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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended June 30, 2003


                         Commission file number 33-96190

                                AEARO CORPORATION

             (Exact name of registrant as specified in its charter)

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


     Delaware  13-3840450 (State or other  jurisdiction of incorporation or (IRS
Employer Identification No.)organization)

          5457 West 79th Street                                  46268
          Indianapolis, Indiana                               (Zip Code)
(Address of principal executive offices)

                                 (317) 692-6666
              (Registrant's telephone number, including area code)

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X ------ ----

     The number of shares of the  registrant's  common stock, par value $.01 per
share, outstanding as of August 14, 2003 was 101,912.5.

<PAGE>
                                Aearo Corporation

                                TABLE OF CONTENTS

             Form 10-Q for the Quarterly Period Ended June 30, 2003

PART I-FINANCIAL INFORMATION..................................................3
----------------------------
Item 1.    Financial Statements...............................................3
-------    --------------------
           Condensed Consolidated Balance Sheets - Assets.....................3
           ----------------------------------------------
           Condensed Consolidated Balance Sheets - Liabilities and Stockholders
           Equity.............................................................4
           --------------------------------------------------------------------
           Condensed Consolidated Statements of Operations....................5
           -----------------------------------------------
           Condensed Consolidated Statements of Cash Flows....................6
           -----------------------------------------------
           Notes To Condensed Consolidated Financial Statements...............7
           ----------------------------------------------------
Item 2.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.............................................16
-------    --------------------------------------------------------------------
Item 3.    Quantitative and Qualitative Disclosures About Market Risk........25
-------    ----------------------------------------------------------
Item 4.    Controls and Procedures...........................................27
-------    -----------------------
PART II - OTHER INFORMATION..................................................28
---------------------------
Item 1.    Legal Proceedings.................................................28
-------    -----------------
Item 2.    Changes in Securities and Use of Proceeds.........................29
-------    -----------------------------------------
Item 3.    Defaults Upon Senior Securities...................................29
-------    -------------------------------
Item 4.    Submission of Matters to a Vote of Security Holders...............29
-------    ---------------------------------------------------
Item 5.    Other Information.................................................29
-------    -----------------
Item 6.    Exhibits and Reports on Form 8-K..................................29
-------    --------------------------------
SIGNATURES....................................................................30
----------
EXHIBIT INDEX.................................................................31
-------------
                                     - 1 -
<PAGE>
                          Part I-Financial Information

Item 1. Financial Statements

                                AEARO CORPORATION

                 Condensed Consolidated Balance Sheets - Assets

                             (Dollars in Thousands)
<TABLE>

                                                                      June 30,    September 30,
                                                                       2003           2002
                                                                  -------------  -------------
                                                                   (Unaudited)
<S>                                                                 <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                                        $    15,057     $    14,480
  Accounts receivable (net of allowance for doubtful accounts of
      $2,087 and $1,524, respectively)                                  48,038          46,478
  Inventories                                                           37,275          33,161
  Deferred and prepaid expenses                                          3,941           3,449
                                                                   -----------    ------------
      Total current assets                                             104,311          97,568
                                                                   -----------    ------------

LONG TERM ASSETS:
  Property, plant and equipment, net                                    49,144          48,096
  Intangible assets, net                                               138,978         121,979
  Other assets                                                           3,259           2,526
                                                                   -----------    ------------

      Total assets                                                 $   295,692    $    270,169
                                                                   ===========    ============
</TABLE>

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

                                     - 2 -
<PAGE>


                                AEARO CORPORATION

  Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Equity

                             (Dollars in Thousands)

<TABLE>
                                                                 June 30,            September 30,
                                                                  2003                   2002
                                                              -------------         --------------
<S>                                                           <C>                   <C>
                                                              (Unaudited)
CURRENT LIABILITIES:
   Current portion of long-term debt                          $      16,266         $       12,847
   Accounts payable and accrued liabilities                          42,981                 36,410
   Accrued interest                                                   5,628                  2,568
   U.S. and foreign income taxes                                      4,213                  1,156
                                                              -------------         --------------

         Total current liabilities                                   69,088                 52,981
                                                              -------------         --------------

   Long-term debt                                                   173,910                182,715
   Deferred income taxes                                                912                    800
   Other liabilities                                                 13,508                 12,129
                                                              -------------         --------------

         Total liabilities                                    $     257,418         $      248,625
                                                              -------------         --------------

COMMITMENTS AND CONTINGENCIES:
Preferred stock, $.01 par value-
(Redemption value of $120,068 and $109,480, respectively)
    Authorized--200,000 shares

    Issued and outstanding--45,000 shares                                  -                      -

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value-
    Authorized--200,000 shares

    Issued and outstanding--101,913 shares                                 1                      1
   Additional paid-in capital                                        32,224                 32,254
   Retained earnings                                                 16,942                  6,825
   Accumulated other comprehensive loss                             (10,893)               (17,536)
                                                              --------------        ---------------

         Total stockholders' equity                                  38,274                 21,544
                                                              -------------         --------------

         Total liabilities and stockholders' equity           $     295,692         $      270,169
                                                              =============         ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                     - 3 -
<PAGE>
                                Aearo Corporation

                 Condensed Consolidated Statements of Operations

                             (DOLLARS IN THOUSANDS)

                                   (Unaudited)
<TABLE>
                                                    ------------------------------------    ------------------------------------
                                                        For the Three Months Ended                For the Nine Months Ended
                                                                 June 30,                                  June 30,
                                                    ----------------   ----------------     ----------------   -----------------
                                                         2003                2002                 2003                 2002

<S>                                                 <C>                 <C>                  <C>                 <C>
NET SALES                                           $        86,723     $        76,435      $       232,126     $       208,761

COST OF SALES                                                45,767              40,024              121,324             110,312
                                                    ---------------     ---------------      ---------------     ---------------

         Gross profit                                        40,956              36,411              110,802              98,449

SELLING AND ADMINISTRATIVE                                   26,219              24,914               75,407              68,602

RESEARCH AND TECHNICAL SERVICES                               1,462               1,493                4,671               4,251

AMORTIZATION OF INTANGIBLES                                      62               1,570                  194               4,686

OTHER CHARGES                                                   735                 330                1,692                 368
                                                    ---------------     ---------------      ---------------     ---------------

         Operating income                                    12,478               8,104               28,838              20,542

INTEREST EXPENSE, NET                                         4,728               4,972               14,671              15,018
                                                    ---------------     ---------------      ---------------     ---------------

         Income before provision for income taxes
                                                              7,750               3,132               14,167               5,524

PROVISION FOR INCOME TAXES                                    1,367                 850                4,051               1,936
                                                    ---------------     ---------------      ---------------     ---------------

         Net Income                                 $         6,383     $         2,282      $        10,116     $         3,588
                                                    ===============     ===============      ===============     ===============
</TABLE>

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

                                     - 4 -
<PAGE>
                               Aearo Corporation

                 Condensed Consolidated Statements of Cash Flows

                             (DOLLARS IN THOUSANDS)

                                   (Unaudited)

<TABLE>
                                                                                     For the Nine Months Ended
                                                                                               June 30,
                                                                                  -------------      -------------
                                                                                       2003              2002
                                                                                  -------------      -------------
 <S>                                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                     $      10,116      $       3,588
   Adjustments to reconcile net income to cash provided by operating activities-
      Depreciation                                                                        8,175              7,976
      Amortization of intangible assets and deferred financing costs                      1,422              5,842
      Deferred income taxes                                                                (14)                 --
      Other, net                                                                            386                288
      Changes in assets and liabilities-(net of effects of acquisitions)
         Accounts receivable                                                              2,015            (2,226)
         Inventories                                                                    (1,083)            (1,385)
         Accounts payable and accrued liabilities                                         5,261                829
         Income taxes payable                                                             3,013                478
         Other, net                                                                     (1,233)              (499)
                                                                                  -------------      -------------

              Net cash provided by operating activities                                  28,059             14,891
                                                                                  -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant and equipment                                            (7,525)           (5,846)
   Cash paid for acquisitions, net of cash acquired                                     (11,062)           (7,342)
   Proceeds provided by disposals of property, plant and equipment                           22                 13
                                                                                  -------------      -------------

              Net cash used by investing activities                                    (18,565)           (13,175)
                                                                                  -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of notes                                                                        --            (2,000)
   Repayment of term loans                                                              (9,580)            (6,097)
   Repayment of capital lease obligations                                                 (164)              (100)
   Repayment of long-term debt                                                             (57)              (102)
   Other                                                                                   (30)              (147)
                                                                                  -------------      -------------

              Net cash used by financing activities                                     (9,831)            (8,446)
                                                                                  -------------      -------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                     914               (44)
                                                                                  -------------      -------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                            577            (6,774)

CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD                                          14,480             18,233
                                                                                  -------------      -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                          $      15,057      $      11,459
                                                                                  =============      =============

NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Capital lease obligations                                                      $         430      $       1,421
                                                                                  =============      =============

CASH PAID FOR:
   Interest                                                                       $      10,538      $      10,952
                                                                                  =============      =============
   Income taxes                                                                   $       1,332      $       1,536
                                                                                  =============      =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                     - 5 -
<PAGE>


                                Aearo Corporation
              Notes To Condensed Consolidated Financial Statements
                                  June 30, 2003
                                   (Unaudited)

1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   In  the  opinion  of  management,   the  accompanying   unaudited   condensed
   consolidated  financial  statements  contain  all  adjustments  necessary  to
   present fairly, in accordance with accounting  principles  generally accepted
   in the United States of America, the Company's financial position, results of
   operations and cash flows for the interim periods  presented.  The results of
   operations for the interim  periods shown in this report are not  necessarily
   indicative of results for any future  interim  period or for the entire year.
   These  condensed   consolidated  financial  statements  do  not  include  all
   disclosures  associated  with annual  financial  statements  and  accordingly
   should be read in conjunction with the consolidated  financial statements and
   notes thereto included in the Company's Annual Report on Form 10-K405.

