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, 2003


                         Commission file number 0-26942


                                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, 2004 was 59,412.5.


<PAGE>


                                Aearo Corporation
                                TABLE OF CONTENTS
           Form 10-Q for the Quarterly Period Ended December 31, 2003

PART I-FINANCIAL INFORMATION..................................................3

Item 1.  Financial Statements.................................................3
   Condensed Consolidated Balance Sheets - Assets.............................3
   Condensed Consolidated Balance Sheets - Liabilities and
      Stockholders' Equity....................................................4
   Condensed Consolidated Statements of Operations............................5
   Condensed Consolidated Statements of Cash Flows............................6
   Notes To Condensed Consolidated Financial Statements.......................7
Item 2.  Management's Discussion and Analysis of Financial
   Condition and Results of Operations.......................................16
Item 3.  Quantitative and Qualitative Disclosures About Market Risk..........24
Item 4.  Controls and Procedures.............................................26

PART II - OTHER INFORMATION..................................................27

Item 1.  Legal Proceedings...................................................27
Item 2.  Changes in Securities and Use of Proceeds...........................29
Item 3.  Defaults Upon Senior Securities.....................................29
Item 4.  Submission of Matters to a Vote of Security Holders.................29
Item 5.  Other Information...................................................29
Item 6.  Exhibits and Reports on Form 8-K....................................29

SIGNATURES...................................................................30

EXHIBIT INDEX................................................................31


                                      -2-
<PAGE>


                          PART I-FINANCIAL INFORMATION
Item 1...Financial Statements


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

                                              December 31,       September 30,
                                                  2003               2003
                                             --------------     --------------
                                              (Unaudited)
 CURRENT ASSETS:
  Cash and cash equivalents                   $     4,670         $     7,301
  Accounts receivable (net of allowance for
    doubtful accounts of
    $1,475 and $1,358, respectively)               45,362              49,146
  Inventories                                      42,561              37,269
  Deferred and prepaid expenses                     5,615               7,321
                                             --------------     --------------
    Total current assets                           98,208             101,037
                                             --------------     --------------

LONG TERM ASSETS:
 Property, plant and equipment, net                49,092              48,869
 Goodwill, net                                     86,089              81,770
 Other intangible assets, net                      57,819              57,887
 Other assets                                       3,267               3,953
                                             --------------     --------------

    Total assets                              $   294,475         $   293,516
                                             ==============     ==============



                                      -3-


                                AEARO CORPORATION
  Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Equity
         (Dollars in Thousands, Except for Per Share and Share Amounts)


                                           December 31,     September 30,
                                               2003              2003
                                          --------------    --------------
                                            (Unaudited)
CURRENT LIABILITIES:
 Current portion of long-term debt        $     18,763      $     17,767
 Accounts payable and accrued liabilities       39,177            44,043
 Accrued interest                                5,692             2,736
 U.S. and foreign income taxes                   1,883             1,885
                                          --------------    --------------

   Total current liabilities                    65,515            66,431
                                          --------------    --------------

LONG TERM LIABILITIES:
 Long-term debt                                191,904           195,786
 Deferred income taxes                           1,707             1,609
 Other liabilities                              12,073            11,334
                                          --------------    --------------

   Total liabilities                           271,199           275,160
                                          --------------    --------------

COMMITMENTS AND CONTINGENCIES

Preferred stock, $.01 par value-
(Redemption value of $63,845 and $61,910, respectively)
   Authorized--200,000 shares
   Issued and outstanding--22,500 shares         -                   -

STOCKHOLDERS' EQUITY:
 Common stock, $.01 par value-
   Authorized--200,000 shares
   Issued and outstanding--59,413 shares             1                 1
 Stock subscription receivables                 (1,409)           (1,399)
 Retained earnings                              29,224            26,541
 Accumulated other comprehensive loss           (4,540)           (6,787)
                                          --------------    --------------

     Total stockholders' equity                 23,276            18,356
                                          --------------    --------------

     Total liabilities and stockholders'
       equity                              $   294,475        $  293,516
                                          ==============    ==============




                                      -4-
<PAGE>


                               Aearo Corporation
                 Condensed Consolidated Statements of Operations
                             (Dollars in Thousands)
                                   (Unaudited)

                                                 For the Three Months Ended
                                                        December 31,
                                             ---------------------------------
                                                   2003              2002
                                             ---------------   ---------------

NET SALES                                     $     79,201      $     68,717

COST OF SALES                                       41,776            35,645
                                             ---------------   ---------------
   Gross profit                                     37,425            33,072

SELLING AND ADMINISTRATIVE                          27,471            24,321

RESEARCH AND TECHNICAL SERVICES                      1,741             1,583

AMORTIZATION OF INTANGIBLES                            108               116

OTHER (CREDITS) CHARGES, NET                        (1,042)              458
                                             ---------------   ---------------
   Operating income                                  9,147             6,594

INTEREST EXPENSE, NET                                5,812             4,942
                                             ---------------   ---------------
   Income before provision for income taxes          3,335             1,652

PROVISION FOR INCOME TAXES                             652               610
                                             ---------------   ---------------
   Net income                                 $      2,683      $      1,042
                                             ===============   ===============



