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 December 31, 2002


                         Commission file number 33-96190


                                AEARO CORPORATION
             (Exact name of registrant as specified in its charter)

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


               Delaware                                13-3840450
     (State or other jurisdiction of       (IRS Employer Identification No.)
     incorporation or 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 February 13, 2003 was 101,912.5.


                                     <PAGE>


                                Aearo Corporation
                                TABLE OF CONTENTS
           Form 10-Q for the Quarterly Period Ended December 31, 2002

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............23

Item 4. Controls and Procedures...............................................25

PART II - OTHER INFORMATION...................................................26

Item 1.    Legal Proceedings..................................................26

Item 2.    Changes in Securities and Use of Proceeds..........................27

Item 3.    Defaults Upon Senior Securities....................................27

Item 4.    Submission of Matters to a Vote of Security Holders................27

Item 5.    Other Information..................................................27

Item 6.    Exhibits and Reports on Form 8-K...................................27

SIGNATURES....................................................................28






<PAGE>


                          PART I-FINANCIAL INFORMATION

Item 1   Financial Statements



                                AEARO CORPORATION
                 Condensed Consolidated Balance Sheets - Assets
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                           December 31,      September 30,
                                                               2002              2002
                                                              ------           -------
                                                           (Unaudited)
<S>                                                         <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents .............................   $ 16,099          $ 14,480
  Accounts receivable (net of allowance for doubtful
    accounts of $1,608 and $1,524, respectively).........     39,014            46,478
  Inventories ...........................................     37,521            33,161
  Deferred and prepaid expenses .........................      3,688             3,449
                                                              ------            ------
    Total current assets ................................     96,322            97,568
                                                              ------            ------

LONG TERM ASSETS:
  Property, plant and equipment, net ....................     48,454            48,096
  Intangible assets, net ................................    125,592           121,979
  Other assets ..........................................      2,704             2,526
                                                             -------           -------

      Total assets ......................................   $273,072          $270,169
                                                            ========          ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidates
                             finanical statements.


                                      -3-
<PAGE>



                                AEARO CORPORATION
  Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Equity
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                          December 31,    September 30,
                                                             2002             2002
                                                          ----------       ----------
                                                          (Unaudited)
<S>                                                        <C>              <C>
CURRENT LIABILITIES:
  Current portion of long-term debt ....................   $  14,481        $  12,847
  Accounts payable and accrued liabilities .............      33,269           36,410
  Accrued interest .....................................       5,628            2,568
  U.S. and foreign income taxes ........................       1,741            1,156
                                                           ---------        ---------
        Total current liabilities ......................      55,119           52,981
                                                           ---------        ---------

  Long-term debt .......................................     179,644          182,715
  Deferred income taxes ................................         843              800
  Other liabilities ....................................      12,621           12,129
                                                           ---------        ---------
        Total liabilities ..............................   $ 248,227        $ 248,625
                                                           ---------        ---------

COMMITMENTS AND CONTINGENCIES:
Preferred stock, $.01 par value-
(Redemption value of $112,901 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 ...........................      32,242           32,254
   Retained earnings ....................................       7,867            6,825
   Accumulated other comprehensive loss .................     (15,265)         (17,536)
                                                            ---------        ---------
         Total stockholders' equity .....................      24,845           21,544
                                                            ---------        ---------
         Total liabilities and stockholders' equity .....   $ 273,072        $ 270,169
                                                            =========        =========
</TABLE>


  The accompanying notes are an integral part of these condensed consolidates
                             finanical statements.


                                      -4-
<PAGE>


                 Condensed Consolidated Statements of Operations
                             (DOLLARS IN THOUSANDS)
                                   (Unaudited)

                                                      For the Three Months Ended
                                                               December 31,
                                                        ------------------------
                                                             2002        2001
                                                           --------   ----------

NET SALES ..............................................   $ 68,717   $ 61,643

COST OF SALES ..........................................     35,645     32,928
                                                           --------   --------

         Gross profit ..................................     33,072     28,715

SELLING AND ADMINISTRATIVE .............................     24,321     20,856

RESEARCH AND TECHNICAL SERVICES ........................      1,583      1,369

AMORTIZATION OF INTANGIBLES ............................        116      1,559

OTHER CHARGES, NET .....................................        458          9
                                                           --------   --------

         Operating income ..............................      6,594      4,922

INTEREST EXPENSE, NET ..................................      4,942      5,110
                                                           --------   --------

         Income (loss) before provision for income taxes      1,652       (188)

PROVISION FOR INCOME TAXES .............................        610        523
                                                           --------   --------

         Net income (loss) .............................   $  1,042   $   (711)
                                                           ========   ========

  The accompanying notes are an integral part of these condensed consolidates
                             finanical statements.