2) COMPANY BACKGROUND

   Aearo  Corporation,  a  Delaware  corporation,  and its direct  wholly  owned
   subsidiary,  Aearo Company, a Delaware corporation  (collectively referred to
   herein as the  "Company")  manufactures  and sells  products  under the brand
   names: AOSafety(R),  E-A-R(R), and Peltor(R). These products are sold through
   three reportable  segments,  which are Safety Products,  Safety  Prescription
   Eyewear and Specialty Composites.

3) SIGNIFICANT ACCOUNTING POLICIES

   Use of Estimates.  The  preparation of the condensed  consolidated  financial
   statements in conformity with accounting principles generally accepted in the
   United  States  of  America   requires   management  to  make  estimates  and
   assumptions  that affect the reported  amounts of assets and  liabilities and
   disclosure of contingent  assets and liabilities at the date of the financial
   statements  and the  reported  amounts of revenues  and  expenses  during the
   reporting periods. Actual results could differ from those estimates.

   Revenue  Recognition.  The  Company  recognizes  revenue  when title and risk
   transfer to the customer,  which is generally  when the product is shipped to
   customers. At the time revenue is recognized,  certain provisions may also be
   recorded  including  pricing  discounts  and  incentives.   In  addition,  an
   allowance for doubtful  accounts is generally  recorded based on a percentage
   of aged receivables.  However, management judgment is involved with the final
   determination  of the allowance based on several factors  including  specific
   analysis of a customer's credit  worthiness,  historical bad debt experience,
   changes in payment history and general economic and market trends.

   Foreign Currency Translation. Assets and liabilities of the Company's foreign
   operations are translated at period-end  exchange rates.  Income and expenses
   are  translated at the  approximate  average rate during the period.  Foreign
   currency  translation  adjustments  are  recorded as a separate  component of
   stockholders' equity.

   Foreign Currency Transactions. Foreign currency gains and losses arising from
   transactions  by any of  the  Company's  subsidiaries  are  reflected  in net
   income.

   Income Taxes. Deferred tax assets and liabilities are determined based on the
   difference  between  the  financial  statement  and tax bases of  assets  and
   liabilities using enacted tax rates.

   Goodwill  and Other  Intangibles.  Effective  October  1, 2002,  the  Company
   adopted  Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  142,
   "Goodwill  and Other  Intangibles".  Under the  provisions  of SFAS No.  142,
   goodwill  and  intangible  assets that have  indefinite  useful  lives are no
   longer amortized but are tested at least annually for impairment. The Company
   performed  its  first  annual  impairment  test as of  January  1,  2003  and
   determined there was no impairment. Intangible assets that have finite useful
   lives will continue to be amortized  over their useful lives.  As a result of
   the  non-amortization  provisions of SFAS No. 142, the

                                     - 6 -
<PAGE>

   Company  will  no  longer  record   approximately   $5.8  million  of  annual
   amortization   relating  to  goodwill  and  indefinite   lived   intangibles.
   Intangible assets increased $17.0 million during the nine month period ending
   June 30, 2003.  Goodwill  increased  $16.5 million,  of which,  $10.1 million
   related to  acquisitions  and $6.4 million related to foreign  exchange.  The
   allocation of purchase  price for  acquisitions  to goodwill is  preliminary.
   Other  intangibles  increased  $0.5  million  due to  non-compete  agreements
   related to  acquisitions.  The following  presents  amortization  expense and
   proforma  net income for the three and nine  months  ended June 30,  2003 and
   2002 as if SFAS No. 142 had been adopted (Dollars in thousands):
<TABLE>

                                  Three Months Ended        Nine Months Ended
                                        June 30,                  June 30,
                               -----------------------   -----------------------
                                   2003       2002           2003         2002
                               ----------- ----------    -----------   ---------
   <S>                         <C>          <C>          <C>               <C>
   Net income as reported      $    6,383   $    2,282   $    10,116       3,588
   Goodwill amortization              --          792            --        2,350
   Trademark amortization             --          742            --        2,224
                               ----------   ----------   -----------   ---------
   Net income                  $    6,383   $    3,816   $    10,116       8,162
                               ==========   ==========   ===========   =========
</TABLE>

   The  trademark  is deemed to have an  indefinite  useful  life  because it is
expected to generate cash flow indefinitely.

   Asset Retirement Obligations.  Effective October 1, 2002, the Company adopted
SFAS No.  143,  "Accounting  for Asset  Retirement  Obligations".  SFAS No.  143
requires the Company to record the fair value of liabilities associated with the
retirement  of long-lived  assets in the period in which they are incurred.  The
adoption  of SFAS No. 143 had no  material  impact on the  Company's  results of
operations or financial position.

   Impairment or Disposal of Long-Lived  Assets.  Effective October 1, 2002, the
Company  adopted SFAS No. 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived  Assets",   which  supercedes  SFAS  No.  121,  "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of".
SFAS No. 144 retains the fundamental  provisions with respect to the recognition
and  measurement of long-lived  asset  impairment but does not apply to goodwill
and other  intangibles  assets.  The  adoption  of SFAS No. 144 had no  material
effect on the Company's results of operations or financial position.

   Extinguishment  of Debt.  Effective October 1, 2002, the Company adopted SFAS
No. 145 "Rescission of Financial  Accounting  Standards Board ("FASB") Statement
No.  4,  44,  and  62,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections".  This statement  rescinds SFAS No. 4, "Reporting  Gains and Losses
from  Extinguishment of Debt", and an amendment of that Statement,  SFAS No. 64,
"Extinguishments  of  Debt  Made to  Satisfy  Sinking-Fund  Requirements".  This
Statement also rescinds SFAS No. 44,  "Accounting for Intangible Assets of Motor
Carriers".  This  Statement  amends SFAS No. 13,  "Accounting  for  Leases",  to
eliminate the inconsistency  between the required accounting for sales-leaseback
transactions and the required  accounting for certain lease  modifications  that
have economic effects similar to  sale-leaseback  transactions.  The adoption of
SFAS No. 145 had no effect on the  Company's  results of operations or financial
position.

   Financial Instruments with Characteristics of both Liabilities and Equity. In
May 2003,  the FASB  issued  SFAS No. 150,  "Accounting  for  Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity".  SFAS No. 150
establishes standards for how an issuer classifies and measures three classes of
freestanding  financial instruments with characteristics of both liabilities and
equity.  It  requires  that an issuer  classify a financial  instrument  that is
within its scope as a liability or an asset in some circumstances.  SFAS No. 150
was effective for financial  instruments  entered into or modified after May 31,
2003,  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15, 2003.  The Company has not entered into any  financial
instruments  within  the scope of SFAS No.  150 since May 31,  2003 and does not
hold any significant financial instruments within its scope.

                                     - 7 -
<PAGE>

   Exit or Disposal  Activities.  Effective October 1, 2002, the Company adopted
SFAS  No.  146,   "Accounting  for  Costs   Associated  with  Exit  or  Disposal
Activities".  SFAS No. 146 requires that a liability for costs  associated  with
exit or disposal  activities be recognized  and measured at fair value only when
the  liability  is  incurred.  SFAS No. 146 is  effective  for exit or  disposal
activities  that are initiated after December 31, 2002. The adoption of SFAS No.
146 did not have a material  effect on the  Company's  results of  operations or
financial position.

   Stock-based  Compensation.  In December  2002,  the FASB issued SFAS No. 148,
"Accounting  for  Stock-Based  Compensation  -  Transition  and  Disclosure,  an
amendment of FASB Statement No. 123". SFAS No. 148 provides  alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this statement
amends  the  disclosure  requirements  of  SFAS  No.  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used on  reported  results.  The  Company  currently  accounts  for  stock-based
compensation  under the intrinsic method of Accounting  Principles Board ("APB")
Opinion No. 25. The following  table  illustrates the effect on net income as if
the fair value based  method had been  applied to all  outstanding  and unvested
awards: (Dollars in thousands)

<TABLE>
                                                               Three Months Ended         Nine Months Ended
                                                                   June 30,                     June 30,
                                                            ------------------------    ----------------------
                                                              2003           2002           2003       2002
                                                            ----------    ----------    ----------  ----------
     <S>                                                    <C>           <C>           <C>              <C>
     Net income as reported                                 $   6,383     $    2,282    $  10,116        3,588
     Deduct: Total stock-based employee compensation
     expense determined under fair value based method for
     all awards, net of tax                                      (37)           (47)         (141)       (111)
                                                            ----------    ----------    ----------  -----------
     Net income                                             $   6,346     $    2,235    $   9,975        3,477
                                                            ==========    ==========    ==========  ===========
</TABLE>

   Disclosure  Requirements  for  Guarantees.  In November 2002, the FASB issued
FASB  Interpretation  ("FIN") No. 45,  "Guarantor's  Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others".  FIN No. 45 expands upon the  disclosure  requirements  to be made by a
guarantor  in  its  interim  and  annual  financial   statements  regarding  its
obligations under certain guarantees that it has issued.  Additionally,  FIN No.
45 requires that the  guarantor  recognize,  at the inception of a guarantee,  a
liability  for the fair  value  of the  obligation  undertaken  in  issuing  the
guarantee.  Footnote  disclosures are required in interim and year-end financial
statements ending after December 15, 2002. Liability recognition and measurement
provisions apply prospectively to guarantees issued or modified starting January
1, 2003.  The adoption of FIN No. 45 had no effect on the  Company's  results of
operations or financial position.