                                      -5-
<PAGE>


                                Aearo Corporation
                 Condensed Consolidated Statements of Cash Flows
                             (Dollars in Thousands)
                                   (Unaudited)

                                                   For the Three Months Ended
                                                           December 31,
                                                 ------------------------------
                                                     2003              2002
                                                 -------------    -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                     $    2,683       $    1,042
   Adjustments to reconcile net income
   to cash provided by operating activities-
      Depreciation                                     2,929            2,659
      Amortization of intangible assets and
        deferred financing costs                       1,263              516
      Deferred income taxes                               (7)              --
      Other, net                                         107              217
      Changes in assets and liabilities-
        (net of effects of acquisitions)
        Accounts receivable                            5,067            8,145
        Inventories                                   (4,304)          (3,793)
        Income taxes payable                              28             (603)
        Accounts payable and accrued liabilities      (2,794)            (264)
        Other, net                                     2,003              265
                                                 -------------    -------------
        Net cash provided by operating activities      6,975            8,184
                                                 -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property, plant and equipment         (2,353)          (2,187)
   Cash paid for acquisitions                                          (1,250)
   Proceeds provided by disposals of property,
     plant and equipment                                  12                5
                                                 -------------    -------------
        Net cash used by investing activities         (2,341)          (3,432)
                                                 -------------    -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of revolving credit facility, net        (1,100)             --
   Repayment of term loans                            (4,466)          (3,164)
   Repayment of capital lease obligations                (61)             (49)
   Repayment of long-term debt                           (82)             (23)
   Other                                                 (11)             (12)
                                                 -------------    -------------
        Net cash used by financing activities         (5,720)          (3,248)
                                                 -------------    -------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH               (1,545)             115
                                                 -------------    -------------

INCREASE IN (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                   (2,631)           1,619

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD         7,301           14,480
                                                 -------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD          $    4,670       $   16,099
                                                 =============    =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Capital lease obligations                      $       --       $      430
                                                 =============    =============
CASH PAID FOR:
   Interest                                       $    1,325       $    1,541
                                                ==============    =============
   Income taxes                                   $      953       $        5
                                                ==============    =============


                                      -6-
<PAGE>

                                AEARO CORPORATION
              Notes To Condensed Consolidated Financial Statements
                                DECEMBER 31, 2003
                                   (Unaudited)

1)   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

2)   COMPANY BACKGROUND

     Aearo  Corporation,  a Delaware  corporation,  and its direct  wholly owned
     subsidiary, Aearo Company, a Delaware corporation (collectively referred to
     herein as the  "Company")  manufactures  and sells products under the brand
     names: AOSafety(R),  E-A-R(R),  Peltor(R) and SafeWaze(TM).  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 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  pricing discounts and incentives.  In addition,  an
     allowance for doubtful accounts is generally recorded based on a percentage
     of aged  receivables.  However,  management  judgment is involved  with the
     final  determination  of the allowance based on several  factors  including
     specific  analysis of a customer's credit  worthiness,  historical bad debt
     experience,  changes in payment  history  and general  economic  and market
     trends.

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

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

                                      -7-
<PAGE>


     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.  The effective tax rate in
     the three months ended  December 31, 2003 and 2002 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  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.

     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.
     Intangible  assets  that have  finite  useful  lives  will  continue  to be
     amortized  over their  useful lives and  reviewed  for  impairment  at each
     reporting date. The following  presents a summary of intangibles  assets as
     of December 31, 2003:

                                     Gross       Accumulated        Carrying
                                     Amount      Amortization        Amount
                                 -------------   -------------   -------------
     Trademarks                    $   75,722      $  (21,409)     $   54,313
     Customer Relationship List         1,850             (46)          1,804
     Patents                            2,118            (837)          1,281
     Other                              1,549          (1,128)            421
                                 -------------   -------------   -------------
     Total Intangibles             $   81,239      $  (23,420)     $   57,819
                                 =============   =============   =============

     Aggregate Estimate of Amortization Expense:

     For the year ended 9/30/2004                              $          431
     For the year ended 9/30/2005                              $          401
     For the year ended 9/30/2006                              $          405
     For the year ended 9/30/2007                              $          417
     For the year ended 9/30/2008                              $          328
     For the year ended 9/30/2009                              $          340

     The following  presents the changes in the carrying  amount of goodwill for
     the period ended December 31, 2003:


     Balance October 1, 2003                                   $       81,770
     Additions                                                             --
     Impairments                                                           --
     Translation adjustment                                             4,319
                                                              ----------------
     Balance December 31, 2003                                 $       86,089
                                                              ================

     Employers'  Disclosure about Pension and Other Post Retirement  Benefit. In
     December 2003, the FASB revised SFAS No. 132, "Employers'  Disclosure about
     Pension and Other Post Retirement  Benefits".  The revision of SFAS No. 132
     requires additional disclosures about assets,  obligations,  cash flows and
     net periodic  benefit costs of defined benefit pension plans and other post
     retirement  plans.  The  provisions  of this  statement  regarding  interim
     disclosures  will be effective  for the Company in the period  ending March
     31, 2004.