                                      -5-
<PAGE>


                 Condensed Consolidated Statements of Cash Flows
                             (DOLLARS IN THOUSANDS)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                       For the Three Months Ended
                                                                                               December 31,
                                                                                         ---------------------
                                                                                            2002         2001
                                                                                          --------    --------
<S>                                                                                       <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ..................................................................   $  1,042    $   (711)
   Adjustments to reconcile net income (loss) to cash provided by operating activities-
      Depreciation ....................................................................      2,659       2,375
      Amortization of intangible assets and deferred financing costs ..................        516       1,866
      Deferred income taxes ...........................................................       --            96
      Other, net ......................................................................        217          15
      Changes in assets and liabilities-(net of effects of acquisitions)
         Accounts receivable ..........................................................      8,145       7,443
         Inventories ..................................................................     (3,793)     (1,073)
         Accounts payable and accrued liabilities .....................................       (867)     (1,017)
         Other, net ...................................................................        265        (890)
                                                                                          --------    --------
              Net cash provided by operating activities ...............................      8,184       8,104
                                                                                          --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant and equipment .........................................     (2,187)     (1,811)
   Cash paid for acquisitions .........................................................     (1,250)       (730)
   Proceeds provided by disposals of property, plant and equipment ....................          5        --
                                                                                          --------    --------
Net cash used by investing activities..................................................     (3,432)     (2,541)
                                                                                          --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of senior subordinated debt ..............................................         --      (2,000)
   Repayment of term loans ............................................................     (3,164)     (2,017)
   Repayment of capital lease obligations .............................................        (49)        (13)
   Repayment of long-term debt ........................................................        (23)        (35)
   Other                                                                                       (12)        (16)
                                                                                          --------    --------
              Net cash used by financing activities ...................................     (3,248)     (4,081)
                                                                                          --------    --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ...............................................        115         301
                                                                                          --------    --------

INCREASE IN CASH AND CASH EQUIVALENTS .................................................      1,619       1,783

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................     14,480      18,233
                                                                                          --------    --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..............................................   $ 16,099    $ 20,016
                                                                                          ========    ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Capital lease obligations ..........................................................   $    430    $  1,285
                                                                                          ========    ========

CASH PAID FOR:
   Interest ...........................................................................   $  1,541    $  1,698
                                                                                          ========    ========
   Income taxes .......................................................................   $      5    $    433
                                                                                          ========    ========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidates
                             finanical statements.


                                      -6-
<PAGE>



                                AEARO CORPORATION
              Notes To Condensed Consolidated Financial Statements
                                DECEMBER 31, 2002

                                   (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.

     Reclassifications.  Certain amounts  included in the prior period financial
     statements  may have been  reclassified  to conform to the  current  period
     presentation.  The  reclassifications  have no impact on net income  (loss)
     previously reported.

     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 an allowance  for doubtful  accounts.  Allowance for
     doubtful  accounts is generally 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  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.



                                      -7-
<PAGE>


                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)


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


     Shipping and Handling Fees and Costs.  Shipping and handling  costs include
     payments to third  parties for the  delivery of products to  customers,  as
     well as internal  salaries and overhead costs  incurred to store,  move and
     prepare  finished  products for shipment.  Shipping and handling  costs are
     included  with  selling and  administrative  expenses  in the  accompanying
     condensed consolidated statement of operations and totaled $4.5 million and
     $4.0 million in the periods ended December 31, 2002 and 2001, respectively.
     The Company  recovers a portion of its shipping and handling costs from its
     customers and records this recovery in net sales.

