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 March 31, 2001


                         Commission file number 33-96190


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

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


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

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

                                 (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

        The number of shares of the  registrant's  common stock,  par value $.01
per share, outstanding as of May 10, 2001 was 102,087.5




<PAGE>


                                AEARO CORPORATION
                                TABLE OF CONTENTS
                       FORM 10-Q FOR THE QUARTERLY PERIOD
                              ENDED MARCH 31, 2001

PART I.                    FINANCIAL INFORMATION

ITEM 1.                    FINANCIAL STATEMENTS

           CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
           MARCH 31, 2001(UNAUDITED) AND SEPTEMBER 30, 2000                3-4

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           (UNAUDITED) FOR THE THREE MONTH AND SIX MONTH PERIODS
           ENDED MARCH 31, 2001 AND 2000                                    5

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND          6

           NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
           (UNAUDITED)                                                      7-12

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   13-20


ITEM 3.    QUANTITATIVE AND QUALITATIVE
           DISCLOSURES ABOUT MARKET RISK                                   21-22


PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS                                                  23

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS                          23

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES                                    23

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                23

ITEM 5.    OTHER INFORMATION                                                  23

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K                                   23

SIGNATURE PAGE



                                      -2-
<PAGE>









                                     PART I

Item 1.  Financial Statements
                                AEARO CORPORATION

                  CONDENSED CONSOLIDATED BALANCE SHEETS--ASSETS

                             (DOLLARS IN THOUSANDS)




                                                   March 31,    September 30,
                                                      2001          2000
                                                   ---------      ---------
                                                 (Unaudited)
CURRENT ASSETS:
   Cash and cash equivalents                        $  2,833       $  3,495
   Accounts receivable (net of reserve
     for doubtful accounts of $ 798
     and $1,354 respectively)                         42,196         44,342
   Inventories                                        36,283         34,310
   Deferred and prepaid expenses                       3,067          2,623
                                                    --------       --------

         Total current assets                         84,379         84,770
                                                    --------       --------

PROPERTY, PLANT AND EQUIPMENT, NET                    51,878         53,163

INTANGIBLE ASSETS, NET                               120,785        126,242

OTHER ASSETS                                           2,248          2,691
                                                    --------       --------


         Total assets                               $259,290       $266,866
                                                    ========       ========



















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



                                      -3-
<PAGE>



                                AEARO CORPORATION

   CONDENSED CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                            March 31,  September 30,
                                                              2001          2000
                                                           ----------   ----------
                                                          (Unaudited)
CURRENT LIABILITIES:
<S>                                                         <C>          <C>
   Current portion of long-term debt                        $  21,186    $  19,313
   Accounts payable and accrued liabilities                    37,333       39,427
   Accrued interest                                             3,380        3,423
   U.S. and foreign income taxes                                5,543        5,375
                                                            ---------    ---------

         Total current liabilities                             67,442       67,538
                                                            ---------    ---------

LONG-TERM DEBT                                                176,465      180,506

DEFERRED INCOME TAXES                                             403          507

OTHER LIABILITIES                                               2,421        2,466
                                                            ---------    ---------

         Total liabilities                                  $ 246,731    $ 251,017
                                                            ---------    ---------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value-
   (Redemption value of $92,923 and $87,237, respectively)
     Authorized--200,000 shares
     Issued and outstanding--45,000 shares                       --           --
   Common stock, $.01 par value-
     Authorized--200,000 shares
     Issued and outstanding--102,088 and 102,088 at
     March 31, 2001 and September 30, 2000, respectively            1            1
   Additional paid-in capital                                  32,353       32,213
   Retained earnings (deficit)                                     34         (614)
   Accumulated other comprehensive loss                       (19,829)     (15,751)
                                                            ---------    ---------

         Total stockholders' equity                            12,559       15,849
                                                            ---------    ---------

         Total liabilities and stockholders' equity         $ 259,290    $ 266,866
                                                            =========    =========
</TABLE>






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



                                      -4-
<PAGE>



                                AEARO CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                    For the                  For the
                                               Three Months Ended       Six Months Ended
                                                    March 31,               March 31,
                                              --------------------    ----------------------
                                                2001       2000         2001         2000
                                              --------   ---------    ---------    ---------

<S>                                           <C>        <C>          <C>          <C>
NET SALES                                     $ 73,938   $  77,430    $ 142,207    $ 149,624

COST OF SALES                                   39,316      41,431       77,069       80,079
                                              --------   ---------    ---------    ---------

         Gross profit                           34,622      35,999       65,138       69,545

SELLING AND ADMINISTRATIVE                      21,610      23,350       45,497       46,958

RESEARCH AND TECHNICAL SERVICES                  1,365       1,391        2,849        2,718

AMORTIZATION OF INTANGIBLES                      1,634       1,766        3,289        3,491

OTHER CHARGES (INCOME), NET                        514        (374)         523         (409)
                                              --------   ---------    ---------    ---------

         Operating income                        9,499       9,866       12,980       16,787

INTEREST EXPENSE, NET                            5,880       6,212       11,681       12,159
                                              --------   ---------    ---------    ---------

         Income before provision for income
         taxes                                   3,619       3,654        1,299        4,628

PROVISION FOR INCOME TAXES                         584       1,113          651        1,414
                                              --------   ---------    ---------    ---------

         Net income                              3,035       2,541          648        3,214

PREFERRED STOCK DIVIDEND ACCRUED                 2,857       2,544        5,686        5,036
                                              --------   ---------    ---------    ---------

         Net Income (Loss) applicable to
         Common Shareholders                  $    178   $      (3)   $  (5,038)   $  (1,822)
                                              ========   =========    =========    =========


AVERAGE COMMON AND DILUTED COMMON SHARES
OUTSTANDING                                    102,088     101,895      102,088      102,218
                                              ========   =========    =========    =========