   Consolidation of Variable Interest Entities. In January 2003, the FASB issued
FIN No. 46,  "Consolidation of Variable Interest  Entities,  an Amendment of ARB
No. 51". FIN No. 46 addresses  consolidation of business  enterprises of certain
variable  interest  entities,  and is effective for variable  interest  entities
created  after  January 31, 2003 and to variable  interest  entities in which an
enterprise  obtains an interest  after that date. The adoption of FIN No. 46 had
no effect on the Company's results of operations or financial position.

   Accounting for Derivative  Instruments and Hedging Activities.  SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities"  requires that
every derivative  instrument be recorded in the balance sheet as either an asset
or a liability measured at its fair value.

   The Company has  formally  documented  its hedging  relationships,  including
identification  of the hedging  instruments  and the hedge items, as well as its
risk   management   objectives  and  strategies  for   undertaking   each  hedge
transaction.  From time to time the Company enters into forward foreign currency
contracts and interest rate swap and collar agreements, which are derivatives as
defined by SFAS No.  133.  The  Company  enters into  forward  foreign  currency
contracts  to  mitigate  the  effects of changes  in foreign  currency  rates on
profitability  and enters into interest rate swap and collar agreements to hedge
its variable interest rate risk.

                                     - 8 -
<PAGE>

   These  derivatives  are cash  flow  hedges.  For all  qualifying  and  highly
effective cash flow hedges, the changes in the fair value of the derivatives are
recorded  in  other   comprehensive   income.   Amounts   accumulated  in  other
comprehensive  income will be  reclassified as earnings when the related product
sales affect earnings for forward foreign currency contracts. As a result of the
forward  foreign  currency  contracts,  the  Company has  recorded a  derivative
payable of $0.5 million at June 30, 2003. All forward foreign currency contracts
will expire over the next three months.

   During the three and nine month  periods  ending June 30,  2003,  the Company
reclassified  into  earnings a net loss of  approximately  $1.0 million and $1.7
million,  respectively,  resulting from the exercise of forward foreign currency
contracts.  All forward foreign currency  contracts were determined to be highly
effective; therefore no ineffectiveness was recorded in earnings.

   The Company also executes forward foreign currency contracts for up to 30-day
terms to protect against the adverse effects that exchange rate fluctuations may
have on the foreign-currency-denominated trade activities (receivables, payables
and cash) of foreign  subsidiaries.  These contracts have not been designated as
hedges  under  SFAS No.  133 and  accordingly,  the gains and losses on both the
derivative  and  foreign-currency-denominated  trade  activities are recorded as
transaction  adjustments in current earnings.  The impact on earnings was a gain
of approximately $0.2 million for the three and nine month period ended June 30,
2003.

   The Company  also  entered into an interest  rate collar  arrangement  during
October 2001 to protect $25.0  million of adjustable  Term Loan debt (as defined
below in Note 6). The fair value of the collar at June 30,  2003 was a liability
of $0.1 million.  The Company has not elected to take hedge accounting treatment
for the interest rate collar as defined under SFAS No. 133 and, as a result, any
fair value adjustment is charged directly to other income  (expense).  There was
no material  impact on earnings for the three and nine month  periods ended June
30, 2003.

   In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  149  amends  and
clarifies  accounting for derivative  instruments,  including certain derivative
instruments  embedded in other contracts,  and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS is
generally  effective for contracts  entered into or modified after June 30, 2003
and for hedging  relationships  designated after June 30, 2003. The Company does
not expect the adoption of SFAS No. 149 to have a material impact on its results
of operations or financial position.

4) COMPREHENSIVE INCOME

   Comprehensive income consisted of the following (Dollars in thousands):
<TABLE>

                                               For the Three Months Ended        For the Nine Months
                                                          June 30,                   Ended June 30,
                                               -----------     ----------       ----------- -----------
                                                    2003          2002             2003         2002
                                               -----------     ----------       ----------  -----------
    <S>                                        <C>             <C>              <C>         <C>
     Net income                                $    6,383      $    2,282       $  10,116   $     3,588

     Foreign currency translation adjustment        2,996           4,622           7,181         5,320
     Unrealized gain (loss) on derivative
       instruments                                    116           (752)           (538)         (616)
                                               ----------      ----------       ---------   -----------
     Comprehensive income                      $    9,496      $    6,152       $  16,759   $     8,292
                                               ==========      ==========       =========   ===========
    </TABLE>
                                      - 9 -
<PAGE>

   Inventories consisted of the following (Dollars in thousands):
<TABLE>

                                                  June 30,     September 30,
                                                    2003           2002
                                               ------------    -------------

     <S>                                       <C>             <C>
     Raw materials                             $      8,871    $       7,514
     Work in process                                 12,222           10,196
     Finished goods                                  16,182           15,451
                                               ------------    -------------
                                               $     37,275    $      33,161
                                               ============    =============
</TABLE>

   Inventories,  which include materials,  labor and manufacturing overhead, are
stated at the lower of cost or market, cost being determined using the first-in,
first-out method.

6) DEBT

   The  Company's  debt  structure   includes:   (a)  $98.0  million  of  senior
subordinated  notes  ("Notes")  due  2005,  which  are  publicly  held  and  are
redeemable  at the  option  of the  Company,  in whole or in  part,  at  various
redemption  prices,  and (b) up to an aggregate of $135.0 million under a credit
agreement  with various  banks  comprised  of (i) a secured  term loan  facility
consisting  of  loans   providing  for  up  to  $100.0  million  of  term  loans
(collectively  the "Term Loans") with a portion of the Term Loans denominated in
foreign currencies,  (ii) a secured revolving credit facility ("Revolving Credit
Facility")  providing  for up to $30.0  million of  revolving  loans for general
corporate purposes and (iii) a U.K. overdraft facility of up to an equivalent of
$5.0 million in Great Britain Pounds for working capital  requirements as needed
(collectively the "Senior Bank Facilities"). The amounts outstanding on the Term
Loans at June 30,  2003  were  approximately  $88.1  million.  No  amounts  were
outstanding under the Revolving Credit or U.K. overdraft facilities.

   Under the terms of both the Senior Bank  Facilities and the Notes  indenture,
Aearo  Company is  required  to comply  with  certain  financial  covenants  and
restrictions.  Aearo Company was in compliance with all financial  covenants and
restrictions at June 30, 2003.

   During the first  quarter of fiscal 2002,  the  Company's  Board of Directors
authorized  management  to  repurchase,  from  time to time,  a  portion  of the
Company's  12.5%  Notes,  subject to market  conditions  and other  factors.  No
assurances can be given as to whether or when or at what price such  repurchases
will  occur.  Subsequently,  pursuant  to a first  amendment  to the Senior Bank
Facilities,  the Company  purchased and retired $2.0 million of the Notes during
the first quarter of fiscal 2002.

7) COMMITMENTS AND CONTINGENCIES

   Lease  Commitments.  The  Company  leases  certain  transportation  vehicles,
warehouse facilities, office space, and machinery and equipment under cancelable
and  non-cancelable  leases,  most of which  expire  within  10 years and may be
renewed by the Company.

   Contingencies  Various  lawsuits and claims arise  against the Company in the
ordinary course of its business.  Most of these lawsuits and claims are products
liability  matters that arise out of the use of safety  eyewear and  respiratory
product  lines  manufactured  by the Company as well as products  purchased  for
resale.  In  addition,  the Company may be  contingently  liable with respect to
numerous  lawsuits  involving  respirators  sold by its  predecessors,  American
Optical  Corporation and Cabot  Corporation,  arising out of agreements  entered
into when the AOSafety(R)  Division was sold by American Optical  Corporation to
Cabot in April 1990 and when later sold by Cabot to the  Company in 1995.  These
lawsuits typically involve plaintiffs  alleging that they suffer from asbestosis
or silicosis, and that such condition results in part from respirators that were
negligently designed or manufactured. The defendants in these lawsuits are often
numerous, and include, in

                                     - 10 -
<PAGE>

   addition  to  respirator  manufacturers,  employers  of  the  plaintiffs  and
manufacturers of sand (used in sand blasting) and asbestos.  Responsibility  for
legal costs, as well as for settlements and judgments,  is shared  contractually
by the  Company,  Cabot,  American  Optical  Corporation  and a prior  owner  of
American Optical Corporation.  Liability is allocated among the parties based on
the number of years each  Company  owned the  AOSafety  Division and the alleged
years of  exposure  of the  individual  plaintiff.  The  Company's  share of the
contingent liability is further limited by an agreement entered into between the
Company and Cabot on July 11, 1995, as amended in 2002. This agreement  provides
that, so long as the Company pays to Cabot an annual fee of $400,000, Cabot will
retain  responsibility  and liability  for, and  indemnify the Company  against,
asbestos  and  silica-related  legal  claims  asserted  after July 11,  1995 and
alleged to have arisen out of the use of  respirators  while exposed to asbestos
or silica prior to January 1, 1997. To date,  the Company has elected to pay the
annual fee. The Company could  potentially be liable for these  exposures if the
Company elects to discontinue its participation in this arrangement, or if Cabot
is no  longer  able to  meet  its  obligations  in  these  matters.  With  these
arrangements in place,  however, the Company's potential liability is limited to
exposures  alleged to have arisen from the use of  respirators  while exposed to
asbestos  or  silica  on or after  January  1,  1997.  The  Company  also may be
responsible  for certain claims  relating to acquired  companies  other than the
AOSafety(R)  Division  that  are not  covered  by,  and are  unrelated  to,  the
agreement with Cabot.

