Phantom Equity Program
                                  Exhibit 10.46

     Aearo  maintains a management  phantom  equity  program,  pursuant to which
specified members of management may be entitled to receive proceeds upon Aearo's
achievement  of specified  financial  goals  relating to the value of the common
equity.  In  general,  subject  to a  participant's  continued  employment,  the
participant's  right to receive  such  proceeds  will vest  immediately  upon an
outright  sale  of  the  majority  of  Aearo  by  existing   shareholders  or  a
recapitalization  which  results  in a  significant  distribution  to the common
equity (each, a "realization  event").  However,  the Board of Director of Aearo
has the right to accelerate  vesting for individual  participants.  The proceeds
under the management phantom equity program generally will be distributed upon a
realization event.