BASIC AND DILUTED NET INCOME (LOSS)
PER COMMON SHARE                              $   1.74   $   (0.03)   $  (49.35)   $  (17.82)
                                              ========   =========    =========    =========

</TABLE>


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



                                      -5-
<PAGE>



                                AEARO CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  For the Six Months Ended
                                                                                          March 31,
                                                                                   ---------------------
                                                                                   --------    ---------
                                                                                     2001         2000
                                                                                   --------    ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>         <C>
   Net income                                                                      $    648    $  3,214
   Adjustments to reconcile net income to cash provided by operating activities-
     Depreciation                                                                     5,121       4,863
     Amortization of intangible assets and deferred financing costs                   4,009       4,446
     Deferred income taxes                                                              (85)        (11)
     Other, net                                                                          22          37
     Changes in assets and liabilities-
       Accounts receivable                                                            1,389      (2,431)
       Inventories                                                                   (2,530)     (1,741)
       Accounts payable and accrued liabilities                                      (1,699)       (779)
       Other, net                                                                      (449)       (904)
                                                                                   --------    --------

              Net cash provided by operating activities                               6,426       6,694
                                                                                   --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant and equipment                                        (4,439)     (4,778)
   Cash paid for Norhammer                                                             --        (3,620)
   Proceeds provided by disposals of property, plant and equipment                       36          10
                                                                                   --------    --------

              Net cash used by investing activities                                  (4,403)     (8,388)
                                                                                   --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from revolving credit facility, net                                       7,500      10,250
   Repayment of term loans                                                           (8,895)     (7,210)
   Repayment of external long-term debt                                                  (5)       (161)
   (Repurchase) of common stock, net                                                   --          (286)
   Increase in shareholder notes, net                                                   139        (226)
                                                                                   --------    --------

              Net cash provided (used) by financing activities                       (1,261)      2,367
                                                                                   --------    --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                              (1,424)     (1,466)
                                                                                   --------    --------

DECREASE IN CASH AND CASH EQUIVALENTS                                                  (662)       (793)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                        3,495       4,050
                                                                                   --------    --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                           $  2,833    $  3,257
                                                                                   ========    ========

CASH PAID FOR:
   Interest                                                                        $ 11,040    $ 11,060
                                                                                   ========    ========
   Income taxes                                                                    $  1,001    $    845
                                                                                   ========    ========

</TABLE>



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


                                      -6-
<PAGE>



                                Aearo Corporation

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2001
                                   (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, 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-K.

(2)    FORMATION ACQUISITION AND FINANCING

       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.

       Aearo Corporation was formed by Vestar Equity Partners,  L.P. (Vestar) in
       June 1995 to effect the  acquisition of  substantially  all of the assets
       and liabilities of Cabot Safety  Corporation and certain  affiliates (the
       Predecessor) all of which were wholly owned by Cabot Corporation (Cabot),
       (the Formation Acquisition). The Formation Acquisition closed on July 11,
       1995, when Aearo Corporation acquired substantially all of the assets and
       certain  liabilities of the Predecessor  for cash,  preferred stock and a
       42.5% common  equity  interest in Aearo  Corporation.  Aearo  Corporation
       immediately  contributed  the acquired  assets and  liabilities  to Aearo
       Company, a wholly owned subsidiary of Aearo  Corporation,  pursuant to an
       asset transfer  agreement dated June 13, 1995.  Aearo  Corporation has no
       other material  assets,  liabilities or operations  other than those that
       result from its ownership of the common stock of Aearo Company.

       The  Formation   Acquisition   has  been  accounted  for  as  a  purchase
       transaction  effective as of July 11, 1995, in accordance with Accounting
       Principles  Board Opinion No. 16, Business  Combinations,  and EITF Issue
       No. 88-16, Basis in Leveraged Buyout Transactions,  and accordingly,  the
       consolidated  financial statements for the periods subsequent to July 11,
       1995 reflect the purchase price,  including transaction costs,  allocated
       to tangible and intangible assets acquired and liabilities assumed, based
       on a portion of their  estimated  fair  values as of July 11,  1995.  The
       valuation of assets and liabilities  acquired reflect carryover basis for
       the percentage ownership retained by Cabot.

 (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  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
       previously reported.

                                      -7-
<PAGE>

       Revenue Recognition.  The Company recognizes revenue upon shipment of its
       products to customers,  at which time title of ownership transfers to the
       buyer.

       Foreign  Currency  Translation.  Assets and  liabilities of the Company's
       foreign  operations are translated at period-end  exchange rates.  Income
       and expenses are  translated at the  approximate  average rate during the
       period.  Foreign  currency  translation  adjustments  are  recorded  as a
       separate  component of stockholders'  equity.  Foreign currency gains and
       losses arising from transactions by any of the Company's subsidiaries are
       reflected in net income.

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

       Intangible  Assets.  Intangible assets consist primarily of the goodwill,
       patents,  and trademarks purchased in business  acquisitions.  Intangible
       assets are amortized over their estimated useful lives.

       Income (Loss) per Common  Share.  Basic income (loss) per common share is
       computed by dividing net income (loss) by the weighted  average number of
       shares of common  stock  outstanding  during the period.  Diluted  income
       (loss) per share  reflects  the  potential  dilution  that could occur if
       securities  or other  contracts to issue  common stock were  exercised or
       converted.  As of March 31,  2001 and 2000,  there were  12,189 and 9,883
       options  outstanding,  respectively.  The stock options were not dilutive
       and were not included in the diluted income (loss) per share  calculation
       for the three and six months  ended  March 31,  2001 and 2000.  Basic and
       diluted income (loss) per common share for the three and six months ended
       March 31, 2001 and 2000, were equal; therefore, no reconciliation between
       basic and diluted income (loss) per share is required.