   At June 30, 2003, the Company has recorded  liabilities of approximately $4.8
million,  which represents  reasonable estimates of its probable liabilities for
product liabilities  substantially related to asbestos and silica-related claims
as determined by the Company in  consultation  with an  independent  consultant.
This reserve is re-evaluated  periodically and additional  charges or credits to
operations may result as additional  information  becomes available.  Consistent
with the current environment being experienced by companies involved in asbestos
and  silica-related  litigation,  there has been an  increase  in the  number of
asserted  claims that could  potentially  involve the Company.  Various  factors
increase the difficulty in determining  the Company's  potential  liability,  if
any, in such claims,  including the fact that the  defendants in these  lawsuits
are often numerous and the claims generally do not specify the amount of damages
sought.  Additionally,  the bankruptcy  filings of other companies with asbestos
and  silica-related  litigation  could increase the Company's cost over time. In
light of these and other uncertainties inherent in making long-term projections,
the Company has determined that the five-year  period through fiscal 2007 is the
most reasonable time period for projecting  asbestos and  silica-related  claims
and defense costs.  It is possible that the Company may incur  liabilities in an
amount in excess of amounts  currently  reserved.  However,  taking into account
currently available information, historical experience, and the Cabot agreement,
but  recognizing  the inherent  uncertainties  in the  projection  of any future
events, it is management's  opinion that these suits or claims should not result
in final  judgments or settlements  in excess of the Company's  reserve that, in
the  aggregate,  would  have  a  material  effect  on  the  Company's  financial
condition, liquidity or results of operations.

8) SEGMENT REPORTING

   The  Company   manufactures   and  sells  products  under  the  brand  names:
AOSafety(R),  E-A-R(R),  and  Peltor(R).  These  products are sold through three
reportable segments, which are Safety Products,  Safety Prescription Eyewear and
Specialty Composites. The Safety Products segment manufactures and sells hearing
protection devices,  non-prescription safety eyewear, face shields, reusable and
disposable  respirators,  hard hats and first aid kits. The Safety  Prescription
Eyewear segment  manufactures and sells  prescription  eyewear products that are
designed  to  protect  the eyes  from the  typical  hazards  encountered  in the
industrial work environment.  The Company's Safety Prescription  Eyewear segment
purchases  component  parts (lenses and the majority of its frames) from various
suppliers,  grinds, shapes and applies coatings to the lenses in accordance with
the customer's prescription, and then assembles the glasses using the customer's
choice of frame. The Specialty  Composites segment  manufactures a wide array of
energy-absorbing  materials  that are  incorporated  into  other  manufacturers'
products to control noise, vibration and shock.

                                     - 11 -
<PAGE>

Net Sales by Business Segment (Dollars in thousands):
<TABLE>

                                      For the Three Months Ended         For the Nine Months Ended
                                                 June 30,                        June 30,
                                     -----------------------------      ----------------------------
                                            2003         2002               2003             2002
                                     -------------    ------------      ------------     -----------
     <S>                             <C>              <C>               <C>              <C>
     Safety Products                 $      68,269    $     55,034      $    176,953     $   150,417
     Safety Prescription Eyewear            10,165          11,118            30,463          30,662
     Specialty Composites                    8,289          10,283            24,710          27,682
                                     -------------    ------------      ------------     -----------
     Total                           $      86,723    $     76,435      $    232,126     $   208,761
                                     =============    ============      ============     ===========
</TABLE>

   Inter-segment  sales  of the  Specialty  Composites  segment  to  the  Safety
Products  segment  totaled  $0.7  million and $1.3  million for the three months
ended June 30, 2003 and 2002,  respectively.  Inter-segment  sales  totaled $2.3
million  and $2.6  million  for the nine  months  ended June 30,  2003 and 2002,
respectively.  The  inter-segment  sales value is determined  at fully  absorbed
inventory cost at standard rates plus 25%.

   Profit by Business Segment and  reconciliation to income before provision for
income taxes (Dollars in thousands):
<TABLE>
                                                    For the Three Months Ended     For the Nine Months Ended
                                                              June 30,                      June 30,
                                                    --------------------------     ---------------------------
                                                       2003             2002          2003             2002
                                                    -----------    -----------     -----------    ------------

<S>                                                 <C>            <C>             <C>            <C>
     Safety Products                                $    14,472    $    10,590     $    35,677    $     29,268
     Safety Prescription Eyewear                            249            484             612           1,484
     Specialty Composites                                   631          1,468             918           2,452
                                                    -----------    -----------     -----------    ------------
     Segment profit                                      15,352         12,542          37,207          33,204

     Depreciation                                         2,812          2,868           8,175           7,976
     Amortization of intangibles                             62          1,570             194           4,686
     Interest                                             4,728          4,972          14,671          15,018
                                                    -----------    -----------     -----------    ------------
     Income before provision for income taxes       $     7,750      $   3,132     $    14,167    $      5,524
                                                    ===========    ===========     ===========    ============
</TABLE>

   Segment   profit  is  defined  as  operating   income  before   depreciation,
amortization,  interest expense and income taxes and represents the measure used
by the chief  operating  decision maker to assess segment  performance  and make
decisions about the allocation of resources to business segments.

9) RESTRUCTURING CHARGE

   During  fiscal 2001,  the Company  recorded a  restructuring  charge of $11.4
million  relating to a plan announced by the Company to improve its  competitive
position  and  long-term  profitability.  The plan  includes  the closure of its
Ettlingen, Germany plant, significantly reorganizing operations at the Company's
Varnamo, Sweden plant, rationalizing the manufacturing assets and product mix of
its Specialty  Composites  business unit and a reduction of products and product
lines.

   The  restructuring  charge  included  cash  charges  of $2.3  million,  which
includes  $1.8 million for  severance  and other  separation  costs to cover the
reduction  of 5% of the  Company's  work force and $0.5  million for other costs
associated  with this plan.  The  restructuring  charge also  included  non-cash
charges  of  $9.1  million,  which  includes  $3.2  million  for  non-cancelable
long-term lease obligations,  $2.9 million for asset  impairments,  $2.4 million
for inventory  disposals  and $0.6 million  related to the sale of the Company's
Ettlingen, Germany location, which is currently being marketed for sale.

                                     - 12 -
<PAGE>

   During 2002,  the Company  reversed  $0.6 million of reserves  related to the
September 30, 2001 restructuring  provision.  The adjustment represents a change
in estimate of the plan for the disposal of certain  items of inventory  and the
closure of its  Ettlingen,  Germany plant.  The portion  related to inventory of
$0.5 million was  classified  as a reduction in cost of sales with the remaining
$0.1 million classified as operating expenses.

   The following  table displays the activity and balances of the  restructuring
reserve account for the nine months ended June 30, 2003 (Dollars in thousands):
<TABLE>

                                   September 30,                    June 30,
                                        2002          Charges        2003
                                   ------------    -----------    ------------
    <S>                            <C>             <C>            <C>
    Employee termination costs     $        730    $     (376)    $        354
    Lease agreements                      2,352          (672)           1,680
    Loss on disposal of assets              700                            700
    Other                                    47           (45)               2
                                   ------------    -----------    ------------
    Total                          $      3,829     $    (777)    $      2,736
                                   ============    ===========    ============
</TABLE>

   The Company expects the  restructuring  payments to be completed by the third
quarter of fiscal 2005.

10). ACQUISITIONS

     On October 7, 2002, the Company acquired  Industrial  Protection  Products,
Inc. ("IPP") of Wilmington,  Massachusetts for approximately  $1.2 million.  The
transaction  was  accounted  for using the  purchase  method  of  accounting  in
accordance with SFAS No. 141,  "Business  Combinations",  and  accordingly,  the
operating results of IPP have been included with those of the Company subsequent
to October 7, 2002. If the  acquisition  had occurred at the beginning of fiscal
2002, the pro forma consolidated  results would not be materially different from
actual results for the nine months ended June 30, 2002.

     On March 14,  2003 the  Company  acquired  VH  Industries,  Inc.  ("VH") of
Concord,  North Carolina for  approximately  $11.5  million.  VH Industries is a
manufacturer of fall  protection  products sold under the SafeWaze trade name in
the United States.  The  transaction was accounted for using the purchase method
of accounting  in accordance  with SFAS No. 141,  "Business  Combinations",  and
accordingly,  the  operating  results of VH have been included with those of the
Company  subsequent  to March  14,  2003.  The  following  unaudited  pro  forma
information presents results as if the acquisition had occurred at the beginning
of the respective periods (Dollars in thousands):
<TABLE>

                                   Three Months Ended               Nine Months Ended
                                         June 30,                         June 30,
                                ---------------------------    --------------------------
                                   2003            2002             2003         2002
                                ------------    -----------    ------------   -----------
    <S>                         <C>             <C>            <C>                <C>
     Net sales as reported      $    86,723     $    76,435    $    232,126       208,761
     Pro forma sales                 86,723          79,427         236,616       216,527

     Net income as reported     $     6,383     $     2,282    $     10,116       $ 3,588
     Pro forma net income             6,383           2,847          10,804         4,749
</TABLE>

11)  SUBSEQUENT EVENTS

     On June 27, 2003, the Company  signed an agreement with Cabot  Corporation,
subject to, among other things,  the approval of the Company's  bank lenders and
receipt  of  financing,  to  redeem  all of the  common  and  preferred  shares,
including accrued dividends,  held by Cabot for approximately $33.5 million. The
Company

                                     - 13 -
<PAGE>

expects  to  finance  the  redemption  with a  combination  of cash and
additional  borrowings.  This  transaction  is expected to close  during the 4th
quarter.