                                      -8-
<PAGE>


     Stock-based  Compensation.  The Company currently  accounts for stock-based
     compensation  under the  intrinsic  method of Accounting  Principles  Board
     ("APB") Opinion No. 25. The following  table  illustrates the effect on net
     income  as if  the  fair  value  based  method  had  been  applied  to  all
     outstanding awards: (Dollars in thousands)

                                                    Three Months Ended
                                                        December 31,
                                                -----------------------------
                                                    2003             2002
                                                -------------   -------------
                                                 (Unaudited)     (Unaudited)
     Net income as reported                      $     2,683     $    1,042
     Deduct: Total stock-based employee
     compensation expense determined under
     fair value based method for all awards,
     net of tax                                          (37)           (34)
                                                -------------   -------------
     Proforma net income                         $     2,646     $    1,008
                                                =============   =============

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

     The Company has formally  documented its hedging  relationships,  including
     identification  of the hedging  instruments and the hedge items, as well as
     its risk management  objectives and strategies for  undertaking  each hedge
     transaction.  From time to time the  Company  enters into  forward  foreign
     currency contracts and interest rate swap, cap 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.  Amounts  accumulated  in other
     comprehensive  income will be  reclassified  as  earnings  when the related
     product sales affect earnings for forward foreign currency contracts.  As a
     result of the forward foreign currency contracts,  the Company has recorded
     a derivative  payable of $0.8 million and $0.4 million at December 31, 2003
     and  September  30,  2003,  respectively.   All  forward  foreign  currency
     contracts will expire over the next nine months.

     During  the  periods  ending  December  31,  2003  and  2002,  the  Company
     reclassified  into  earnings a net loss of  approximately  $0.2 million and
     $0.1 million, respectively,  resulting from the exercise of forward foreign
     currency contracts.  All forward foreign currency contracts were determined
     to be highly  effective;  therefore  no  ineffectiveness  was  recorded  in
     earnings.

     The Company also  executes  forward  foreign  currency  contracts for up to
     30-day  terms to protect  against the adverse  effects that  exchange  rate
     fluctuations may have on the foreign-currency-denominated  trade activities
     (receivables,  payables and cash) of foreign subsidiaries.  These contracts
     have not been designated as hedges under SFAS No. 133 and accordingly,  the
     gains and losses on both the  derivative  and  foreign-currency-denominated
     trade  activities  are  recorded  as  transaction  adjustments  in  current
     earnings.  The impact on earnings was a loss of approximately $ 0.1 million
     for each of the periods ended December 31, 2003 and 2002.

                                      -9-
<PAGE>


     The Company has approximately $30.5 million of variable rate debt protected
     under an interest rate cap arrangement  through December 31, 2004. The fair
     value of the cap at  December  31,  2003 and  September  30,  2003 was $0.1
     million, respectively. The Company has not elected to take hedge accounting
     treatment for the interest rate cap as defined under SFAS No, 133 and, as a
     result,   any  fair  value   adjustment   is  charged   directly  to  other
     income/(expense).  During the quarter ended  December 31, 2003 there was no
     change in the value of the interest rate cap.

4)   COMPREHENSIVE INCOME

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

                                                       Three months ended
                                                           December 31,
                                                 -----------------------------
                                                      2003            2002
                                                 -------------   -------------
                                                   (Unaudited)    (Unaudited)

     Net income                                   $    2,683      $    1,042
        Foreign currency translation adjustment,
        net of income taxes                            2,636           2,868
        Unrealized loss on derivative instruments,
        net of Income taxes                             (389)           (597)
                                                 -------------  --------------
     Comprehensive income                         $    4,930     $     3,313
                                                 =============  ==============

5)   INVENTORIES
     Inventories consisted of the following (Dollars in thousands):

                                                  December 31,   September 30,
                                                     2003            2003
                                                 -------------   -------------
                                                  (Unaudited)

        Raw materials                             $     9,952     $     8,301
        Work in process                                10,599          11,976
        Finished goods                                 22,010          16,992
                                                 -------------   -------------
                                                  $    42,561     $    37,269
                                                 =============   =============

     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.


                                      -10-
<PAGE>


6)   DEBT

     The Company's  debt structure  includes:  (a) $98.0 million of 12.5% Senior
     Subordinated  Notes  ("Notes")  due  2005,  which  are  publicly  held  and
     redeemable  at the option of the Company,  in whole or in part,  at various
     redemption prices, (b) $15.0 million of Holding Company Notes due 2005, and
     (c) up to an  aggregate of $130.0  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 and (ii) the Revolving Credit Facility providing for up to $30.0
     million of revolving loans for general corporate purposes (collectively the
     "Senior  Bank  Facilities").  In addition  the Company has the  capacity to
     borrow  $5.0  million  under  a U.K.  overdraft  facility  (the  "Overdraft
     Facility").  The amount  outstanding on the Term Loans and Revolving Credit
     Facility at December 31, 2003, were approximately  $83.4 and $10.6 million,
     respectively.  The U.K  overdraft  facility  has  not  been  formalized  or
     executed; therefore no amounts were outstanding at December 31, 2003. Under
     the terms of the Senior Bank  Facilities,  the Note  Indenture and the Note
     Purchase Agreement for the Holding Company Notes, 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, 2003.