        Accounting  for  Derivative  Instruments  and  Hedging  Activities.  The
       Company  adopted the  provisions  of Statement  of  Financial  Accounting
       Standards  (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 adoption of SFAS No. 133
       on October  1, 2000  resulted  in a $0.4  million  transition  adjustment
       charge to accumulated  other  comprehensive  income to recognize the fair
       value of all derivatives that are designated as cash flow hedges.

       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.  The Company has foreign  currency  exchange  contracts  and
       interest rate swap  agreements,  which are derivatives as defined by SFAS
       No. 133. The Company enters into foreign  currency  forward  contracts to
       mitigate   the   effects  of  changes  in  foreign   currency   rates  on
       profitability  and enters into  interest  rate swap  agreements  to hedge
       their  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.  Amounts accumulated in other comprehensive income
       will be  reclassified  as earnings when the related  product sales affect
       earnings for forward currency contracts or when related interest payments
       affect  earnings  for  interest  rate  swaps.  As a result of the foreign
       currency  forward  contracts and the interest rate swap  agreements,  the
       Company has recorded a derivative  liability of $0.7 million at March 31,
       2001. All forward contracts and swap agreements will expire over the next
       6 months.

       During  the  three  month  period  ending  March  31,  2001  the  Company
       reclassified into earnings a net loss of approximately $321,000 resulting
       from the exercise of foreign currency  contracts and a net loss of $7,000
       resulting  from  interest  rate swap  settlements.  All foreign  currency
       contracts and interest rate swap  agreements were determined to be highly
       effective whereby no ineffectiveness was recorded in earnings.

                                      -8-
<PAGE>

       The Company also  executes  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 $297,000 for the quarter ended March 31, 2001.

(4)    COMPREHENSIVE INCOME

       Comprehensive income consisted of the following (dollars in thousands):

                                       Three Months Ended    Six Months Ended
                                           March 31,            March 31,

                                         2001      2000       2001       2000
                                       -------    -------    -------    --------

Net income                             $ 3,035    $ 2,541    $   648    $ 3,214

    Foreign currency translation
       Adjustment                       (5,089)      (886)    (3,395)    (3,686)
    Unrealized gain (loss) on
       derivative instruments            1,018       --         (683)      --
                                       -------    -------    -------    -------


Comprehensive income (loss)            $(1,034)   $ 1,655    $(3,430)   $  (472)
                                       =======    =======    =======    =======


(5)    INVENTORIES

       Inventories consisted of the following (dollars in thousands):

                                    March 31,              September 30,
                                      2001                     2000
                                 --------------           --------------

                                    (unaudited)

Raw materials                    $        8,466           $        8,246
Work in process                           8,057                    7,662
Finished goods                           19,760                   18,402
                                 --------------           --------------

                                 $       36,283           $       34,310
                                 ==============           ==============

       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.



                                      -9-
<PAGE>

 (6)   DEBT

       The  Company's   debt  structure   includes   $100.0  million  of  Senior
       Subordinated  Notes  (Notes) due 2005,  as well as a senior bank facility
       comprised of (i) term loans denominated in U.S.,  Canadian,  British, and
       German  currencies  (Term  Loans)  and (ii) a  secured  revolving  credit
       facility (Revolving Credit Facility) providing for up to $25.0 million of
       revolving  loans, a portion of which is to be used for general  corporate
       purposes,   and  as  to  $15.0  million  thereof,  to  finance  permitted
       acquisitions  (collectively the Senior Bank Facilities).  Under the terms
       of both the Senior Bank Facilities and the Notes indenture, Aearo Company
       is required to comply with certain financial  covenants and restrictions.
       On December 14, 2000, the Senior Bank Facilities were amended to increase
       the amount available to finance  acquisitions from $15.0 million to $33.0
       million and to modify certain  financial  covenants for periods ending on
       and after  December 31, 2000.  Aearo Company was in  compliance  with all
       financial  covenants  and  restrictions  at March 31,  2001.  The amounts
       outstanding on the term loans and the revolving  credit facility at March
       31,  2001  were   approximately   $77.4   million   and  $17.5   million,
       respectively.

(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
       relate to the Company's safety eyewear and respiratory  product lines and
       primarily  involve   accidents  and/or  exposures   occurring  after  the
       Company's  predecessor  acquired the  AOSafety(R)  Division from American
       Optical  Corporation  in April 1990. The Company is  contingently  liable
       with respect to numerous lawsuits involving  respirators sold by American
       Optical Corporation prior to the acquisition of the AOSafety(R)  Division
       in April 1990. These lawsuits typically involve plaintiffs  alleging that
       they suffer from asbestosis or silicosis, and that such condition results
       in part from respirators which 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,  American Optical Corporation and
       a prior owner of American Optical Corporation. The Company and Cabot have
       entered into an arrangement whereby, so long as the Company pays to Cabot
       an annual fee of  $400,000,  which the Company has elected to pay,  Cabot
       will retain  responsibility  and liability for, and indemnify the Company
       against,  certain legal claims  asserted after July 11, 1995 (the date of
       the Company's  formation)  alleged to arise out of the use of respirators
       manufactured prior to July 1995. The Company has the right to discontinue
       the  payment of such  annual fee at any time,  in which case the  Company
       will assume  responsibility  for and indemnify Cabot with respect to such
       claims  however,  management  intends to continue  the annual  payment of
       $400,000 to Cabot.  The Company may be responsible  for claims alleged to
       arise out of the use of respirators  manufactured  by the Company as well
       as products purchased for resale. The Company may also be responsible for
       certain claims of acquired companies other than the AOSafety(R)  division
       that are not covered by the agreement with Cabot.