                                     - 14 -
<PAGE>
Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

The following  discussion  should be read in conjunction  with the  Consolidated
Financial  Statements  of the  Company,  including  notes  thereto.  This Report
contains  forward-looking  statements  within the  meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934.
The Company's  actual  results could differ  materially  from those set forth in
such forward-looking  statements. The factors that might cause such a difference
include, among others, the following: risks associated with indebtedness;  risks
related  to  acquisitions;  risks  associated  with  the  conversion  to  a  new
management  information  system;  high  level of  competition  in the  Company's
markets;  importance  and costs of product  innovation;  risks  associated  with
international operations; product liability exposure; unpredictability of patent
protection and other intellectual property issues;  dependence on key personnel;
the risk of adverse effect of economic and regulatory  conditions on sales;  and
risks associated with environmental matters.

Critical Accounting Policies

The Company's  discussion and analysis of its financial condition and results of
operations  are  based  upon  the  Company's  condensed  consolidated  financial
statements,  which have been prepared in accordance with  accounting  principles
generally  accepted in the United States of America ("GAAP").  GAAP requires the
use of estimates,  judgments,  assumptions  and  subjective  interpretations  of
accounting  principles that affect the reported amounts of assets,  liabilities,
revenues and expenses.  The Company believes its use of estimates and underlying
accounting  assumptions adhere to GAAP and are consistently applied. The Company
revises its estimates and assumptions as new information becomes available.

The Company believes that of its significant  accounting  policies (see Notes to
the  Consolidated  Financial  Statements in the Company's  Annual Report on Form
10-K405)  the  following  policies  involve a higher  degree of judgment  and/or
complexity.

Income  Taxes - The  Company  accounts  for  income  taxes  in  accordance  with
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income Taxes",  which requires deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between book and
tax  bases of  recorded  assets  and  liabilities.  SFAS No.  109 also  requires
deferred  tax assets be reduced by a  valuation  allowance  if it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.  Recognition  of a  deferred  tax  asset is  dependent  on  generating
sufficient future taxable income in the United States prior to the expiration of
the tax loss and credit carryforwards, which expire over various periods ranging
from 2010 to 2021. In its evaluation of the adequacy of the valuation allowance,
the Company  assesses prudent and feasible tax planning  strategies.  Due to the
uncertainties  of realizing these tax benefits,  the Company has recorded a full
valuation allowance against these losses and credit carryforwards.  The ultimate
amount of deferred tax assets  realized could be different from those  recorded,
as influenced by potential  changes in enacted tax laws and the  availability of
future taxable income.

Product Liabilities -The Company has established  reserves for potential product
liabilities that arise out of the use of the Company's  products.  A significant
amount of judgment is required to quantify the  Company's  ultimate  exposure in
these  matters and the  valuation  of reserves is  estimated  based on currently
available  information,  historical experience and from time to time the Company
may seek the assistance of an independent consultant. While the Company believes
that the  current  level of reserves is  adequate,  changes in the future  could
impact these determinations.

Restructuring - The Company recorded a restructuring charge in fiscal 2001 based
on a plan to improve its competitive position and long-term  profitability.  The
provision  recorded was based on estimates of the expected costs associated with
site closures,  consolidation of products and product lines, disposal of assets,
contract  terminations or other costs directly related to the restructuring.  To
the extent that actual costs may

                                     - 15 -
<PAGE>

differ from amounts  recorded,  revisions  to the  estimated  reserves  would be
required. A reduction of $0.6 million was made during fiscal 2002 to account for
new information made available during that year.

Pension Plan - The valuation of the  Company's  pension plan requires the use of
assumptions  and  estimates  that are used to develop  actuarial  valuations  of
expenses and  assets/liabilities.  These  assumptions  include  discount  rates,
investment  returns,   projected  salary  increases  and  mortality  rates.  The
actuarial  assumptions  used in the  Company's  pension  reporting  are reviewed
annually and compared  with external  benchmarks to assure that they  accurately
account  for  future  pension  obligations.  Changes in  assumptions  and future
investment  returns could  potentially  have a material  impact on the Company's
pension expense and funding requirements.

Impairment  of  Long-Lived  Assets - The Company  evaluates  long-lived  assets,
including other  intangibles  and related  goodwill,  of  identifiable  business
activities for impairment when events or changes in circumstances  indicate,  in
management's  judgment,  that  the  carrying  value  of such  assets  may not be
recoverable. Cash flows used in the potential impairment evaluation are based on
management's  estimates and  assumptions.  Changes in business  conditions could
potentially require future adjustments to asset valuations.

Revenue  Recognition  - The  Company  recognizes  revenue  when  title  and risk
transfer  to the  customer,  which is  generally  when the product is shipped to
customers.  At the time revenue is  recognized,  certain  provisions may also be
recorded including pricing discounts and incentives.  In addition,  an allowance
for  doubtful  accounts is  generally  recorded  based on a  percentage  of aged
receivables.   However,   management   judgment  is  involved   with  the  final
determination  of the  allowance  based on several  factors  including  specific
analysis of a customer's  credit  worthiness,  historical  bad debt  experience,
changes in payment history and general economic and market trends.

                                     - 16 -
<PAGE>

Results of  Operations  -- Three  Months  Ended June 30, 2003  Compared to Three
Months Ended June 30, 2002

                              Results of Operations
                             (Dollars in Thousands)
                                   (Unaudited)
<TABLE>

                                                                 Three Months Ended June 30,
                                               -----------------------------------------------------------------
                                                   2003               %               2002                %
                                              --------------   --------------    --------------    -------------
<S>                                             <C>                      <C>        <C>                     <C>
Net Sales
  Safety Products                               $    68,269              78.7       $    55,034             72.0
  Safety Prescription Eyewear                        10,165              11.7            11,118             14.5
  Specialty Composites                                8,289               9.6            10,283             13.5
                                                -----------       -----------       -----------      -----------
     Total net sales                                 86,723             100.0            76,435            100.0

Cost of Sales                                        45,767               52.8           40,024             52.4

Gross profit                                         40,956              47.2            36,411             47.6

Operating Expenses-
  Selling and administrative                         26,219              30.2            24,914             32.6
  Research and technical services                     1,462               1.7             1,493              2.0
  Amortization of intangibles                            62                --             1,570              2.1
  Other charges, net                                    735               0.9               330               --
                                                -----------       -----------       -----------      -----------
     Total operating expenses                        28,478              32.8            28,307             37.0

Operating income                                     12,478              14.4             8,104             10.6

Interest expense, net                                 4,728               5.5             4,972              6.5
                                                -----------       -----------       -----------      -----------
Income before provision for income taxes              7,750               8.9             3,132              4.1

Provision for income taxes                            1,367               1.5               850              1.1
                                                -----------       -----------               ---              ---
Net income                                      $     6,383               7.4       $     2,282              3.0
                                                ===========       ===========       ===========      ===========
</TABLE>

Net Sales.  Net sales in the three months ended June 30, 2003 increased 13.5% to
$86.7  million from $76.4  million in the three months ended June 30, 2002.  The
increase in net sales was  primarily  driven by the impact of foreign  exchange,
acquisitions  and organic  growth in the Safety  Products  segment was partially
offset by declines in the Safety Prescription  Eyewear and Specialty  Composites
segments.  The weakness of the U.S.  dollar  relative to other  currencies,  and
acquisitions,  favorably  impacted net sales by $4.9  million and $3.4  million,
respectively.  The Safety  Products  segment net sales in the three months ended
June 30, 2003  increased  24.0% to $68.3 million from $55.0 million in the three
months ended June 30,  2002.  The  increase in net sales  resulted  from a 10.1%
increase due to organic growth,  an 8.8% increase due to foreign  exchange and a
5.2% increase due to  acquisitions.  The increase in organic growth is primarily
due to product  innovations.  The Safety Prescription  Eyewear segment sales for
the three months ended June 30, 2003  decreased 8.6% to $10.2 million from $11.1
million in the three  months  ended June 30,  2002.  The  decrease in volume was
partially offset by a 5.0% increase due to acquisitions. The Safety Prescription
Eyewear segment sales have been negatively  impacted by the continued  reduction
in manufacturing  employment in North America.  The Specialty Composites segment
sales in the three  months ended June 30, 2003  decreased  19.4% to $8.3 million
from $10.3  million in the three months  ended June 30,  2002.  The decrease was


                                     - 17 -
<PAGE>

primarily  driven by volume  declines  in the truck  market and the  electronics
segment of the precision equipment market, which includes computers and personal
communications system ("PCS") applications.

Gross  Profit.  Gross Profit in the three  months ended June 30, 2003  increased
12.5% to $41.0  million  from $36.4  million in the three  months ended June 30,
2002.   The  increase  in  gross  profit  is  primarily   due  to   productivity
improvements, the impact of foreign exchange and acquisitions. Gross Profit as a
percentage  of net sales in the three  months  ended June 30,  2003 was 47.2% as
compared to 47.6% in the three  months  ended June 30,  2002.  The change in the
gross profit percentage is primarily due to product mix.