     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 currently 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 expects to complete the  transitional  impairment test for goodwill
     by the end of the second quarter of fiscal 2003.  Accordingly,  the Company
     has not yet determined what effect,  if any, this impairment test will have
     on the Company's  earnings and financial  position.  Any impairment  charge
     resulting  from  the  impairment  test  for  goodwill  will  be  recognized
     effective October 1, 2002.  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 Company  will no longer
     record  approximately  $5.8  million  of annual  amortization  relating  to
     goodwill  and  indefinite  lived   intangibles.   The  following   presents
     amortization  expense and  proforma  net income for the three  months ended
     December 31, 2002 and 2001 as if SFAS No. 142 had been adopted  (Dollars in
     thousands):

                                                      2002        2001
                                                    --------    --------
     Goodwill amortization                          $     --    $    780

     Trademark amortization                         $     --    $    741

     Other amortization                             $    116    $     38

     Net income                                     $  1,042    $    810


     Other  amortization  relates to patents  and  non-compete  agreements.  The
     Company  amortizes these  intangibles over their legal lives. 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")



                                      -8-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)


     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.

     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  additional
     disclosure  requirements  of SFAS No. 148 are effective for interim periods
     beginning after December 15, 2002.

     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 Company does not expect
     the  adoption  of FIN No.  45 to have a  material  impact  on it  financial
     position or results of operations.

     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 1, 2003 and to variable
     interest  entities in which an  enterprise  obtains an interest  after that
     date.  The  Company  does not expect the  adoption of FIN No. 46 to have an
     impact on its financial position or results of operations.



                                      -9-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)

     Accounting for Derivative  Instruments and Hedging Activities.  The Company
     adopted  the  provisions  of  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 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.  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 (loss). Amounts accumulated in other
     comprehensive  income  (loss) 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 $0.6 million at December 31,
     2002. All forward foreign currency  contracts will expire over the next six
     months.

     During the period ending  December 31, 2002 the Company  reclassified  into
     earnings  a net  loss of  approximately  $0.1  million  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 loss of approximately $ 0.1 million
     for the period ended December 31, 2002.

     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 December 31, 2002
     was $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). Approximately $0.1 million was expensed during the quarter ended
     December 31, 2002.



                                      -10-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)




4)   COMPREHENSIVE INCOME

     Comprehensive   income  (loss)  consisted  of  the  following  (Dollars  in
     thousands):

                                                     Three months ended
                                                         December 31,
                                                  ------------------------
                                                     2002           2001
                                                  (Unaudited)    (Unaudited)
                                                  ---------        -------

     Net income (loss)                            $   1,042       $ (711)

        Foreign currency translation adjustment       2,868           560
        Unrealized gain (loss) on derivative
           instruments                                (597)           209
                                                  ---------       -------
        Comprehensive income                      $   3,313       $    58
                                                  =========       =======

5)   INVENTORIES

     Inventories consisted of the following (Dollars in thousands):

                                        December 31,   September 30,
                                           2002            2002
                                         --------        --------
                                         (Unaudited)
          Raw materials                  $  8,630        $  7,514
          Work in process                  10,131          10,196
          Finished goods                   18,760          15,451
                                         --------        --------
                                         $ 37,521        $ 33,161
                                         ========        ========

     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  amount  outstanding  on the  Term  Loans at  December  31,  2002,  was
     approximately   $92.1  million.  No  amounts  were  outstanding  under  the
     Revolving Credit Facility or the U.K. overdraft facility.



                                      -11-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)


     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 December 31, 2002.

     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  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 December 31, 2002, the Company has recorded liabilities of approximately
     $4.6 million, which represents reasonable estimates of its probable


                                      -12-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)

     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.

     Net Sales by Business Segment (Dollars in thousands):

                                         Three Months Ended
                                            December 31,
                                   --------------------------------
                                          2002             2001
                                   ----------------   -------------
                                     (Unaudited)         (Unaudited)

    Safety Products                $    50,486         $     45,006
    Safety Prescription Eyewear          9,804                8,994
    Specialty Composites                 8,427                7,643
                                   -----------         ------------
    Total                          $    68,717         $     61,643
                                   ===========         ============


                                      -13-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)


     Inter-segment  sales from the  Specialty  Composites  segment to the Safety
     Products segment totaled $0.8 million and $0.7 million for the three months
     ended December 31, 2002 and 2001,  respectively.  The  inter-segment  sales
     value is determined at fully absorbed inventory cost at standard rates plus
     25%.