       At March 31, 2001 the Company has reserved approximately $4.6 million for
       product liabilities  including those arising from asbestosis or silicosis
       litigation.  The  reserve is  re-evaluated  periodically  and  additional
       charges  to  operations  may  result as  additional  information  becomes
       available.  Consistent with the general  environment being experienced by
       other companies involved in asbestos-related  litigation,  there has been
       an increase in the number of asserted legal 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  related  litigation  could affect the Company's cost over time.
       However,  it is  management's  opinion,  taking  into  account  currently
       available information,  historical experience,  uncertainties,  the Cabot
       agreement,  and the Company's reserve, that these suits and claims should
       not result in final  judgments or  settlements  that,  in the  aggregate,
       would have a material  effect on the  Company's  financial  condition  or
       results of operation.

                                      -10-
<PAGE>

(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 to External Customers by Business Segment (Dollars in thousands)

                                      Three Months Ended     Six Months Ended
                                          March 31,               March 31,

                                       2001       2000        2001        2000
                                      -------    -------    --------    --------
Safety Products                       $53,010    $54,335    $102,133    $106,009
Safety Prescription Eyewear            10,701     10,766      19,642      19,794
Specialty Composites                   10,227     12,329      20,432      23,821
                                      -------    -------    --------    --------
Total                                 $73,938    $77,430    $142,207    $149,624
                                      =======    =======    ========    ========


Intersegment  sales of the Specialty  Composites  segment to the Safety Products
segment  totaled  $0.9 million and $0.7 million for the three months ended March
31, 2001 and 2000,  respectively.  Intersegment  sales  totaled $1.9 million and
$1.6 million for the six months ended March 31, 2001 and 2000, respectively. The
intersegment  sales value is  determined  at fully  absorbed  inventory  cost at
standard rates plus 25%.


                                      -11-
<PAGE>

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

                                    Three Months Ended        Six Months Ended
                                        March 31,               March 31,

                                     2001        2000        2001        2000
                                   --------    --------    --------    --------
Safety Products                    $ 11,027    $ 11,439    $ 17,586    $ 21,424
Safety Prescription Eyewear           1,074       1,388       1,074       1,928
Specialty Composites                    616       1,137       1,214       2,172
Reconciling items                       903           5       1,405        (454)
                                   --------    --------    --------    --------
Total EBITDA                         13,620      13,969      21,279      25,070

Depreciation                          2,591       2,423       5,121       4,863
Amortization                          1,634       1,766       3,289       3,491
Non-operating Costs                    (104)        (86)       (111)        (71)
Interest                              5,880       6,212      11,681      12,159
                                   --------    --------    --------    --------
Income before tax provision        $  3,619    $  3,654    $  1,299    $  4,628
                                   ========    ========    ========    ========

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 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.





                                      -12-
<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  Condensed
Consolidated  Financial  Statements  of the Company,  including  notes  thereto,
appearing  elsewhere  in  this  Report.  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  -- Three Months  Ended March 31, 2001  Compared to Three
                          Months Ended March 31, 2000

                                    Unaudited
                (Dollars in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>

                                                   Three Months Ended March 31,           Change - Favorable
                                                   ----------------------------           ------------------
                                                                                              (Unfavorable)
                                              2001         %          2000         %        Amount      Percent
Net Sales                                  ----------   -------   ----------    -------   ----------    -------
<S>                                        <C>          <C>       <C>           <C>       <C>           <C>
   Safety Products                         $   53,010     71.7%   $   54,335      70.2%    $  (1,325)      (2.4)
   Safety Prescription Eyewear                 10,701     14.5        10,766      13.9           (65)      (0.6)
   Specialty Composites                        10,227     13.8        12,329      15.9        (2,102)     (17.0)
                                           ----------   -------   ----------    -------   ----------
     Total net sales                           73,938    100.0        77,430     100.0        (3,492)      (4.5)
Cost of Sales                                  39,316     53.2        41,431      53.5         2,115        5.1
                                           ----------   -------   ----------    -------    ---------
   Gross profit                                34,622     46.8        35,999      46.5        (1,377)      (3.8)
Operating Expenses-
   Selling and administrative                  21,610     29.2        23,350      30.2         1,740        7.5
   Research and technical services              1,365      1.8         1,391       1.8            26        1.9
   Amortization of intangibles                  1,634      2.2         1,766       2.3           132        7.5
   Other charges (income), net                    514      0.7          (374)     (0.5)         (888)       --
                                           ----------   -------   ----------    -------   ----------
     Operating income                           9,499     12.8         9,866      12.7          (367)      (3.7)
Interest expense, net                           5,880      8.0         6,212       8.0           332        5.3
                                           ----------   -------   ----------    -------   ----------
   Income before provision for income
   taxes                                        3,619      4.9         3,654       4.7           (35)      (1.0)
Provision for income
   taxes                                          584      0.8         1,113       1.4           529       47.5
                                           ----------   -------   ----------    -------    ---------
Net income                                      3,035      4.1         2,541       3.3           494       19.4
Preferred stock dividend accrued                2,857      3.9         2,544       3.3          (313)     (12.3)
                                           ----------   -------   ----------    -------   ----------
Income (loss) applicable to common
shareholders                               $      178      0.2    $       (3)      --      $     181       --
                                           ==========   =======   ==========    =======   ==========
Income (loss) per common share             $     1.74      --     $    (0.03)      --      $    1.77       --
                                           ==========             ==========              ==========
EBITDA                                     $   13,620     18.4%   $   13,969      18.0%    $    (349)      (2.5)
                                           ==========   =======   ==========    =======   ==========