Operating  Expenses.  Operating expenses in the three months ended June 30, 2003
increased  0.6% to $28.5  million  from $28.3  million in the three months ended
June 30, 2002.  The increase was primarily  driven by an increase in selling and
administrative expenses and other charges, net partially offset by a decrease in
amortization  expense.  Selling and administrative  expenses in the three months
ended June 30, 2003 included  approximately $0.8 million of incremental expenses
due to acquisitions and $1.0 million due to the weakness of the U.S dollar.  The
increase in other charges,  net was primarily driven by foreign exchange losses.
Amortization expense decreased approximately $1.5 million due to the adoption of
SFAS No. 142. SFAS No. 142 requires the Company to no longer  amortize  goodwill
and other  intangibles with indefinite  useful lives. Had the provisions of SFAS
No. 142 been  adopted in the three  months  ended  June 30,  2002,  amortization
expense  would have been  reduced by  approximately  $1.5  million.  Selling and
administrative  expenses as a percentage of net sales  decreased to 30.2% in the
three  months ended June 30, 2003 as compared to 32.6% in the three months ended
June 30, 2002.

Operating  Income.  Primarily  as a  result  of  the  factors  mentioned  above,
operating income increased 54.0% to $12.5 million in the three months ended June
30, 2003 from $8.1 million in the three  months  ended June 30, 2002.  Operating
income as a  percentage  of net sales in the three  months  ended June 30,  2003
increased to 14.4% as compared to 10.6% in the three months ended June 30, 2002.

Interest Expense,  Net. Interest expense, net in the three months ended June 30,
2003  decreased 4.9% to $4.7 million from $5.0 million in the three months ended
June 30, 2002.

Provision For Income  Taxes.  The provision for income taxes in the three months
ended June 30, 2003 was $1.4  million as  compared to $0.9  million in the three
months ended June 30, 2002.  The  effective  tax rates in the three months ended
June 30, 2003 and 2002 was different  from the statutory  rate due to the mix of
income between the Company's foreign subsidiaries and domestic subsidiaries. The
Company's foreign subsidiaries had taxable income in their foreign jurisdictions
while the Company's  domestic  subsidiaries  generated net operating losses. The
domestic  subsidiaries  have net operating  loss  carry-forwards  for income tax
purposes.  Due to the  uncertainty  of  realizing  these tax  benefits,  the tax
benefits  generated  by the net  operating  losses  have been fully  offset by a
valuation allowance.

Net Income.  For the three months ended June 30, 2003 the Company had net income
of $6.4  million as compared to $2.3 million for the three months ended June 30,
2002.

                                     - 18 -
<PAGE>

Results of Operations -- Nine Months Ended June 30, 2003 Compared to Nine Months
Ended June 30, 2002

                              Results of Operations
                             (Dollars in Thousands)
                                   (Unaudited)

<TABLE>
                                                                          Nine Months Ended June 30,

                                                      -------------------------------------------------------------------
                                                           2003                %                2002                 %
                                                      -----------      ------------       ------------       ------------
   <S>                                               <C>                      <C>         <C>                      <C>
    Net Sales
      Safety Products                                 $   176,953              76.2        $   150,417              72.1
      Safety Prescription Eyewear                          30,463              13.1             30,662              14.7
      Specialty Composites                                 24,710              10.7             27,682              13.2
                                                      -----------       -----------        -----------       -----------
         Total net sales                                  232,126             100.0            208,761             100.0

    Cost of Sales                                         121,324              52.3            110,312              52.8

       Gross profit                                       110,802              47.7             98,449              47.2

    Operating Expenses-
      Selling and administrative                           75,407              32.5             68,602              32.9
      Research and technical services                       4,671               2.0              4,251               2.0
      Amortization of intangibles                             194               0.1              4,686               2.2
      Other charges, net                                    1,692               0.7                368               0.2
                                                      -----------       -----------        -----------       -----------
         Total operating expenses                          81,964              35.3             77,907              37.3

    Operating income                                       28,838              12.4             20,542               9.8

    Interest expense, net                                  14,671               6.3             15,018               7.2
                                                      -----------       -----------        -----------      ------------
     Income before provision for income taxes              14,167               6.1              5,524               2.6

    Provision for income taxes                              4,051               1.7              1,936               0.9
                                                      -----------       -----------              -----               ---
    Net income                                             10,116               4.4              3,588               1.7
                                                      ===========       ===========        ===========      ============
</TABLE>

Net Sales.  Net sales in the nine months ended June 30, 2003 increased  11.2% to
$232.1  million from $208.8  million in the nine months ended June 30, 2002. The
increase  in sales was  primarily  driven by the  impact  of  foreign  exchange,
organic growth in the Safety Products segment and acquisitions  partially offset
by volume declines in the Specialty  Composites and Safety Prescription  Eyewear
segments.  The weakness of the U.S.  dollar  relative to other  currencies,  and
acquisitions,  favorably  impacted net sales by $10.9  million and $8.2 million,
respectively.  The Safety  Products  segment net sales in the nine months  ended
June 30, 2003 increased  17.6% to $177.0 million from $150.4 million in the nine
months  ended June 30,  2002.  The  increase in net sales  resulted  from a 6.9%
increase due to organic  growth,  a 7.1% increase due to foreign  exchange and a
3.6% increase due to acquisitions. The Safety Prescription Eyewear segment sales
for the nine months  ended June 30, 2003  decreased  0.6% to $30.5  million from
$30.7 million in the nine months ended June 30, 2002.  The decrease in net sales
resulted from a 10.1%  reduction in volume  partially  offset by a 9.0% increase
from acquisitions and a 0.5 % increase due to foreign exchange. The reduction in
volume experienced by the Safety Prescription Eyewear segment is a result of the
continued decline in industrial  manufacturing  employment in North America. The
Specialty  Composites  segment net sales in the nine months  ended June 30, 2003
decreased  10.7% to $24.7  million  from $27.7  million in the nine months ended
June 30,  2002.  The

                                     - 19 -
<PAGE>

decrease was primarily driven by volume declines in the automotive  market,  the
truck market and the  electronics  segment of the  precision  equipment  market,
which   includes   computers   and  personal   communications   system   ("PCS")
applications.

Gross  Profit.  Gross  profit in the nine months  ended June 30, 2003  increased
12.5% to $110.8  million  from $98.4  million in the nine months  ended June 30,
2002.  The increase in gross  profit is  primarily  due to the impact of foreign
exchange,  productivity  improvements  and  acquisitions.   Gross  profit  as  a
percentage of net sales in the nine months ended June 30, 2003 improved to 47.7%
as compared to 47.2% in the nine months ended June 30, 2002. The increase in the
gross  profit as a  percentage  of net sales is  primarily  due to product  mix,
foreign exchange, and productivity improvements.

Operating  Expenses.  Operating  expenses in the nine months ended June 30, 2003
increased 5.2% to $82.0 million from $77.9 million in the nine months ended June
30, 2002. The increase in operating expenses was primarily driven by an increase
in selling and  administrative  expenses,  research and  technical  services and
other  charges,  net  partially  offset by a decrease in  amortization  expense.
Selling and  administrative  expenses  included  approximately  $2.5  million of
incremental  expenses due to  acquisitions,  $2.5 million due to the weakness of
the U.S dollar as well as increased  spending for product launches and marketing
support.  Research and technical services expense increased $0.4 million related
to new product development. The increase in other charges, net was primarily due
to foreign exchange losses.  Amortization  expense decreased  approximately $4.5
million due the  adoption of SFAS No. 142.  SFAS No. 142 requires the Company to
no longer amortize  goodwill and other intangibles with indefinite useful lives.
Amortization  expense would have been reduced by approximately  $4.5 million had
the  provisions  of SFAS No. 142 been  adopted in the nine months ended June 30,
2002. Selling and administrative expenses as a percentage of net sales decreased
to 32.5% in the nine months ended June 30, 2003 as compared to 32.9% in the nine
months ended June 30, 2002.

Operating  Income.  Primarily  as a  result  of  the  factors  mentioned  above,
operating  income increased 40.4% to $28.8 million in the nine months ended June
30, 2003 from $20.5  million in the nine months ended June 30,  2002.  Operating
income as a  percentage  of net sales in the nine  months  ended  June 30,  2003
increased to 12.4% as compared to 9.8% in the nine months ended June 30, 2002.

Interest Expense,  Net. Interest expense,  net in the nine months ended June 30,
2003 decreased 2.3% to $14.7 million from $15.0 million in the nine months ended
June 30, 2002. The decrease is attributed to lower weighted  average  borrowings
and interest rates in effect for the nine months ended June 30, 2003 as compared
to the nine months ended June 30, 2002.

Provision  For Income Taxes.  The  provision for income taxes  increased to $4.1
million in the nine  months  ended June 30,  2003 from $1.9  million in the nine
months ended June 30,  2002.  The  effective  tax rates in the nine months ended
June 30, 2003 and 2002 was different  from the statutory  rate due to the mix of
income between the Company's foreign subsidiaries and domestic subsidiaries. The
Company's foreign subsidiaries had taxable income in their foreign jurisdictions
while the Company's  domestic  subsidiaries  generated net operating losses. The
domestic  subsidiaries  have net operating  loss  carry-forwards  for income tax
purposes.  Due to the  uncertainty  of  realizing  these tax  benefits,  the tax
benefits  generated  by the net  operating  losses  have been fully  offset by a
valuation allowance.

Net Income.  For the nine months  ended June 30, 2003 the Company had net income
of $10.1  million as compared to $3.6 million for the nine months ended June 30,
2002.