     To finance part of the  redemption of Aearo's  common and  preferred  stock
     owned by Cabot  Corporation  in August  2003,  the Company  authorized  the
     issuance and sale of $15.0 million  aggregate  principal of Holding Company
     Notes due July 15, 2005.

     The Company's  Board of Directors has 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 such repurchases will occur.

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 is a defendant in lawsuits by plaintiffs alleging
     that they suffer from respiratory medical conditions, such as asbestosis or
     silicosis,  relating  to exposure  to  asbestos  and silica,  and that such
     conditions  result, in part, from the use of respirators  that,  allegedly,
     were negligently designed or manufactured. The defendants in these lawsuits
     are  often  numerous,   and  include,  in  addition  to  manufacturers  and
     distributors of respirators, manufacturers,  distributors and installers of
     sand (used in sand blasting),  asbestos and  asbestos-containing  products.
     Most of these claims are covered by the Asset  Transfer  Agreement  entered
     into on June 13, 1995 by the Company  and Aearo  Company,  on the one hand,
     and Cabot and certain of its  subsidiaries  (the  "Sellers"),  on the other
     hand (the "1995  Asset  Transfer  Agreement").  In the 1995 Asset  Transfer
     Agreement,  so long as the Company  makes an annual  payment of $400,000 to
     Cabot,  the Sellers  agreed to retain,  and Cabot and the Sellers agreed to
     defend and  indemnify  the Company  against,  any  liability or  obligation
     relating  to or  otherwise  arising  under any  proceeding  or other  claim
     against  the  Company  or  Cabot or their  respective  affiliates  or other


                                      -11-
<PAGE>


     parties  with whom any Seller  directly  or  indirectly  has a  contractual
     liability sharing  arrangement which sounds in product liability or related
     causes of action  arising  out of actual  or  alleged  respiratory  medical
     conditions  caused or allegedly caused by the use of respirators or similar
     devices sold by Sellers or their predecessors  (including  American Optical
     Corporation  and its  predecessors)  prior to July 11, 1995.  To date,  the
     Company has elected to pay the annual fee and intends to continue to do so.
     The Company could  potentially be liable for claims  currently  retained by
     Sellers if the  Company  elects to cease  paying the annual fee or if Cabot
     and the Sellers no longer are able to perform their  obligations  under the
     1995 Asset Transfer  Agreement.  Cabot  acknowledged  in the Stock Purchase
     Agreement that it and the Company  entered into on June 27, 2003 (providing
     for the sale by Cabot to the  Company of all of the  common  and  preferred
     stock of the Company owned by Cabot) that the  foregoing  provisions of the
     1995 Asset  Transfer  Agreement  remain in effect.  The 1995 Asset Transfer
     Agreement  does not apply to claims  relating  to the  business  of Eastern
     Safety Equipment, the stock of which the Company acquired in 1996.

     At December  31, 2003 and  September  30,  2003,  the Company has  recorded
     liabilities of  approximately  $4.5 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 2008 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 1995 Asset Transfer
     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), Peltor(R) and SafeWaze(TM). 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,  communication headsets,
     non-prescription  safety  eyewear,  face shields,  reusable and  disposable
     respirators,  hard hats,  fall  protection  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


                                      -12-
<PAGE>

     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,
                                                  -----------------------------
                                                      2003             2002
                                                  -------------   -------------
                                                   (Unaudited)     (Unaudited)
    Safety Products                                $   59,780      $   50,486
    Safety Prescription Eyewear                         9,464           9,804
    Specialty Composites                                9,957           8,427
                                                  -------------   -------------
    Total                                          $   79,201      $   68,717
                                                  =============   =============

     Inter-segment  sales from the  Specialty  Composites  segment to the Safety
     Products segment totaled $0.7 million and $0.8 million for the three months
     ended December 31, 2003 and 2002,  respectively.  The  inter-segment  sales
     value is determined at fully absorbed inventory cost at standard rates plus
     25%.

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

                                                     Three Months Ended
                                                         December 31,
                                                 -----------------------------
                                                      2003           2002
                                                 -------------   -------------
                                                  (Unaudited)     (Unaudited)

     Safety Products                              $   11,230      $    8,957
     Safety Prescription Eyewear                        (214)            (68)
     Specialty Composites                              1,168             480
                                                 -------------   -------------
     Segment profit                                   12,184           9,369

     Depreciation                                      2,929           2,659
     Amortization of intangibles                         108             116
     Interest                                          5,812           4,942
                                                 -------------   -------------
     Income before provision for income taxes     $    3,335      $    1,652
                                                 =============   =============

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


                                      -13-
<PAGE>


9)   RESTRUCTURING CHARGE

     During fiscal 2001, the Company  recorded a  restructuring  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.

     During the 4th quarter of fiscal 2003, the Company reversed $0.3 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 was  classified  as a reduction in cost of
     sales.