     EBITDA by  Business  Segment and  reconciliation  to income  (loss)  before
     provision for income taxes (Dollars in thousands):

                                                  Three Months Ended
                                                    December 31,
                                             ------------------------------
                                                 2002              2001
                                             ----------          ----------
                                             (Unaudited)         (Unaudited)

     Safety Products                          $    8,984          $    7,982
     Safety Prescription Eyewear                     (81)                254
     Specialty Composites                            713                  31
     Reconciling Items                                13                 597
                                              ----------          ----------
     Total EBITDA                                  9,629               8,864

     Depreciation                                  2,659               2,375
     Amortization                                    116               1,559
     Non-operating Costs                             260                   8
     Interest                                      4,942               5,110
                                              ----------          ----------
     Income (loss) before
     provision for income taxes               $    1,652          $     (188)
                                              ==========          ==========

     EBITDA is  defined by the  Company  as  earnings  before  interest,  taxes,
     depreciation,   amortization,   and   non-operating   income  or   expense.
     Non-operating  income or expense is further defined as extraordinary  gains
     or  losses,  or gains or  losses  from  sales of assets  other  than in the
     ordinary course of business.  While the Company believes EBITDA is a useful
     indicator of its ability to service  debt,  EBITDA should not be considered
     as a  substitute  for net  income  (loss)  determined  in  accordance  with
     accounting principles generally accepted in the United States of America as
     an indicator of operating  performance or as an alternative to cash flow as
     a measure of liquidity.  Investors should be aware that EBITDA as presented
     above may not be comparable to similarly titled measures presented by other
     companies  and  comparisons  could be  misleading  unless all companies and
     analysts calculate this measure in the same fashion.

9)   RESTRUCTURING CHARGE

     During fiscal 2001, the Company recorded an unusual charge of $11.4 million
     relating to a  restructuring  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 unusual  charge  included cash charges of $2.3 million,  which includes
     $1.8 million for severance and other separation costs to cover the


                                      -14-
<PAGE>
                                AEARO CORPORATION
              Notes To Consolidated Condensed Financial Statements
                                DECEMBER 31, 2002

                                   (Unaudited)


     reduction  of 5% of the  Company's  work force and $0.5  million  for other
     costs associated with this plan. The unusual 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.

     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 three months ended  December 31, 2002  (Dollars in
     thousands):



                                 September 30,                December 31,
                                     2002         Charges         2002
                                  ---------     -----------    ----------
    Employee termination costs    $     730     $    (129)     $     601
    Lease agreements                  2,352          (224)         2,128
    Loss on disposal of assets          700                          700
    Other                                47           (17)            30
                                  ---------     -----------    ----------
    Total                         $   3,829     $    (370)     $   3,459
                                  =========    ===========    ==========


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 proforma  consolidated  results would not be
     materially  different  from  actual  results  for the  three  months  ended
     December 31, 2001.





                                      -15-
<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

                              Results of Operations
                             (Dollars in Thousands)
                                   (Unaudited)

                                          Three months ended December 31,
                                    -------------------------------------------
                                       2002        %          2001          %
                                    ---------    ------     ---------    ------
Net Sales
 Safety Products                    $ 50,486      73.5      $ 45,006       73.0
 Safety Prescription Eyewear           9,804      14.3         8,994       14.6
 Specialty Composites                  8,427      12.2         7,643       12.4
                                    ---------    ------     ---------    ------
     Total net sales                  68,717     100.0        61,643      100.0
Cost of Sales                         35,645      51.9        32,928       53.4
                                    ---------    ------     ---------    ------
Gross profit                          33,072      48.1        28,715       46.6
Operating Expenses
 Selling and administration           24,321      35.4        20,856       33.8
 Research and technical services       1,583       2.3         1,369        2.2
 Amortization                            116       0.1         1,559        2.5
 Other charges, net                      458       0.7             9         --
                                    ---------    ------     ---------    ------
     Total operating expenses         26,478      38.5        23,793       38.6
Operating income                       6,594       9.6         4,922        8.0
Interest expense, net                  4,942       7.2         5,110        8.3
                                   ---------    ------     ---------     ------
Income (loss) before provision for
income taxes                           1,652       2.4          (188)      (0.3)
Provision for income taxes               610       0.9           523        0.8
                                   ---------    ------     ---------    -------
Net income (loss)                  $   1,042       1.5     $    (711)      (1.2)
                                   =========    ======     =========    =======
EBITDA                             $  9,629       14.0     $   8,864       14.4
                                   =========    ======     =========    =======