Effects of Changes in Exchange Rates

In general,  the  Company's  results of  operations  are  affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and Canada in local  currencies.  While many of the

                                     - 20 -
<PAGE>

Company's  selling  and  distribution   costs  are  also  denominated  in  these
currencies,  a large portion of product costs are U.S. Dollar denominated.  As a
result,  a decline in the value of the U.S. Dollar relative to other  currencies
can have a favorable impact on the  profitability of the Company and an increase
in the value of the U.S.  Dollar  relative to these other  currencies can have a
negative effect on the  profitability  of the Company.  Since the acquisition of
Peltor, the Company's  operations are also affected by changes in exchange rates
relative to the Swedish Krona.  In contrast to the above, a decline in the value
of the Krona  relative to other  currencies  can have a favorable  impact on the
profitability  of the Company and an increase in the value of the Krona relative
to other  currencies  can have a  negative  impact on the  profitability  of the
Company.  The Company  utilizes  forward  foreign  currency  contracts and other
hedging instruments to mitigate the effects of changes in foreign currency rates
on profitability.

Effects of Inflation

In recent  years,  inflation  has been modest and has not had a material  impact
upon the results of the Company's operations.

Effects of Economic Conditions

Softening of the North American economy began during the first fiscal quarter of
2001. Since that time the overall economic  downturn has resulted in declines in
manufacturing employment and overall consumer confidence.  These reductions have
had a significant impact on the revenues of the Safety Prescription  Eyewear and
Specialty   Composites  segments.   The  Safety  Products  segment,   which  has
experienced  revenue  growth in the first nine months of fiscal  2003,  has been
able to offset these declines through continued product  innovations.  There can
be no  assurances,  given  the  current  economic  conditions,  that the  Safety
Products  segment will  maintain  these trends for the  remainder of this fiscal
year and beyond.

Liquidity and Capital Resources

The Company's  sources of funds have consisted  primarily of operating cash flow
and debt  financing.  The Company's  uses of those funds consist  principally of
debt service, capital expenditures and acquisitions.

The Company's debt structure includes:  (a) $98.0 million of Senior Subordinated
Notes  ("Notes")  due 2005,  which are publicly  held and are  redeemable at the
option of the Company,  in whole or in part, at various  redemption  prices, and
(b) up to an aggregate of $135.0  million under a credit  agreement with various
banks  comprised  of (i) a  secured  term  loan  facility  consisting  of  loans
providing for up to $100.0 million of term loans (collectively the "Term Loans")
with a portion  of the Term Loans  denominated  in  foreign  currencies,  (ii) a
secured revolving credit facility ("Revolving Credit Facility") providing for up
to $30.0 million of revolving loans for general corporate  purposes and, (iii) a
U.K.  overdraft facility of up to an equivalent of $5.0 million in Great Britain
Pounds for working capital requirements as needed (collectively the "Senior Bank
Facilities").  The amounts  outstanding  on the Term Loans at June 30, 2003 were
approximately  $88.1 million.  No amounts were  outstanding  under the Revolving
Credit or U.K. overdraft facilities.

Under the terms of both the  Senior  Bank  Facilities  and the Notes  indenture,
Aearo  Company is  required  to comply  with  certain  financial  covenants  and
restrictions.  Aearo Company was in compliance with all financial  covenants and
restrictions at June 30, 2003.

During the first  quarter  of fiscal  2002,  the  Company's  Board of  Directors
authorized  management  to  repurchase  from  time to  time,  a  portion  of the
Company's Notes,  subject to market conditions and other factors.  No assurances
can be given as to whether or when or at what price such  purchases  will occur.
Subsequently,  pursuant to a first amendment to the Senior Bank Facilities,  the
Company purchased and retired $2.0 million of the Notes during the first quarter
of fiscal 2002.

                                     - 21 -
<PAGE>

Maturities  under the Company's Term Loans are:  approximately  $3.2 million for
the remainder of fiscal 2003,  $17.3  million in fiscal 2004,  and $67.6 million
thereafter.  The Company is required to make  interest  payments with respect to
both the Senior Bank Facilities and the Notes.  The Company's  Revolving  Credit
Facility and Term Loans mature in March 2005.

The  Company's  net cash  provided by operating  activities  for the nine months
ended June 30, 2003 totaled  $28.1  million as compared to $14.9 million for the
nine months ended June 30, 2002. The increase of $13.2 million was primarily due
to a $10.8  million  improvement  in the  Company's  net  changes  in assets and
liabilities  and an increase of $2.4 million in net income adjusted for non-cash
charges  (depreciation,  amortization,  deferred taxes and other). The Company's
net changes in assets and  liabilities  were primarily  driven by an increase in
cash from  receivables,  accounts  payable,  accrued  liabilities,  income taxes
payable and inventory partially offset by a reduction of other, net.

Net cash used by  investing  activities  was $18.6  million  for the nine months
ended June 30, 2003 as compared to $13.2  million for the nine months ended June
30, 2002. The increase of $5.4 million in net cash used by investing  activities
is primarily  attributed to an increase in  acquisitions  of $3.8 million and an
increase in capital expenditures of $1.6 million.

Net cash used by  financing  activities  for the nine months ended June 30, 2003
was $9.8 million  compared  with net cash used by financing  activities  for the
nine months ended June 30, 2002 of $8.4  million.  The change of $1.4 million is
primarily due to an increase in the repayment of Term Loans partially  offset by
no repayment for the Notes in the nine months ended June 30, 2003 as compared to
the nine months ended June 30, 2002.

On June 27,  2003,  the  Company  signed an  agreement  with Cabot  Corporation,
subject to, among other things,  the approval of the Company's  bank lenders and
receipt  of  financing,  to  redeem  all of the  common  and  preferred  shares,
including accrued dividends,  held by Cabot for approximately $33.5 million. The
Company  expects  to  finance  the  redemption  with a  combination  of cash and
additional  borrowings.  This  transaction  is expected to close  during the 4th
quarter.

The Company  maintains a  non-contributory  defined benefit cash balance pension
plan. The Company utilizes an outside actuarial firm to estimate pension expense
and funding  based on various  assumptions  including  the discount rate and the
expected  long-term  rate of return on plan assets.  In developing  the expected
long-term rate of return assumption,  the Company's  management  evaluates input
from outside  investment  advisors and  actuaries  as of the  measurement  date.
Beginning  in fiscal year 2000,  the actual  assets  returns  for the  Company's
pension plan have been adversely affected by the continued  deterioration in the
equity  markets.  During that time,  the asset returns on the Company's  pension
plan have been negative.  Although  short-term  trends have been  negative,  the
Company  believes  that an 8.5%  long-term  rate of  return  on plan  assets  is
reasonable  based on historical  trends over a 20-30 year period.  The estimated
effect of a 1% change in the  expected  long-term  rate of return on plan assets
results in a $0.1 million impact on pension expense.  The discount rate has also
declined  from 7.75% to 6.75%  during the same  period.  The  Company  bases the
discount  rate on the Aa Corporate  bond yields.  The  estimated  impact of a 1%
change in the discount rate results in a $0.2 million impact on pension expense.

The  negative  asset  returns  and  declining  discount  rates are  expected  to
unfavorably  impact the Company's  pension  expense and the funded status of the
pension plan. Under minimum funding rules, no additional  pension  contributions
are required to be made in fiscal 2003.  However,  contributions may increase in
future years.  Due to the  uncertainty  of the future  returns of the equity and
corporate  bond  markets,  it is  difficult  to  estimate  the impact of pension
contributions in the future.

The Company has a  substantial  amount of  indebtedness.  The Company  relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain  customary

                                     - 22 -
<PAGE>

drawing  conditions) to meet its liquidity needs.  The Company  anticipates that
operating  cash  flow  will  be  adequate  to meet  its  operating  and  capital
expenditure  requirements  for the next several years,  although there can be no
assurances  that  existing  levels of sales and  normalized  profitability,  and
therefore cash flow, will be maintained.  In particular,  since fiscal 2001, the
Company has been  affected  by the  significant  slowdown  in the  manufacturing
sector of the  economies  in which the  Company  markets  its  products  and the
related reductions in manufacturing employment, exacerbated by the impact of the
terrorist  events of September 11, 2001. The Company  expects to arrange for new
financing of both the Senior Bank  Facilities  and the Notes before the maturity
of the Senior Bank Facilities in June 2005.  There can be no assurances that any
additional  financing  or other  sources of  capital  will be  available  to the
Company at  acceptable  terms,  or at all. The  inability  to obtain  additional
financing  would  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.

                                     - 23 -
<PAGE>


Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks related to changes in foreign currencies,
interest rates and commodity  pricing.  The Company uses derivatives to mitigate
the impact of changes in foreign  currencies and interest rates. All derivatives
are for purposes other than trading.  The Company adopted the provisions of SFAS
No. 133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities" on
October 1, 2000. The Company has formally documented its hedging  relationships,
including  identification of hedging instruments and the hedge items, as well as
its risk management objectives.