     The following table displays the activity and balances of the restructuring
     reserve  account for the three months ended  December 31, 2003  (Dollars in
     thousands):


                                  September 30,                    December 31,
                                       2003          Charges          2003
                                  -------------   -------------   -------------
     Employee termination costs    $      224      $      (46)     $      178
     Lease agreements                   1,456            (189)          1,267
     Loss on disposal of assets           691            (322)            369
     Other                                 17                              17
                                  -------------   -------------   -------------
     Total                         $    2,388      $     (557)     $    1,831
                                  =============   =============   =============





                                      -14-
<PAGE>


10)  ACQUISITIONS

     On March 14,  2003 the  Company  acquired  VH  Industries,  Inc.  ("VH") of
     Concord, North Carolina for approximately $11.6 million. VH Industries is a
     manufacturer of fall protection products sold under the SafeWaze trade name
     in the United States.  The transaction was accounted for using the purchase
     method  of  accounting  in   accordance   with  SFAS  No.  141,   "Business
     Combinations",  and  accordingly,  the  operating  results  of VH have been
     included  with  those of the  Company  subsequent  to March 14,  2003.  The
     following  unaudited  pro  forma  information  presents  results  as if the
     acquisition  had  occurred  at  the  beginning  of the  respective  periods
     (Dollars in thousands):

                                                     Three Months Ended
                                                        December 31,
                                                -----------------------------
                                                    2003             2002
                                                -------------   -------------
     Net sales as reported                       $   79,201      $   68,717
     Pro forma sales                                 79,201          71,058

     Net income as reported                      $    2,683      $    1,042
     Pro forma net income                             2,683           1,369






                                      -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

Critical Accounting Policies

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

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

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

Product Liabilities -The Company has established  reserves for potential product
liabilities that arise out of the use of the Company's  products.  A significant
amount of judgment is required to quantify the  Company's  ultimate  exposure in
these  matters and the  valuation  of reserves is  estimated  based on currently
available  information,  historical experience and from time to time the Company


                                      -16-
<PAGE>


may seek the assistance of an independent consultant. While the Company believes
that the  current  level of reserves is  adequate,  changes in the future  could
impact these determinations.

Restructuring - The Company recorded a restructuring charge in fiscal 2001 based
on a plan to improve its competitive position and long-term  profitability.  The
provision  recorded was based on estimates of the expected costs associated with
site closures,  consolidation of products and product lines, disposal of assets,
contract  terminations or other costs directly related to the restructuring.  To
the extent that actual costs may differ from amounts recorded,  revisions to the
estimated  reserves  would be  required.  A reduction  of $0.3  million was made
during  the 4th  quarter  of fiscal  2003 to account  for new  information  made
available during the year.

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

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

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

Goodwill - The Company  adopted  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets" on October 1, 2002.  This  standard  requires that goodwill no longer be
amortized, and instead, be tested for impairment on a periodic basis. In testing
for a potential  impairment  of  goodwill,  SFAS No. 142 requires the Company to
individually  allocate and assign the carrying  value of assets and  liabilities
(including goodwill) to specific reporting units or business segments,  estimate
the fair  value of the  reporting  units or  business  segments,  and  determine
goodwill  impairment  by  comparing  the  estimated  fair value to the  assigned
carrying  value.  The process of evaluating  the potential  impairment is highly
subjective and requires significant judgment at many points during the analysis.

As of January 1, 2004,  the Company is in the process of  performing  its annual
impairment evaluation.  The Company may incur charges for impairment of goodwill
in the future if the carrying  value of assets exceeds the estimated fair value.
Any future  impairment  charge could adversely  affect the Company's  results of
operation and financial position.


                                      -17-
<PAGE>




                                            Results of Operations
                                            (Dollars in Thousands)
                                                 (Unaudited)

                                         Three months ended December 31,
                                -----------------------------------------------
                                    2003         %           2002         %
                                ------------  --------   ------------  --------
Net Sales
   Safety Products               $  59,780      75.5      $  50,486      73.5
   Safety Prescription Eyewear       9,464      11.9          9,804      14.3
   Specialty Composites              9,957      12.6          8,427      12.2
                                ------------  --------   ------------  --------
      Total net sales               79,201     100.0         68,717     100.0
Cost of Sales                       41,776      52.7         35,645      51.9
                                ------------  --------   ------------  --------
Gross profit                        37,425      47.3         33,072      48.1

Operating Expenses
   Selling and administration       27,471      34.7         24,321      35.4
   Research and technical services   1,741       2.2          1,583       2.3
   Amortization                        108       0.1            116       0.1
   Other charges (income), net      (1,042)     (1.3)           458       0.7
                                ------------  --------   ------------  --------
      Total operating expenses      28,278      35.7         26,478      38.5
Operating income                     9,147      11.6          6,594       9.6
Interest expense, net                5,812       7.3          4,942       7.2
                                ------------  --------   ------------  --------
Income before provision
  for income taxes                   3,335       4.3          1,652       2.4
Provision for income taxes             652       0.8            610       0.9
                                ------------  --------   ------------  --------
Net income                       $   2,683       3.5      $   1,042       1.5
                                ============  ========   ============  ========



Results of Operations -- Three Months Ended  December 31, 2003 Compared to Three
Months Ended December 31, 2002