                                      -16-
<PAGE>




     Results of Operations  -- Three Months Ended  December 31, 2002 Compared to
     Three Months Ended December 31, 2001

     Net Sales.  Net sales in the three months ended December 31, 2002 increased
     11.5% to $68.7  million  from  $61.6  million  in the  three  months  ended
     December 31, 2001. The increase in net sales was primarily driven by volume
     growth,  the  impact of  acquisitions  and  foreign  exchange.  The  Safety
     Products  segment net sales in the three  months  ended  December  31, 2002
     increased  12.2% to $50.5  million  from $45.0  million in the three months
     ended  December 31, 2001.  The increase in net sales was  primarily  due to
     volume  growth,  the  impact of  acquisitions  and  foreign  exchange.  The
     weakness of the U.S. dollar relative to other  currencies had the impact of
     increasing  sales by $2.0 million in the three  months  ended  December 31,
     2002 as compared to the three  months ended  December 31, 2001.  The Safety
     Products segment sales included  approximately $1.4 million of sales due to
     acquisitions made in fiscal 2002. The Safety  Prescription  Eyewear segment
     net sales in the three months ended  December  31, 2002  increased  8.9% to
     $9.8 million from $9.0 million in the three months ended December 31, 2001.
     The Safety  Prescription  Eyewear segment net sales included  approximately
     $1.2  million of sales due to  acquisitions  made in fiscal 2002 as well as
     the acquisition of Industrial Protection Products, Inc. on October 7, 2002.
     Specialty Composites' net sales in the three months ended December 31, 2002
     increased 10.5% to $8.4 million from $7.6 million in the three months ended
     December 31, 2001. The increase was primarily driven by volume increases in
     the truck market,  the aircraft 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  December 31, 2002
     increased  15.2% to $33.1  million  from $28.7  million in the three months
     ended  December 31, 2001.  The increase in gross profit is primarily due to
     improved   sales   volumes,    continued   productivity   improvements   in
     manufacturing  operations,  the impact of  acquisitions  and the effects of
     foreign  exchange.  Gross profit as a percentage  of net sales in the three
     months ended  December  31, 2002  improved to 48.1% as compared to 46.6% in
     the three months ended  December 31, 2001. The increase in the gross profit
     percentage  of  net  sales  is  primarily  due  to  continued  productivity
     improvements in manufacturing operations.

     Operating  Expenses.  Operating expenses in the three months ended December
     31, 2002  increased  11.3% to $26.5 million from $23.8 million in the three
     months  ended  December 31,  2001.  The increase in operating  expenses was
     primarily driven by increased  spending in selling and  administrative  and
     other charges  (income),  net,  partially  offset by amortization  expense.
     Selling and administrative  expenses included approximately $1.0 million of
     expenses due to  acquisitions  and $0.5 million due to foreign  exchange as
     well as increased  spending to support new product launches and build brand
     support.  Selling and administrative  expenses as a percentage of net sales
     increased to 35.4% in the three months ended  December 31, 2002 as compared
     to 33.8% in the three months ended December 31, 2001.  Amortization expense
     decreased approximately $1.4 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.  Had the provisions of SFAS No.
     142 been adopted in the three months ended December 31, 2001,  amortization
     expense  would  have been  reduced by  approximately  $1.4  million.  Other
     charges,  net was $0.5 million for the three months ended December 31, 2002
     as compared to no expense in the three months ended  December 31, 2001. The
     increase of $0.5 million was primarily driven by assets  write-offs of $0.3
     million and foreign currency transaction and hedge losses of $0.2 million.



