for the first quarter was ($108) million versus $28 million in cash flow provided by operating activities in the year-ago quarter. The decrease in operating cash flow was primarily due to a change in the U.S. Government’s advance payments process under the FMTV contract, temporarily reducing the quantity of trucks eligible for advance payments.

Investing Activities — Net cash used in investing activities decreased primarily due to our purchases of short-term investment securities in anticipation of our acquisition of Stewart & Stevenson during the three months ended March 31, 2006.

Financing Activities — Net cash provided by/(used in) financing activities increased primarily due to increased borrowings under the Credit Facility. During the three months ended March 31, 2007 and 2006, we borrowed, net $127 million and repaid, net $522,000, respectively, on our revolving lines of credit.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, included in our annual report on Form 10-K, as amended, for the fiscal year ended December 31, 2006, except for the treatment of tax contingency accruals.

Effective January 1, 2007, the Company began to measure and record tax contingency accruals in accordance with Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, ‘‘Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’). The expanded disclosure requirements of FIN 48 are presented in Note 17 to the condensed consolidated financial statements in Part I, Item 1.

FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more−likely−than−not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes. As in the past, changes in accruals associated with uncertainties arising from pre−acquisition years for acquired businesses are charged or credited to goodwill. Adjustments to other tax accruals are generally recorded in earnings in the period they are determined.

Prior to January 1, 2007, the Company recorded accruals for tax contingencies and related interest when it was probable that a liability had been incurred and the amount of the contingency could be reasonably estimated based on specific events such as an audit or inquiry by a taxing authority.

RECENT ACCOUNTING PRONOUNCEMENTS

The disclosure requirements and cumulative effect of adoption of FIN 48 are presented in Note 17 to the condensed consolidated financial statements in Part I, Item 1.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157, ‘‘Fair Value Measurements,’’ (‘‘SFAS 157’’). 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 of the adoption of SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, ‘‘The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  — CONTINUED

Statement No. 115,’’ (‘‘SFAS 159’’). SFAS 159 allows a company to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. The Company is currently evaluating the effect of the adoption of SFAS 159 will have on its consolidated financial statements.

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussions contained herein, statements contained in this Quarterly Report on Form 10-Q may constitute ‘‘forward looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, but not limited to, our failure to continue to develop and market new and innovative products and services and to keep pace with technological changes; competitive pressures; failure to obtain or protect intellectual property rights; the ultimate effect of various domestic and foreign political and economic issues on our business, financial condition or results of operations; quarterly fluctuations in revenues and volatility of stock prices; contract delays; cost overruns; our ability to attract and retain key personnel; currency and customer financing risks; dependence on certain suppliers, customers and availability of raw materials; changes in the financial or business condition of our distributors or resellers; our ability to successfully identify, negotiate and conclude acquisitions, alliances and other business combinations, and integrate past and future business combinations; regulatory, legal, political and economic changes; an adverse determination in connection with the Zylon^® investigation being conducted by the U.S. Department of Justice and certain state agencies and/or other Zylon^®-related litigation; and other risks, uncertainties and factors inherent in our business and otherwise discussed elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission or in materials incorporated therein by reference.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3.    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. In addition, we have entered into interest rate swap agreements to reduce our overall interest expense.

MARKET RATE RISK

The following discussion about our market rate risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates, foreign currency exchange rates, and equity security price risk as a result of the sale of put 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 8.25% Notes, borrowings under 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 8.25% 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 5.35% on April 27, 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 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, 2006, there was a $283,000 hedge asset included in other assets, which, as a result of the change in fair value, is a $1 million hedge asset at March 31, 2007.

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.

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ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  — CONTINUED

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.

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ITEM 4.    CONTROLS AND PROCEDURES

Our management performed an evaluation, as of the end of the period covered by this report on Form 10-Q, under the supervision of our principal executive officer and principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rule 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the ‘‘Exchange Act’’)). Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

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 13 to our condensed consolidated financial statements included elsewhere in this report sets forth information regarding the estimated cost and remaining accrual 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, January 2007, and March 2007, the U.S. Defense Contract Audit Agency (‘‘DCAA’’) conducted five post-award pricing audits in connection with certain Heavy Truck Vehicle kits delivered by our Aerospace & Defense Group’s subsidiary located in Phoenix, Arizona. Based on DCAA’s preliminary audit findings, the U.S. Government may seek contract price reductions of approximately $9 million. We expect additional DCAA audits in 2007 regarding this Heavy Truck Vehicle kit program. We believe that most of DCAA’s preliminary audit findings are without merit and intend to vigorously defend any resulting claims, and have established a reserve 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.