</TABLE>

                                      -13-
<PAGE>



Net Sales.  Net sales in the three months ended March 31, 2001 decreased 4.5% to
$73.9 million from $77.4  million in the three months ended March 31, 2000.  The
change in sales was primarily  driven by a stronger US dollar relative to global
currencies  and to a lesser  extent by the  slowing  economy  in North  America.
Safety  Products net sales in the three  months  ended March 31, 2001  decreased
2.4% to $53.0  million  from $54.3  million in the three  months ended March 31,
2000. The strength of the US dollar relative to global currencies had the impact
of reducing sales by approximately  $1.5 million.  On a constant  currency basis
sales were up $0.2 million, or 0.4%, as compared to the three months ended March
31, 2000. The Safety Prescription  Eyewear segment net sales in the three months
ended March 31, 2001  decreased  0.6% to $10.7 million from $10.8 million in the
three months ended March 31, 2000. Specialty  Composites' net sales in the three
months ended March 31, 2001 decreased  17.0% to $10.2 million from $12.3 million
in the three months ended March 31, 2000. The decrease was primarily driven by a
30%  volume  decline  in sales to the  truck  market as  manufacturers  adjusted
production levels due to excess inventories of new and used trucks.


Gross  Profit.  Gross profit in the three months ended March 31, 2001  decreased
3.8% to $34.6  million  from $36.0  million in the three  months ended March 31,
2000.  Gross profit as a percentage of net sales in the three months ended March
31, 2001  improved to 46.8% as compared to 46.5% in the three months ended March
31,  2000.  This  improvement  in the gross  profit  percentage  of net sales is
primarily due to increased  productivity  in the  manufacturing  plants that was
strong  enough to offset the  negative  impact of  changes  in foreign  exchange
rates. The strong US dollar relative to European  currencies  negatively affects
gross  profit  since it  depresses  revenue  while  having a  limited  impact on
manufacturing  costs.  The average  exchange rate used for the Euro in preparing
the condensed consolidated financial statements for the three months ended March
31, 2001 and 2000 was 0.936 and 0.981, respectively.

Selling and Administrative Expenses.  Selling and administrative expenses in the
three months  ended March 31, 2001  decreased  7.5% to $21.6  million from $23.4
million in the three  months ended March 31,  2000.  Selling and  administrative
expenses as a  percentage  of net sales in the three months ended March 31, 2001
decreased  to 29.2% as  compared  to 30.2% in the three  months  ended March 31,
2000.  The  decrease is primarily  due to the  Company's  proactive  measures to
reduce expenses in line with the slowdown in the economy.

Amortization  of  Intangibles.  Amortization  expense in the three  months ended
March 31, 2001  decreased  7.5% to $1.6  million  from $1.8 million in the three
months ended March 31, 2000.

Other Charges  (Income),  Net. Other charges  (income),  net was expense of $0.5
million for the three  months ended March 31, 2001 as compared to income of $0.4
million for the three months ended March 31, 2000.  This change was  primarily a
result of net foreign  currency  transaction  losses in the three  months  ended
March 31,  2001 as compared to net  foreign  currency  transaction  gains in the
three months ended March 31, 2000.


Operating  Income.  Operating income decreased 3.7% to $9.5 million in the three
months  ended March 31, 2001 from $9.9  million in the three  months ended March
31, 2000. Operating income as a percentage of net sales improved to 12.8% in the
three months ended March 31, 2001 as compared to 12.7% in the three months ended
March 31, 2000.


Interest Expense, Net. Interest expense, net in the three months ended March 31,
2001  decreased 5.3% to $5.9 million from $6.2 million in the three months ended
March 31,  2000.  The  reduction  in interest  expense was due to a reduction in
average  borrowings  partially  offset by an  increase in the  weighted  average
interest  rates in effect for the three  months ended March 31, 2001 as compared
to the three months ended March 31, 2000.

Provision For Income  Taxes.  The provision for income taxes in the three months
ended March 31,  2001 was $0.6  million  compared  to $1.1  million in the three
months ended March 31, 2000.  The effective tax rate was 16.1% and 30.5% for the
three  months ended March 31, 2001 and 2000,  respectively.  The decrease in the
effective tax rate  reflects a change  during the second  quarter of 2001 in the
relationship of taxable income from foreign subsidiaries to domestic operations.


                                      -14-
<PAGE>

Net Income. Net income for the three months ended March 31, 2001 increased 19.4%
to $3.0 million from $2.5 million for the three months ended March 31, 2000.


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 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.


                               EBITDA Calculation
                                    Unaudited
                             (Dollars in Thousands)

                                    Three Months Ended         Change
                                           March 31,    Favorable (Unfavorable)
                                      2001       2000     Amount    Percent
                                   --------    --------   ------    -------
Operating Income                   $  9,499    $  9,866   $ (367)     (3.7)%
Add Backs:
     Depreciation                     2,591       2,423      168       6.9%
     Amortization of Intangibles      1,634       1,766     (132)     (7.5)%
     Non-operating income, net         (104)        (86)     (18)    (20.9)%
                                   --------    --------   ------    -------
EBITDA                             $ 13,620    $ 13,969   $ (349)     (2.5)%
                                   ========    ========   ======    =======


EBITDA for the three months  ended March 31, 2001 was $13.6  million as compared
to $14.0  million  for the  three  months  ended  March  31,  2000.  EBITDA as a
percentage  of net sales in the three  months  ended March 31, 2001  improved to
18.4% as compared to 18.0% in the three months ended March 31, 2000.