                                      -17-
<PAGE>

     Operating  Income.  Primarily as a result of the factors  mentioned  above,
     operating  income increased 34.0% to $6.6 million in the three months ended
     December 31, 2002 from $4.9 million in the three months ended  December 31,
     2001.  Operating  income as a  percentage  of net sales in the three months
     ended  December 31, 2002 increased to 9.6% as compared to 8.0% in the three
     months ended December 31, 2001.

     Interest Expense,  Net.  Interest  expense,  net, in the three months ended
     December 31, 2002  decreased  3.3% to $4.9 million from $5.1 million in the
     three months ended  December 31, 2001.  The decrease is attributed to lower
     weighted  average  borrowings  and  interest  rates in effect for the three
     months  ended  December  31,  2002 as compared  to the three  months  ended
     December 31, 2001.

     Provision  For Income  Taxes.  The  provision for income taxes in the three
     months ended December 31, 2002 was $0.6 million as compared to $0.5 million
     in the three months ended  December 31, 2001. The effective tax rate in the
     three  months  ended  December  31,  2002 and 2001 was  different  from the
     statutory rate due to the mix of income  between the Company's  foreign and
     domestic  subsidiaries.  The  Company's  foreign  subsidiaries  had taxable
     income  in  their  foreign   jurisdictions  while  the  Company's  domestic
     subsidiaries generated a net operating loss. 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 (Loss). For the three months ended December 31, 2002 the Company
     had net income of $1.0  million as compared to net loss of $0.7 million for
     the three months ended December 31, 2001 for the reasons described above.

     EBITDA.  EBITDA is defined  by the  Company as  earnings  before  interest,
     taxes,  depreciation,  amortization,  and non-operating  income or expense.
     Non-operating  income or expense is further defined as extraordinary  gains
     or  losses,  or gains or  losses  from  sales of assets  other  than in the
     ordinary course of business.  While the Company believes EBITDA is a useful
     indicator of its ability to service  debt,  EBITDA should not be considered
     as a substitute  for net income  determined in accordance  with  accounting
     principles  generally  accepted  in the  United  States  of  America  as an
     indicator of operating  performance  or as an alternative to cash flow as a
     measure of  liquidity.  Investors  should be aware that EBITDA as presented
     below may not be comparable to similarly titled measures presented by other
     companies  and  comparisons  could be  misleading  unless all companies and
     analysts calculate this measure in the same fashion.





                                      -18-
<PAGE>




                               EBITDA Calculation
                             (Dollars in Thousands)

                                  Three Months Ended
                                     December 31,               Change
                                  -------------------     --------------------
                                    2002       2001        Amount     Percent
                                  -------     -------     --------    --------
    Operating Income               $ 6,594     $ 4,922     $  1,672     34.0  %
     Add Backs:
      Depreciation                   2,659       2,375          284     12.0
      Amortization of Intangibles      116       1,559       (1,443)      --
      Non-operating costs, net         260           8          252       --
                                   -------     -------     --------    --------
    EBITDA                         $ 9,629     $ 8,864     $    765      8.6  %

    By Segment
     Safety Products                 8,984       7,982        1,002     12.6  %
     Safety Prescription Eyewear       (81)        254         (335)      --
     Specialty Composites              713          31          682       --
     Reconciling Items                  13         597         (584)      --
                                   -------     -------     --------    --------
                                   $ 9,629     $ 8,864     $    765      8.6  %
                                   =======     =======     ========    ========