Foreign Currency Risk

The  Company's  results  of  operations  are  subject to risks  associated  with
operating in foreign  countries,  including  fluctuations  in currency  exchange
rates.   While  many  of  the  Company's  selling  and  distribution  costs  are
denominated  in Canadian and  European  currencies,  a large  portion of product
costs are U.S. Dollar  denominated.  As a result,  a decline in the value of the
U.S.  Dollar  relative to other  currencies  can have a favorable  impact on the
profitability  of the Company  and an  increase in the value of the U.S.  Dollar
relative  to  these  other   currencies  can  have  a  negative  effect  on  the
profitability  of the Company.  Since the  acquisition of Peltor,  the Company's
operations  are also  affected  by changes in  exchange  rates  relative  to the
Swedish  Krona.  In contrast with the above, a decline in the value of the Krona
relative to other currencies can have a favorable impact on the profitability of
the  Company  and an  increase  in the  value  of the  Krona  relative  to other
currencies can have a negative impact on the  profitability of the Company.  The
Company executes two hedging programs,  one for transaction  exposures,  and the
other for cash flow exposures in European  operations.  The Company has utilized
forward  foreign  currency  contracts for  transaction  and cash flow exposures.
During the nine months  ended June 30,  2003,  cash flow hedge  losses were $1.7
million and gains on transaction  exposures were $0.2 million. In addition,  the
Company  limits  foreign  exchange  impacts on the  balance  sheet with  foreign
denominated debt in Great Britain Pound Sterling, Euros and Canadian dollars.

The Company  adopted SFAS No. 133  "Accounting  for Derivative  Instruments  and
Hedging  Activities"  on  October  1, 2000.  SFAS No.  133  requires  that every
derivative  instrument  be recorded  in the balance  sheet as either an asset or
liability  measured at its fair value. As a result of forward  foreign  currency
contracts,  the Company has recorded a derivative  payable of $0.5 million as of
June 30, 2003. The forward foreign currency  contracts will expire over the next
three months.

Interest Rates

The Company is exposed to market  risk  changes in  interest  rates  through its
debt.  The Company  utilizes  interest rate  instruments to reduce the impact of
either increases or decreases in interest rates on its floating rate debt.

As a result of the current  economic  slowdown and  corresponding  interest rate
reductions,  the Company  entered into an interest  rate collar  arrangement  in
October 2001 to protect $25.0 million of the outstanding variable rate term loan
debt from future interest rate  volatility.  The collar floor is set at 2% LIBOR
(London  Interbank  Offering  Rate) and cap at 6.25%  LIBOR.  The collar was not
designated  as a hedge  under  SFAS No. 133 and  accordingly,  the fair value of
gains or losses was charged to earnings.

The  Company is of the opinion  that it is well  positioned  to manage  interest
exposures  in the short term.  The Company  continues to monitor  interest  rate
movements and has mitigated  the risks of potential  interest rate  fluctuations
through the use of the aforementioned interest rate instruments.

                                     - 24 -
<PAGE>

Commodity Risk

The Company is subject to market risks with respect to industry pricing in paper
and crude oil as it relates  to various  commodity  items.  The  Company is also
exposed to market  risks for  electricity,  fuel oil and natural gas consumed in
its operations.  Items with potential  impact are paperboard,  packaging  films,
nylons,  resins,  propylene,  ethylene,  plasticizer  and  freight.  The Company
manages pricing  exposures on larger volume  commodities such as  polycarbonate,
polyols and  polyvinyl  chloride via price  negotiations  utilizing  alternative
supplier  competitive  pricing. The Company sources some products and parts from
Far East sources where resource  availability,  competition,  and infrastructure
stability has provided a favorable purchasing environment.  The Company does not
enter into derivative instruments to manage commodity risk.

                                     - 25 -
<PAGE>

Item 4. Controls and Procedures

Disclosure  controls and  procedures  are defined by the Securities and Exchange
Commission as those  controls and other  procedures  that are designed to ensure
that  information  required to be disclosed in the  Company's  filings under the
Securities Act of 1934 is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.  The Company's Chief Executive  Officer and Chief Financial  Officer have
evaluated the Company's  disclosure  controls and procedures as of June 30, 2003
and have determined that such disclosure controls and procedures are effective.

Changes in Controls and Procedures

During the quarter  ended June 30,  2003,  there was no change in the  Company's
internal controls over financial reporting that has materially  affected,  or is
reasonably  likely to  materially,  affect the Company's  internal  control over
financial reporting.

                                     - 26 -
<PAGE>

                           Part II - Other Information

Item 1. Legal Proceedings

Contingencies  Various  lawsuits  and claims  arise  against  the Company in the
ordinary course of its business.  Most of these lawsuits and claims are products
liability  matters that arise out of the use of safety  eyewear and  respiratory
product  lines  manufactured  by the Company as well as products  purchased  for
resale.  In  addition,  the Company may be  contingently  liable with respect to
numerous  lawsuits  involving  respirators  sold by its  predecessors,  American
Optical  Corporation and Cabot  Corporation,  arising out of agreements  entered
into when the AOSafety(R)  Division was sold by American Optical  Corporation to
Cabot in April 1990 and when later sold by Cabot to the  Company in 1995.  These
lawsuits typically involve plaintiffs  alleging that they suffer from asbestosis
or silicosis, and that such condition results in part from respirators that were
negligently designed or manufactured. The defendants in these lawsuits are often
numerous, and include, in addition to respirator manufacturers, employers of the
plaintiffs  and  manufacturers  of sand (used in sand  blasting)  and  asbestos.
Responsibility  for legal costs, as well as for  settlements  and judgments,  is
shared contractually by the Company,  Cabot,  American Optical Corporation and a
prior owner of American  Optical  Corporation.  Liability is allocated among the
parties  based on the number of years each Company  owned the AOSafety  Division
and the alleged  years of exposure of the  individual  plaintiff.  The Company's
share of the  contingent  liability is further  limited by an agreement  entered
into  between the Company and Cabot on July 11, 1995,  as amended in 2002.  This
agreement  provides  that, so long as the Company pays to Cabot an annual fee of
$400,000,  Cabot will retain responsibility and liability for, and indemnify the
Company against,  asbestos and  silica-related  legal claims asserted after July
11, 1995 and alleged to have arisen out of the use of respirators  while exposed
to asbestos or silica prior to January 1, 1997. To date, the Company has elected
to pay the  annual  fee.  The  Company  could  potentially  be liable  for these
exposures  if the  Company  elects  to  discontinue  its  participation  in this
arrangement,  or if Cabot is no  longer  able to meet its  obligations  in these
matters.  With these  arrangements in place,  however,  the Company's  potential
liability  is  limited  to  exposures  alleged  to have  arisen  from the use of
respirators while exposed to asbestos or silica on or after January 1, 1997. The
Company  also  may be  responsible  for  certain  claims  relating  to  acquired
companies other than the  AOSafety(R)  Division that are not covered by, and are
unrelated to, the agreement with Cabot.

At June 30, 2003,  the Company has recorded  liabilities of  approximately  $4.8
million,  which represents  reasonable estimates of its probable liabilities for
product liabilities  substantially related to asbestos and silica-related claims
as determined by the Company in  consultation  with an  independent  consultant.
This reserve is re-evaluated  periodically and additional  charges or credits to
operations may result as additional  information  becomes available.  Consistent
with the current environment being experienced by companies involved in asbestos
and  silica-related  litigation,  there has been an  increase  in the  number of
asserted  claims that could  potentially  involve the Company.  Various  factors
increase the difficulty in determining  the Company's  potential  liability,  if
any, in such claims,  including the fact that the  defendants in these  lawsuits
are often numerous and the claims generally do not specify the amount of damages
sought.  Additionally,  the bankruptcy  filings of other companies with asbestos
and  silica-related  litigation  could increase the Company's cost over time. In
light of these and other uncertainties inherent in making long-term projections,
the Company has determined that the five-year  period through fiscal 2007 is the
most reasonable time period for projecting  asbestos and  silica-related  claims
and defense costs.  It is possible that the Company may incur  liabilities in an
amount in excess of amounts  currently  reserved.  However,  taking into account
currently available information, historical experience, and the Cabot agreement,
but  recognizing  the inherent  uncertainties  in the  projection  of any future
events, it is management's  opinion that these suits or claims should not result
in final  judgments or settlements  in excess of the Company's  reserve that, in
the  aggregate,  would  have  a  material  effect  on  the  Company's  financial
condition, liquidity or results of operations.

                                     - 27 -
<PAGE>

     Item 2.      Changes in Securities and Use of Proceeds
             None.

     Item 3.      Defaults Upon Senior Securities
             None.

     Item 4.      Submission of Matters to a Vote of Security Holders
             None.

     Item 5.      Other Information

On June 27,  2003,  the  Company  signed an  agreement  with Cabot  Corporation,
subject to, among other things,  the approval of the Company's  bank lenders and
receipt  of  financing,  to  redeem  all of the  common  and  preferred  shares,
including accrued dividends,  held by Cabot for approximately $33.5 million. The
Company  expects  to  finance  the  redemption  with a  combination  of cash and
additional  borrowings.  This  transaction  is expected to close  during the 4th
quarter.

     Item 6.      Exhibits and Reports on Form 8-K

                  a) See Index of Exhibits on page 31 hereof.

                  b) Reports on Form 8-K

                  On May 15, 2003,  the Company filed a Current Report on Form
                  8-K to announce its second quarter results of operations.

                  On July 24, 2003, the Company filed a Current Report on Form
                  8-K to announce its third quarter  results of operations and
                  share redemption.

                                     - 28 -
<PAGE>
                                   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.

Date:   August 14, 2003              AEARO CORPORATION

                                     /s/ Jeffrey S. Kulka

                                     ----------------------------------
                                     Jeffrey S. Kulka

                                     Vice President, Chief Financial
                                     Officer, Treasurer, and
                                     Secretary
                                    (Principal Financial and Accounting Officer)

                                     - 29 -
<PAGE>




                                  Exhibit Index

EXHIBITS                DESCRIPTION
---------               ------------

31.1                    Certification of Principal Executive Officer
31.2                    Certification of Principal Financial Officer