                                      -15-
<PAGE>



Results of  Operations -- Six Months Ended March 31, 2001 Compared to Six Months
                              Ended March 31, 2000

                                    Unaudited
                (Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>

                                                  Six Months Ended March 31,                  Change - Favorable
                                                 --------------------------                   -----------------
                                                                                                 (Unfavorable)
                                               2001         %            2000         %       Amount         %
Net Sales                                  ----------    -------    -----------    ------    ---------    -------
<S>                                        <C>           <C>        <C>            <C>       <C>          <C>
   Safety Products                         $  102,133       71.8%   $   106,009      70.9%   $  (3,876)     (3.7)%
   Safety Prescription Eyewear                 19,642       13.8         19,794      13.2         (152)     (0.8)
   Specialty Composites                        20,432       14.4         23,821      15.9       (3,389)    (14.2)
                                           ----------    -------    -----------    ------    ---------
     Total net sales                          142,207      100.0        149,624     100.0       (7,417)     (5.0)
Cost of Sales                                  77,069       54.2         80,079      53.5        3,010       3.8
                                           ----------    -------    -----------    ------    ---------
   Gross profit                                65,138       45.8         69,545      46.5       (4,407)     (6.3)
Operating Expenses-
   Selling and administrative                  45,497       32.0         46,958      31.4        1,461       3.1
   Research and technical services              2,849        2.0          2,718       1.8         (131)     (4.8)
   Amortization of intangibles                  3,289        2.3          3,491       2.3          202       5.8
   Other charges (income), net                    523        0.4           (409)     (0.3)        (932)       --
                                           ----------    -------    -----------    ------    ---------
     Operating income                          12,980        9.1         16,787      11.2       (3,807)    (22.7)
Interest expense, net                          11,681        8.2         12,159       8.1          478       3.9
                                           ----------    -------    -----------    ------    ---------
  Income before provision
  for income  taxes                             1,299        0.9          4,628       3.1       (3,329)    (71.9)
Provision for income
   taxes                                          651        0.5          1,414       0.9          763      54.0
                                           ----------    -------    -----------    ------    ---------
Net income                                        648        0.5          3,214       2.1       (2,566)    (79.8)
Preferred stock dividend accrued                5,686        4.0          5,036       3.4         (650)    (12.9)
                                           ----------    -------    -----------    ------    ---------
Loss applicable to common  shareholders
                                           $   (5,038)      (3.5)   $    (1,822)     (1.2)   $  (3,216)       --
                                           ==========    =======    ===========    ======    =========
Loss per common share                      $   (49.35)      --      $    (17.82)      --     $  (31.53)       --
                                           ==========               ===========              =========
EBITDA                                     $   21,279       15.0%   $    25,070      16.8%   $  (3,791)    (15.1)%
                                           ==========    =======    ===========    =======   =========

</TABLE>


Net Sales.  Net sales in the six months ended March 31, 2001  decreased  5.0% to
$142.2  million from $149.6  million in the six months ended March 31, 2000. The
change in sales was primarily  driven by a stronger US dollar relative to global
currencies  and to a lesser  extent by the  slowing  economy  in North  America.
Safety  Products net sales in the six months ended March 31, 2001 decreased 3.7%
to $102.1  million  from $106.0  million in the six months ended March 31, 2000.
The strength of the US dollar  relative to global  currencies  had the impact of
reducing sales by  approximately  $4.5 million in the six months ended March 31,
2001, as compared to the six months ended March 31, 2000. On a constant currency
basis sales were up $0.2  million,  or 0.2%, as compared to the six months ended
March 31, 2000.  The Safety  Prescription  Eyewear  segment net sales in the six
months ended March 31, 2001  decreased  0.8% to $19.6 million from $19.8 million
in the six months ended March 31, 2000.  Specialty  Composites' net sales in the
six months  ended March 31, 2001  decreased  14.2% to $20.4  million  from $23.8
million in the six months  ended March 31,  2000.  The  decrease  was  primarily
driven by a 35%  volume  decline in sales to the truck  market as  manufacturers
adjusted production levels due to excess inventories of new and used trucks.


Gross Profit. Gross profit in the six months ended March 31, 2001 decreased 6.3%
to $65.1  million  from $69.5  million in the six months  ended March 31,  2000.
Gross Profit as a percentage of net sales in the six months ended March 31, 2001
was 45.8% as  compared  to 46.5% in the six months  ended  March 31,  2000.  The
slight  decline in the gross profit  percentage of net sales is primarily due to
the strength of the US dollar  relative to European  currencies.  The lower Euro
creates an unfavorable  impact on gross margins since it depresses revenue while
having a limited impact on  manufacturing  costs. The average exchange rate used
for the Euro in preparing the condensed  consolidated  financial  statements for
the  six  months   ended  March  31,  2001  and  2000  was  0.9017  and  1.0128,
respectively.

                                      -16-
<PAGE>

Selling and Administrative Expenses.  Selling and administrative expenses in the
six months  ended  March 31, 2001  decreased  3.1% to $45.5  million  from $47.0
million in the six months  ended  March 31,  2000.  Selling  and  administrative
expenses  as a  percentage  of net sales in the six months  ended March 31, 2001
increased  to 32.0% of net  sales as  compared  to 31.4% of net sales in the six
months ended March 31, 2000.  The  decrease is  primarily  due to the  Company's
proactive measures to reduce expenses in line with the slowdown in the economy.

Research and Technical Service Expenses. Research and technical service expenses
in the six months ended March 31, 2001  increased 4.8% to $2.8 million from $2.7
million in the six months ended March 31, 2000.  The increase is  attributed  to
additional focus in the design and development of new products and technologies.

Amortization of Intangibles.  Amortization expense in the six months ended March
31, 2001  decreased  5.8% to $3.3  million  from $3.5  million in the six months
ended March 31, 2000.

Other Charges  (Income),  Net. Other charges  (income),  net was expense of $0.5
million  for the six months  ended  March 31, 2001 as compared to income of $0.4
million for the six months  ended March 31,  2000.  This change was  primarily a
result of net foreign currency  transaction losses in the six months ended March
31, 2001 as compared to net foreign currency transaction gains in the six months
ended March 31, 2000.