     EBITDA for the three months ended  December 31, 2002 increased 8.6% to $9.6
     million from $8.9 million for the three months ended December 31, 2001. The
     increase was primarily due to increased volume, the impact of acquisitions,
     the effects of foreign  exchange  and  improved  productivity.  EBITDA as a
     percentage  of net sales in the three  months  ended  December 31, 2002 was
     14.0% as compared to 14.4% in the three months ended December 31, 2001. The
     Safety Products segment EBITDA for the three months ended December 31, 2002
     increased 12.6% to $9.0 million from $8.0 million in the three months ended
     December 31, 2001. The increase was primarily due to increased volume,  the
     impact  of new  product  launches  and  the  positive  effects  of  foreign
     exchange.  The Safety  Prescription  Eyewear  segment  EBITDA for the three
     months  ended  December  31, 2002 was a loss of $0.1 million as compared to
     income of $0.3  million in the three months  ended  December 31, 2001.  The
     decrease  was  primarily  due to  increased  costs  related to  integration
     efforts for  acquisitions and the timing of benefits related to new eyewear
     frame launch. The Specialty  Composites segment EBITDA for the three months
     ended  December 31, 2002 increased to $0.7 million as compared to breakeven
     in the three months ended  December  31, 2001.  The increase was  primarily
     driven by volume increases in the truck market, the aircraft market and the
     electronics  segment of the  precision  equipment  market,  which  includes
     computers and personal communications system (PCS) applications.


     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  currency.  While  many of the
     Company's selling and distribution costs are also denominated in these


                                      -19-
<PAGE>

     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.
     As a result of 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  layoffs  for many  companies  which has also had an  impact on  overall
     consumer confidence. The announced layoffs have had a significant impact on
     the  number of  employed  industrial  workers.  Although  the  Company  has
     experienced  improved  revenue  trends in the first quarter of fiscal 2003,
     there can be no assurances,  given the current  economic  conditions,  that
     these trends will be maintained for the remainder of the fiscal year.

     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  amount  outstanding  on the  Term  Loans at  December  31,  2002,  was
     approximately   $92.1  million.  No  amounts  were  outstanding  under  the
     Revolving Credit Facility or the U.K. overdraft facility.

     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 December 31, 2002.

     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.



                                      -20-
<PAGE>

     Maturities under the Company's Term Loans are  approximately:  $9.6 million
     for the  remainder of fiscal 2003,  $17.0  million in fiscal 2004 and $65.5
     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 three
     months  ended  December  31, 2002  totaled $8.2 million as compared to $8.1
     million for the three months ended  December 31, 2001. The increase of $0.1
     million  was due  primarily  to a $1.1  million  improvement  in net income
     (loss) adjusted for cash and non-cash charges (depreciation,  amortization,
     deferred taxes and other)  partially offset by a $1.0 million net change in
     assets and liabilities. The Company's net changes in assets and liabilities
     was  primarily  driven by a $2.7 million  reduction of cash from  inventory
     partially  offset by a $1.7  million  increase  in cash  from  receivables,
     accounts payable and accrued liabilities and other.

     Net cash used by investing activities was $3.4 million for the three months
     ended  December  31, 2002 as compared to $2.5  million for the three months
     ended  December 31, 2001.  The increase of $0.9 million in net cash used by
     investing activities is primarily attributed to an increase in acquisitions
     of $0.5 million and an increase in capital expenditures of $0.4 million.

     Net cash used by financing  activities  for the three months ended December
     31,  2002 was  $3.2  million  compared  with  net  cash  used by  financing
     activities  for the three months ended  December 31, 2001 of $4.1  million.
     The change of $0.9 million is primarily  due to the repayment of term loans
     in the three months ended December 31, 2002 as compared to the three months
     ended December 31, 2001.

     The Company  maintains  a  noncontributory  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 asset
     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 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


                                      -21-
<PAGE>

     under the Revolving Credit Facility  (subject to certain  customary 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,  during fiscal
     2001 and 2002, the Company was affected by the significant  slowdown in the
     manufacturing  sector of the  economies  in which the  Company  markets its
     products  that began in earnest  during the first fiscal  quarter of fiscal
     2001,  exacerbated  by the impact of the terrorist  events of September 11,
     2001. As a result, it is expected that the Company will continue to operate
     in a challenging sales environment.  The Company expects to arrange for new
     financing of both the Senior Bank  Facilities and the Notes before maturity
     of the Senior Bank  Facilities  in March 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.





                                      -22-
<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. As a result of the acquisition of Peltor, the
     Company's  operations  are also  affected  by  changes  in  exchange  rates
     relative to the Swedish Krona. 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.