Products Group International Sales Investigation

In January 2007, Armor Holdings Products Group (‘‘AHPG’’) received a written request for information from the Office of Internal Oversight Services (‘‘OIOS’’) of the United Nations (‘‘UN’’)

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ITEM 1.    LEGAL PROCEEDINGS — CONTINUED

regarding IHC Services, Inc. (‘‘IHC’’), a UN-approved vendor-intermediary. Armor Products International, Ltd. (‘‘API’’), a Company subsidiary located in the United Kingdom, had engaged IHC in 2003 to assist API in the preparation of a bid proposal for the supply of body armor to UN personnel and peacekeeping forces. API was awarded the resulting contract in August 2003 (the ‘‘UN Contract’’), which currently runs through July 2007. API also worked with IHC in connection with various other UN purchases.

According to published press reports, a UN investigation has revealed that IHC had close ties to a former UN procurement official who has pled guilty to various federal offenses involving misconduct while in his position at the UN. In 2005, IHC was suspended by the UN. In 2006, when advised about the UN’s suspension of IHC, API terminated its business relationship with IHC. The Company has provided the UN’s OIOS with documents and information concerning the UN Contract and continues to cooperate in the UN’s investigation into IHC.

In February 2007, the Company began an internal investigation into the conduct of several AHPG employees, agents, and distributors relating to international sales. This investigation primarily concerned alleged improper payments received by such persons from various vendors, agents, distributors, and customers of AHPG and related accounting issues at API. As a result of the Company’s investigation, certain employees, agents, and distributors have been terminated or have resigned. The Company is in the process of implementing appropriate corrective actions and does not believe any material adjustments to previously issued financial statements are required.

In response to information developed in responding to the UN inquiry and in the Company’s internal investigation, the Company’s Board of Directors has established a Special Committee of independent directors to oversee an investigation into the circumstances surrounding the UN contract and the Company’s compliance with U.S. and foreign laws relating to sales to foreign governments and international organizations, including without limitation the U.S. Foreign Corrupt Practices Act. The Special Committee has engaged counsel to conduct this investigation and to provide advice to the Special Committee and the Board on these matters.

Counsel for the Special Committee has met with representatives of the U.S. Department of Justice (‘‘DOJ’’) and the U.S. Securities and Exchange Commission (‘‘SEC’’) and disclosed the circumstances leading to the formation of the Special Committee. The Company continues to cooperate with the DOJ and the SEC regarding these matters.

Brazil Tax Dispute

Between 2001 and 2005, O’Gara-Hess & Eisenhardt Armoring do Brasil Ltda. (‘‘OHE Brazil’’) has been assessed 52 Million Reals (US $26 million based on the exchange rate as of April 30, 2007), including interest and penalties, by the Brazilian tax authorities. OHE Brazil has appealed the tax assessments and the cases are pending. To the extent that there may be any liability resulting from such tax assessments, we believe that we are entitled to indemnification from Kroll, Inc. for up to US $8 million under the terms of our purchase agreement dated April 20, 2001, because the events in question with respect to such portion of the tax assessments occurred prior to our purchase of the O’Gara Companies from Kroll, Inc. We do not believe the loss potential is probable and no loss accrual has been recorded.

Other Matters

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

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ITEM 1.    LEGAL PROCEEDINGS — CONTINUED

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 condensed 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.

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ITEM 6.    EXHIBITS

(a)    Exhibits

The following exhibits are filed as part of this quarterly report on Form 10-Q:

Exhibit No.						Description
	31	.1				Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)).
	31	.2				Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)).
	32	.1				Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
	32	.2				Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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SIGNATURES

Pursuant to the requirements 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 and Chief Executive Officer
Dated: May 1, 2007

/s/ Glenn J. Heiar                    

Glenn J. Heiar
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Dated: May 1, 2007

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EXHIBIT INDEX

Exhibit No.						Description
	31	.1				Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)).
	31	.2				Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)).
	32	.1				Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
	32	.2				Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) (17 CFR 240.13a-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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