Operating  Income.  Operating income decreased 22.7% to $13.0 million in the six
months ended March 31, 2001 from $16.8 million in the six months ended March 31,
2000.  Operating  income as a  percentage  of net sales in the six months  ended
March 31, 2001 was 9.1% as  compared to 11.2% in the six months  ended March 31,
2000.


Interest Expense,  Net. Interest expense,  net in the six months ended March 31,
2001  decreased 3.9% to $11.7 million from $12.2 million in the six months ended
March 31,  2000.  The  reduction  in interest  expense was due to a reduction in
average  borrowings  partially  offset by an  increase in the  weighted  average
interest  rates in effect for the six months ended March 31, 2001 as compared to
the six months ended March 31, 2000.

Provision  For Income  Taxes The  provision  for income  taxes in the six months
ended March 31, 2001 was $0.7 million compared to $1.4 million in the six months
ended March 31,  2000.  The  effective  tax rate was 50.1% and 30.6% for the six
months  ended  March 31,  2001 and 2000,  respectively.  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 carryforwards for income tax purposes.  Due
to the uncertainty of realizing these tax benefits,  the tax benefits  generated
by the  year-to-date  net  operating  loss in 2001 has been  fully  offset  by a
valuation allowance.

Net Income.  Net income for the six months ended March 31, 2001 decreased  79.8%
to $0.6 million from $3.2 million for the six months ended March 31, 2000.

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 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.


                                      -17-
<PAGE>

                               EBITDA Calculation
                                    Unaudited
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                 Six Months Ended         Change
                                                      March 31,     Favorable (Unfavorable)
                                               2001        2000       Amount         %
                                            ---------    ---------   ---------    -------
<S>                                         <C>          <C>         <C>          <C>
Operating Income                            $  12,980    $  16,787   $  (3,807)    (22.7)%
Add Backs:
     Depreciation                               5,121        4,863         258       5.3
     Amortization of Intangibles                3,289        3,491        (202)     (5.8)
     Non-operating costs (income), net           (111)         (71)        (40)    (56.3)
                                            ---------    ---------   ---------

EBITDA                                      $  21,279    $  25,070   $  (3,791)    (15.1)%
                                            =========    =========   =========
</TABLE>


EBITDA for the six months ended March 31, 2001 was $21.3  million as compared to
$25.1 million for the six months ended March 31, 2000. EBITDA as a percentage of
net sales in the six months  ended March 31, 2001 was 15.0% as compared to 16.8%
in the six months ended March 31, 2000.

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 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.  The  Company  utilizes
forward foreign currency contracts to mitigate the effects of changes in foreign
currency rates on profitability.

Effects of Inflation

For the three most recent  fiscal  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
this year.  Since that time the overall  economic  downturn has resulted in many
companies  announcing  layoffs which has also had an impact on overall  consumer
confidence.  The Company  sells mainly into the  manufacturing  sector and, to a
lesser  extent,  the  consumer  marketplace.  The  announced  layoffs have had a
significant impact on the number of employed  industrial workers. As a result of
this there has been, and it is expected to continue for some time, a slowdown in
the market for our products. To address these changes the Company has taken, and
expects to continue to take,  proactive measures which have included a reduction
of workforce, frozen hiring, a reduction of senior managers pay, and a reduction
of our planned capital spending and expense budgets.


                                      -18-
<PAGE>

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  $100.0  million of Senior  Subordinated
Notes (Notes) due 2005, as well as a senior bank facility  comprised of (i) term
loans denominated in U.S., Canadian,  British and German currencies  aggregating
$140.0  million  at  inception  (the Term  Loans)  and (ii) a  revolving  credit
facility  providing  for up to $25.0 million (the Senior Bank  Facilities),  for
general  corporate  purposes  and,  as to  $33.0  million  thereof,  to  finance
permitted  acquisitions.  On December 14, 2000, the Senior Bank  Facilities were
amended to increase  the amount  available  to finance  acquisitions  from $15.0
million to $33.0 million and to modify certain  financial  covenants for periods
ending on and after December 31, 2000.  Aearo Company was in compliance with all
financial covenants and restrictions at March 31, 2001.

Maturities under the Company's Term Loans are: $9.9 million for the remainder of
fiscal 2001,  $32.2  million in fiscal 2002,  and $35.3  million in fiscal 2003.
Other than upon a change of control or as a result of certain asset sales, or in
the event that  certain  excess  funds  exist at the end of a fiscal  year,  the
Company  will not be required to make any  principal  payments in respect of the
Notes until  maturity.  The Company is required to make  interest  payments with
respect to both the Senior Bank Facilities and the Notes. The Company's revolver
and Term Loans A mature in May 2002, and the Term Loans B mature in May 2003.

The Company's net cash provided by operating activities for the six months ended
March 31, 2001  totaled  $6.4  million as  compared to $6.7  million for the six
months  ended March 31, 2000.  The  decrease was due  primarily to a decrease of
$2.6  million  in net  income,  offset by an  increase  of $2.6  million  in the
Company's  net changes in assets and  liabilities.  The Company's net changes in
assets and  liabilities  were  primarily  driven by a reduction  in  receivables
during the six  months  ended  March 31,  2001 as  compared  to an  increase  in
receivables  during the six months  ended March 31, 2000,  somewhat  offset by a
larger  growth in inventory  for the six months ended March 31, 2001 as compared
to the prior period.

Net cash used by investing  activities was $4.4 million for the six months ended
March 31, 2001 as compared  to $8.4  million for the six months  ended March 31,
2000. The decrease in net cash used by investing  activities is primarily due to
the acquisition of Norhammer in the prior period.