     To  mitigate  the  effects  of  changes  in  foreign   currency   rates  on
     profitability   the  Company  executes  two  hedging   programs,   one  for
     transaction  exposures,  and the other for cash flow  exposures in European
     operations.  The Company utilizes  forward foreign  currency  contracts for
     transaction  as well as cash flow  exposures.  For the three  months  ended
     December 31, 2002, net  transaction  losses were $0.1 million and cash flow
     hedge losses were $0.1 million. In addition, the Company limits the foreign
     exchange impact on the balance sheet with foreign denominated debt in Great
     Britain Pound Sterling, Euros and Canadian dollars.

     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 it relates to cash flow  exposures in European  operations,  the Company
     has recorded a derivative  payable of $0.6 million as of December 31, 2002.
     The  forward  foreign  currency  contracts  will  expire  over the next six
     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.

     The Company has approximately $25.0 million of variable rate debt protected
     under an interest rate collar  arrangement  through  December 31, 2003. The
     floor is set at 2% and the cap at 6.25%.  The fair  value of the  collar at
     December  31,  2002 was $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). Approximately $0.1 million was expensed
     during the three months ended December 31, 2002.

     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.


     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


                                      -23-
<PAGE>


     exposed to market risks for electricity,  fuel oil and natural gas consumed
     in its  operations.  Items  with  potential  risk of price  volatility  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 risks.





                                      -24-
<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  within  90  days  prior  to the  filing  of this
     Quarterly  Report on Form  10-Q and have  determined  that such  disclosure
     controls and procedures are effective.


     Subsequent to the Company's  evaluation,  there were no significant changes
     in  internal  controls or other  factors  that could  significantly  affect
     internal  controls,   including  any  corrective  actions  with  regard  to
     significant deficiencies and material weaknesses.




                                      -25-
<PAGE>



     PART II - OTHER INFORMATION


     Item 1. Legal Proceedings


     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 December 31, 2002, the Company has recorded liabilities of approximately
     $4.6  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


                                      -26-
<PAGE>



     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.



     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
             None.

     Item 6. Exhibits and Reports on Form 8-K
             (a) Exhibits
                 None
             (b) Reports on Form 8-K
                 None




                                      -27-
<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:  February 13, 2003                AEARO CORPORATION

                                             /s/ Jeffrey S. Kulka



                                             ---------------------------
                                             Jeffrey S. Kulka
                                             Vice President, Chief Financial
                                             Officer, Treasurer, and Secretary
                                             (Principal Financial and
                                             Accounting Officer)



                                      -28-
<PAGE>



                                  CERTIFICATION



     I, Michael A. McLain,  Principal  Executive  Officer of Aearo  Corporation,
     certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Aearo Corporation;

     2. Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

     4. The  registrant's  other  certifying  officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within  90 days  prior  the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c)  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying  officers and I have disclosed,  based
     on our most recent evaluation,  to the registrant's  auditors and the audit
     committee of  registrant's  board of directors  (or person  performing  the
     equivalent functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
     quarterly  report  whether  there  were  significant  changes  in  internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

     Date: February 13, 2003

                                     /s/ Michael A. McLain



                                     -------------------------------
                                     Michael A. McLain
                                     Chief Executive Officer, President
                                     and Chairman of the Board
                                     (Principal Executive Officer)



                                      -29-
<PAGE>



                                  CERTIFICATION


     I,  Jeffrey S. Kulka,  Principal  Financial  Officer of Aearo  Corporation,
     certify that:


     1. I have reviewed this quarterly report on Form 10-Q of Aearo Corporation;

     2. Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

     4. The  registrant's  other  certifying  officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within  90 days  prior  the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c)  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying  officers and I have disclosed,  based
     on our most recent evaluation,  to the registrant's  auditors and the audit
     committee of  registrant's  board of directors  (or person  performing  the
     equivalent functions):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
     quarterly  report  whether  there  were  significant  changes  in  internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

     Date: February 13, 2003        /s/ Jeffrey S. Kulka



                                    -------------------------
                                    Jeffrey S. Kulka
                                    Vice President, Chief Financial Officer,
                                    Treasurer and Secretary
                                    (Principal Financial Officer)



                                      -30-
<PAGE>