Net Sales. Net sales in the three months ended December 31, 2003 increased 15.3%
to $79.2 million from $68.7 million in the three months ended December 31, 2002.
The increase in net sales was primarily  driven by organic  growth in the Safety
Products  and  Specialty  Composites  segments,   the  impact  of  the  SafeWaze
acquisition and foreign currency  translation,  partially offset by a decline in
the Safety Prescription Eyewear segment. The weakness of the U.S. dollar and the
SafeWaze  acquisition  favorably  impacted  net sales by $3.5  million  and $2.2
million, respectively. The Safety Products segment net sales in the three months
ended December 31, 2003  increased  18.4% to $59.8 million from $50.5 million in
the three months ended  December  31, 2002.  The increase in net sales  resulted
from 7.4%  increase  due to  organic  growth,  a 6.6%  increase  due to  foreign
currency  translation  and a 4.4% increase due to the  acquisition  of SafeWaze.
Organic sales growth for the Safety Products segment,  defined as net sales less
the impact of foreign currency  translation and acquisitions,  has increased for
six consecutive  quarters.  The Company attributes this growth to its ability to
successfully  introduce  new  products  into the  markets it serves.  The Safety
Prescription  Eyewear  segment net sales in the three months ended  December 31,
2003  decreased 3.5% to $9.5 million from $9.8 million in the three months ended
December 31, 2002.  The decrease in net sales was primarily due to the reduction
in manufacturing employment in North America. Specialty Composites' net sales in


                                      -18-
<PAGE>


the three months ended December 31, 2003  increased  18.2% to $10.0 million from
$8.4  million in the three months  ended  December  31,  2002.  The increase was
primarily  driven by volume  increases in the  precision  electronics  and truck
markets. The Company tracks measures such as computer and electronic  production
data and truck build rates to gauge the  momentum  in the  Specialty  Composites
segment  which  has been  experiencing  positive  sales  trends  in the last two
quarters.

Gross Profit. Gross profit in the three months ended December 31, 2003 increased
13.2% to $37.4 million from $33.1 million in the three months ended December 31,
2002.  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 currency translation.  Gross profit as a
percentage of net sales in the three months ended December 31, 2003 was 47.3% as
compared to 48.1% in the three  months ended  December 31, 2002.  The decline in
the gross profit percentage of net sales is primarily due to product and channel
mix.

Operating  Expenses.  Operating  expenses in the three months ended December 31,
2003  increased  6.8% to $28.3  million  from $26.5  million in the three months
ended December 31, 2002. The increase in operating expenses was primarily driven
by an increase in selling and administrative and research and technical services
expenses, partially offset by a decrease in other charges (income), net. Selling
and administrative  expenses included approximately $0.6 million of expenses due
to  acquisitions  and $1.0 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  decreased to 34.7% in the
three  months  ended  December 31, 2003 as compared to 35.4% in the three months
ended December 31, 2002. Other charges (income),  net was income of $1.0 million
for the three  months  ended  December  31,  2003 as compared to expense of $0.5
million in the three months ended  December 31, 2002.  The  improvement  of $1.5
million was primarily driven by foreign currency transaction gains in the period
ended  December  31, 2003 and assets  write-offs  of $0.3  million in the period
ended  December 31, 2002 that did not reoccur in the period  ended  December 31,
2003.

Operating  Income.  Primarily  as a  result  of  the  factors  mentioned  above,
operating  income  increased  38.7% to $9.1  million in the three  months  ended
December 31, 2003 from $6.6 million in the three months ended December 31, 2002.
Operating income as a percentage of net sales in the three months ended December
31,  2003  increased  to 11.6% as  compared  to 9.6% in the three  months  ended
December 31, 2002.

Interest Expense, Net. Interest expense, net, in the three months ended December
31, 2003  increased  17.6% to $5.8 million from $4.9 million in the three months
ended December 31, 2002. The increase is attributed to higher  weighted  average
borrowings for the three months ended December 31, 2003 as compared to the three
months  ended  December  31,  2002.  The  increase in  borrowings  can be mainly
attributed to the issuance of $15.0 million of Holding  Company Notes to finance
part of the  redemption  of Aearo's  common and  preferred  stock owned by Cabot
Corporation.

Provision For Income  Taxes.  The provision for income taxes in the three months
ended  December  31, 2003 was $0.7  million as  compared to $0.6  million in the
three months ended December 31, 2002. The effective tax rate in the three months
ended  December 31, 2003 and 2002 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 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.

                                      -19-
<PAGE>


Net Income.  For the three  months  ended  December 31, 2003 the Company had net
income of $2.7  million as compared to $1.0  million for the three  months ended
December 31, 2002 mainly for the reasons described above.




                                      -20-
<PAGE>


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. The Company's Swedish 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.

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.

To finance part of the redemption of Aearo's common and preferred stock owned by
Cabot  Corporation in August 2003, the Company  authorized the issuance and sale
of $15.0 million aggregate principal of Holding Company Notes due July 15, 2005.