Net cash used by  financing  activities  for the six months ended March 31, 2001
was $1.3 million compared with net cash provided by financing activities for the
six months  ended March 31, 2000 of $2.4  million.  The increase of cash used by
financing  activities  of $3.6  million is primarily  attributed  to reduced net
borrowings from the revolving  credit  facility of $2.8 million  combined with a
$1.7 million  increase in cash used for the  repayment of term loans.  Scheduled
principal  repayments  on the Term Loans were $8.9  million and $7.2 million for
the six months ended March 31, 2001 and 2000, respectively.

The Company has a  substantial  amount of  indebtedness.  The Company  relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain  customary 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 the  future.  Levels of sales and  profitability  may be  impacted by service
levels,  continued new product  development,  worldwide economic  conditions and
competitive  pressures.  In  particular,  the  Company  expects  that  sales and
profitability  over the  remainder of fiscal 2001 will be adversely  affected by
the strength of the U.S. Dollar relative to the global currencies.  In addition,
the Company  may make  additional  acquisitions  in the future and would rely on


                                      -19-
<PAGE>

internally  generated  funds and,  to the extent  necessary,  on  borrowings  to
finance such  acquisitions.  It is also  anticipated  that over the next several
quarters  the level of debt service and the  requirements  placed on the Company
through  the  related  financial  covenants  under  the  Company's  Senior  Bank
Facilities  will require that the Company  amend its credit  agreement  with its
syndicate of lenders, or otherwise change its capital structure.




                                      -20-
<PAGE>



Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risks related to change 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
Statement  of  Financial  Accounting  Standard  (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 risk  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. The Company executes two hedging programs, one for
transaction  exposures,  and the  other  for cash  flow  exposures  on  European
operations.  The Company has utilized forward contracts for transaction and cash
flow  exposures.  During the three months  ended March 31, 2001 net  transaction
losses were $0.3 million,  and cash flow hedges were a loss of $0.3 million.  In
addition,  the Company limits foreign  exchange impact on the balance sheet with
foreign  denominated debt in Great Britain Pound Sterling (GBP) and German Marks
(DM).

The  adoption  of SFAS No.  133 on October 1, 2000  resulted  in a $0.3  million
transition  adjustment  charge  to  accumulated  other  comprehensive  income to
recognize the fair value of foreign  currency  forward  contracts  designated as
cash flow  hedges.  During the three  months  ended  March 31,  2001 the Company
recorded a reduction  of $1.3 million to the  derivative  liability to recognize
the change in fair value of foreign currency forward contracts outstanding. As a
result of the foreign  currency  forward  contracts  the Company has  recorded a
derivative  liability of $0.1 million as of March 31, 2001. The foreign currency
forward contracts will expire over the next 6 months.

Interest Rates

The Company is exposed to market  risk  changes in  interest  rates  through its
debt. The Company utilizes interest rate swaps to reduce the impact of potential
increased interest rates on its floating debt. On February 28, 2000, the Company
unwound its zero premium collar by rolling  unrealized gains into a new interest
rate swap that matched the notional amounts of the credit agreement by each loan
currency.  The  interest  rate swaps will  expire  August 31,  2001.  During the
quarter  ended March 31,  2001,  the Company  incurred an  additional  $7,000 of
interest  expense as a result of the  interest  rate swaps and expects  that the
additional interest expense as a result of the interest rate swaps will increase
until the maturity of the interest rate swap agreement.

The  adoption  of SFAS No.  133 on October 1, 2000  resulted  in a $0.1  million
transition  adjustment  charge  to  accumulated  other  comprehensive  income to
recognize  the fair value of interest  rate swap  agreements  designated as cash
flow hedges.  During the three months ended March 31, 2001 the Company  recorded
an additional  $0.3 million of  derivative  liability to recognize the change in
fair value of the  interest  rate swap  agreements.  As a result of the interest
rate swap  agreements  the Company has recorded a  derivative  liability of $0.6
million as of March 31, 2001.

Commodity Risk

                                      -21-
<PAGE>

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



                                      -22-
<PAGE>





                                     PART II

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 relate to the Company's  safety
eyewear and respiratory  product lines and primarily  involve  accidents  and/or
exposures  occurring  after the Company's  predecessor  acquired the AOSafety(R)
Division  from  American  Optical  Corporation  in April  1990.  The  Company is
contingently liable with respect to numerous lawsuits involving respirators sold
by American  Optical  Corporation  prior to the  acquisition of the  AOSafety(R)
Division in April 1990. These lawsuits  typically  involve  plaintiffs  alleging
that they suffer from asbestosis or silicosis,  and that such condition  results
in part from respirators  which 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,  American
Optical  Corporation  and a prior owner of  American  Optical  Corporation.  The
Company  and Cabot have  entered  into an  arrangement  whereby,  so long as the
Company pays to Cabot an annual fee of  $400,000,  which the Company has elected
to pay,  Cabot will retain  responsibility  and liability for, and indemnify the
Company against,  certain legal claims asserted after July 11, 1995 (the date of
the  Company's  formation)  alleged  to  arise  out  of the  use of  respirators
manufactured  prior to July 1995. The Company has the right to  discontinue  the
payment of such annual fee at any time,  in which case the  Company  will assume
responsibility  for and  indemnify  Cabot with  respect to such claims  however,
management  intends to continue  the annual  payment of  $400,000 to Cabot.  The
Company  may be  responsible  for  claims  alleged  to  arise  out of the use of
respirators  manufactured  by the  Company  as well as  products  purchased  for
resale.  The Company  may also be  responsible  for  certain  claims of acquired
companies  other  than the AO  Safety(R)  division  that are not  covered by the
agreement with Cabot.


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








                                      -23-
<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: May 15, 2001            AEARO CORPORATION

                              /s/ Jeffrey S. Kulka

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




                                      -24-
<PAGE>




                                  EXHIBIT INDEX


EXHIBITS                            DESCRIPTION

None


*Filed herewith.



                                      -25-
<PAGE>