The  Company's  debt  structure  includes:  (a) $98.0  million  of 12.5%  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, (b) $15.0 million of Holding Company Notes due 2005, and (c)
up to an aggregate of $130.0 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  and (ii) the
Revolving  Credit Facility  providing for up to $30.0 million of revolving loans
for general corporate purposes  (collectively the "Senior Bank Facilities").  In
addition  the Company  has the  capacity  to borrow  $5.0  million  under a U.K.
overdraft  facility (the "Overdraft  Facility").  The amount  outstanding on the
Term  Loans  and  Revolving   Credit   Facility  at  December  31,  2003,   were
approximately $83.4 and $10.6 million,  respectively. The U.K overdraft facility
has not been  formalized or executed;  therefore no amounts were  outstanding at
December  31,  2003.  Under the terms of the Senior  Bank  Facilities,  the Note
Indenture and the Note Purchase  Agreement for the Holding Company Notes,  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, 2003.

The Company's Board of Directors has 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
such repurchases will occur.

                                      -21-
<PAGE>


Maturities  under the Company's  Term Loans are: $13.4 million for the remainder
of fiscal  2004 and $70.0  million in fiscal  2005.  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 the current  fiscal year,  the Company will not
be required to make additional  principal  payments in respect of the Term Loans
until maturity in 2005.  The Company is required to make interest  payments with
respect to the Senior Bank Facilities,  the Notes and the Holding Company Notes.
The Company's Revolving Credit Facility and Term Loans mature in March 2005.

The Company  typically  makes  capital  expenditures  related  primarily  to the
maintenance and improvement of manufacturing facilities. The Company's principal
source of cash to fund these capital  requirements is cash from operations.  The
Company  spent  $2.4  million  and  $2.2  million,   respectively   for  capital
expenditures   for  the  three  months   ended   December  31,  2003  and  2002,
respectively.

The  Company's net cash  provided by operating  activities  for the three months
ended December 31, 2003 totaled $7.0 million as compared to $8.2 million for the
three  months  ended  December  31,  2002.  The decrease of $1.2 million was due
primarily  to a $3.9 million  decrease  related to the net changes in assets and
liabilities,  partially offset by an improvement in net income adjusted for cash
and non-cash charges (depreciation, amortization, deferred taxes and other). The
Company's  net  changes  in assets and  liabilities  was  primarily  driven by a
decrease in cash from  receivables,  inventory and accounts  payable and accrued
liabilities,  partially  offset by an  increase  in cash from  income  taxes and
other, net.

Net cash used by  investing  activities  was $2.3  million for the three  months
ended  December  31, 2003 as compared to $3.4 million for the three months ended
December 31, 2002.  The  decrease in net cash used by  investing  activities  is
primarily attributed to acquisitions made in the three months ended December 31,
2002.

Net cash used by financing  activities  for the three months ended  December 31,
2003 was $5.7 million  compared with net cash used by financing  activities  for
the three months ended  December  31, 2002 of $3.2  million.  The change of $2.5
million is primarily  due to the  increased  repayment of the  revolving  credit
facility and term loans in the three months ended  December 31, 2003 as compared
to the three months ended December 31, 2002.

The Company  maintains a  non-contributory  defined benefit cash balance pension
plan. The Company utilizes an outside actuarial firm to estimate pension expense
and funding  based on various  assumptions  including  the discount rate and the
expected  long-term  rate of return on plan assets.  In developing  the expected
long-term rate of return assumption,  the Company's  management  evaluates input
from outside  investment  advisors and  actuaries  as of the  measurement  date.
Actual asset  returns for the  Company's  pension  plan  improved in fiscal 2003
after two years of negative returns.  Although recent trends have been positive,
the  Company  lowered the  long-term  rate of return on plan assets from 8.5% to
8.0% for the year ended  September 30, 2003. The Company's  management  believes
that  this rate 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 had also been  lowered  from 6.75% to 6.00% for the  fiscal  year
ended  September  30,  2003.  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  variability of asset returns and discount rates may have either a favorable
or unfavorable  impact on the Company's pension expense and the funded status of
the  pension  plan.   Under  minimum  funding  rules,   no  additional   pension


                                      -22-
<PAGE>


contributions  were required to be made in fiscal 2003.  However,  contributions
may increase in future years.  Due to the  uncertainty  of the future returns of
the equity and corporate bond markets, it is difficult to estimate the impact of
pension contributions in the future.

The Company has a  substantial  amount of  indebtedness.  The Company  relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain  customary 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.
The  Company  expects  to arrange  for new  financing  of both the  Senior  Bank
Facilities  and the Notes before the maturity of the Senior Bank  Facilities  in
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.

Off-Balance Sheet Arrangements

The Company has no financing arrangements involving variable interest entities.


                                      -23-
<PAGE>



Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

Foreign Currency Risk

The  Company's  results  of  operations  are  subject to risks  associated  with
operating in foreign  countries,  including  fluctuations  in currency  exchange
rates.   While  many  of  the  Company's  selling  and  distribution  costs  are
denominated  in Canadian and  European  currencies,  a large  portion of product
costs are U.S. Dollar  denominated.  As a result,  a decline in the value of the
U.S.  Dollar  relative to other  currencies  can have a favorable  impact on the
profitability  of the Company  and an  increase in the value of the U.S.  Dollar
relative  to  these  other   currencies  can  have  a  negative  effect  on  the
profitability of the Company. The Company's Swedish 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 foreign  operations.  The Company  utilizes
forward  foreign  currency  contracts  for  transaction  as well  as  cash  flow
exposures.  For  the  three  months  ended  December  31,  2003  and  2002,  net
transaction  exposures  were a loss of $0.1  million,  respectively.  Cash  flow
exposures  for the same  period were a loss of $0.2  million  and $0.1  million,
respectively. 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 a
result of the forward  foreign  currency  contracts,  the Company has recorded a
derivative  payable of $0.8  million and $0.4  million at December  31, 2003 and
September 30, 2003,  respectively.  All forward foreign currency  contracts will
expire over the next nine months.

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 each of the periods ended December 31, 2003
and 2002.

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.

                                      -24-
<PAGE>


The Company has  approximately  $30.5  million of variable  rate debt  protected
under an interest rate cap arrangement through December 31, 2004. The fair value
of the cap at  December  31,  2003 and  September  30,  2003  was $0.1  million,
respectively. The Company has not elected to take hedge accounting treatment for
the interest rate cap as defined  under SFAS No, 133 and, as a result,  any fair
value  adjustment  is charge  directly  to other  income/(expense).  During  the
quarter  ending  December  31,  2003  there  was no  change  in the value of the
interest rate cap.

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
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.



                                      -25-
<PAGE>



Item 4.  Controls and Procedures

Disclosure  controls and  procedures  are defined by the Securities and Exchange
Commission as those  controls and other  procedures  that are designed to ensure
that  information  required to be disclosed in the  Company's  filings under the
Securities Act of 1934 is recorded,  processed,  summarized and reported  within
the time periods specified in the Securities and Exchange Commission's rules and
forms.  The Company's Chief Executive  Officer and Chief Financial  Officer have
evaluated the Company's  disclosure  controls and  procedures as of December 31,
2003,  and have  determined  that such  disclosure  controls and  procedures are
effective.


There  has been no change  in the  Company's  internal  control  over  financial
reporting  during the quarter  ended  December  31,  2003,  that has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.




                                      -26-
<PAGE>


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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 is a defendant in lawsuits by plaintiffs alleging that
they  suffer  from  respiratory  medical  conditions,   such  as  asbestosis  or
silicosis, relating to exposure to asbestos and silica, and that such conditions
result, in part, from the use of respirators that,  allegedly,  were negligently
designed or  manufactured.  The defendants in these lawsuits are often numerous,
and include,  in addition to  manufacturers  and  distributors  of  respirators,
manufacturers,  distributors  and  installers  of sand (used in sand  blasting),
asbestos and  asbestos-containing  products. Most of these claims are covered by
the Asset  Transfer  Agreement  entered into on June 13, 1995 by the Company and
Aearo Company,  on the one hand, and Cabot and certain of its subsidiaries  (the
"Sellers"), on the other hand (the "1995 Asset Transfer Agreement"). In the 1995
Asset  Transfer  Agreement,  so long as the Company  makes an annual  payment of
$400,000  to Cabot,  the  Sellers  agreed to retain,  and Cabot and the  Sellers
agreed to defend and indemnify the Company against,  any liability or obligation
relating to or otherwise arising under any proceeding or other claim against the
Company or Cabot or their  respective  affiliates or other parties with whom any
Seller directly or indirectly has a contractual  liability  sharing  arrangement
which  sounds in product  liability or related  causes of action  arising out of
actual or alleged  respiratory  medical conditions caused or allegedly caused by
the use of respirators or similar devices sold by Sellers or their  predecessors
(including  American Optical Corporation and its predecessors) prior to July 11,
1995.  To date,  the  Company  has  elected to pay the annual fee and intends to
continue to do so. The Company could  potentially be liable for claims currently
retained by Sellers if the Company  elects to cease  paying the annual fee or if
Cabot and the Sellers no longer are able to perform their  obligations under the
1995  Asset  Transfer  Agreement.  Cabot  acknowledged  in  the  Stock  Purchase
Agreement that it and the Company  entered into on June 27, 2003  (providing for
the sale by Cabot to the Company of all of the common and preferred stock of the
Company owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer
Agreement remain in effect.  The 1995 Asset Transfer Agreement does not apply to
claims relating to the business of Eastern Safety Equipment,  the stock of which
the Company acquired in 1996.

At  December  31,  2003  and  September  30,  2003,  the  Company  has  recorded
liabilities of approximately $4.5 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 2008 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 1995 Asset Transfer Agreement,  but recognizing


                                      -27-
<PAGE>


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.



<PAGE>

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

Item 3.  Defaults Upon Senior Securities
     None.

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

Item 5.  Other Information
     None.

Item 6.  Exhibits  and Reports on Form 8-K

(a)  Exhibits  See Index of Exhibits on page 29 hereof.
(b)  Reports on Form 8-K
     On October  9,  2003,  the  Company  filed a Current  Report on Form 8-K to
     announce its revenues for the fiscal year ended September 30, 2003.

<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, 2004                        AEARO CORPORATION

                                                /s/ Jeffrey S. Kulka

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




<PAGE>



                                  EXHIBIT INDEX


     EXHIBITS           DESCRIPTION

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