Form 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1997

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _________ to _________

                         Commission File Number 69270-NY
                                                --------

                        MACE SECURITY INTERNATIONAL, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        Delaware                                             03-0311630
-------------------------------                           -------------------
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                           Identification No.)

160 Benmont Avenue, Bennington, Vermont                         05201
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(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:               (802) 447-1503
                                                                  --------------

Securities registered pursuant to Section 12(b) of the Act:                 None
                                                                            ----

Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock

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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B (ss.229.405) is not contained herein, and no disclosure will
be contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB |_|.

The registrant's net sales for 1997 were $9,830,591.

As of April 8, 1998 the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price of $1.4375 on that
date, was $6,560,796.

As of April 8, 1998 the registrant had issued and outstanding 7,081,666 shares
of Common Stock.


                                       1
<PAGE>

                                     PART I

ITEM 1. BUSINESS

      The following can be interpreted as including forward looking statements
under the Private Securities Litigation Reform Act of 1995. Such statements are
typically identified by the words "intends", "plans", "effort", "anticipates",
"believes", "expects", or words of similar import. Various important factors
that could cause actual results to differ materially from those expressed in the
forward looking statements are identified below and may vary significantly based
on a number of factors including, but not limited to, marketing success, product
development, production, manufacturing costs, competitive conditions, and the
change in economic conditions of the various markets the Company serves. Actual
future results may differ materially from those suggested in the following
statements.

GENERAL

      Mace Security International, Inc. (the "Company") is a well known producer
of less-lethal defense sprays for the Consumer and Law Enforcement Markets and a
marketer of consumer safety and security products. The Company also supplies
chemical munitions and accessories to law enforcement, correctional and military
agencies throughout the world (the "Law Enforcement Market") and conducts
training for all types of professionals responsible for the management and
control of violent behavior in individuals. These programs encompass basic and
specialized use of force and weapons training, including chemical munitions and
aerosols.

      The Company's goal is to maximize profitability by: strategic acquisitions
and generating planned growth through product diversification, planning for and
meeting the challenges of the ever changing and competitive business climate,
and striving to enlarge market share and expand distribution channels within
each product category.

      The Company believes it is one of the leading manufacturers and
distributors of safety and security items to civilian consumers (the "Consumer
Market") and chemical munitions and accessories to the Law Enforcement Market.

      The Company was incorporated in Vermont in December of 1987 under the name
Mark Sport, Inc. after Jon E. Goodrich, the Company's President and CEO, and a
former principal stockholder obtained an exclusive license to produce and market
defense sprays to the Consumer Market under the Mace(R) brand trademark within
the continental United States, and a non-exclusive license to market defense
sprays under the Mace(R) trademark outside of the continental United States. In
1992, this license was renegotiated to include a purchase option.

      The Company changed its name to Mace Security International, Inc. in
September 1993. In November 1993, prior to its initial public offering, it
merged into a new company incorporated in the state of Delaware.

      The Company exercised its option to purchase the Mace(R) trademark and, in
December 1993, the Company paid in full all amounts due under its promissory
note for the purchase of all rights, title and interest to the Mace(R) brand and
related trademarks.

      In March 1994, the Company acquired certain assets and liabilities of the
Federal Laboratories division of TransTechnology Corporation, which are operated
by the Company as part of its Law Enforcement division. The Company's Law
Enforcement division offers a full line of chemical munitions and accessories,
most of which are marketed under the Federal Laboratories(R) trademark, designed
for outdoor crowd dispersement and confined area use as well as for riot and
barricade situations.


                                       2
<PAGE>

      In late 1997, the Company entered the retail market for consumer safety
products by purchasing (i) a distribution company specializing in the sourcing
and sales of specialized consumer products; and (ii) two retail stores in the
Denver, Colorado area that are currently operated under the trade name Mace
Security Centers(TM). The Company also opened in November 1997 an additional
Mace Security Center(TM) in Denver, Colorado. In addition, a fourth store in the
Denver area is targeted for a June 1998 opening. The operating results of the
Mace Security Centers(TM) are immaterial at this time. It is too soon to
determine the potential for these stores. The Company has finalized a franchise
program for additional Mace Security Centers(TM). The Denver stores will be used
as prototypes for the franchising program. The first franchise is expected to be
sold in 1998.

PRODUCTS AND LINES OF MERCHANDISE

      The Company designs, markets and sells its Consumer product line for use
in protection of the home and automobile, and for personal and child protection.
These products include a line of personal alarms, whistles, window and door
security alarms and defense sprays. The Mace Security Centers(TM) offer a wider
range of products, including home security systems, child monitors, cellular
phones and pagers, and other security devices.

      In 1997, Mace Anti Crime Bureau ("MACB"), an extension of the Consumer
division, completed product development of a highly cost competitive "dye-pack"
used by financial institutions for robbery protection. It was introduced to
trade shows in the fall of 1997 as "MaceCash(TM)". MACB is also in the process
of developing other safeguard devices for use by financial institutions and
armored cars in the physical transportation of cash. Other services provided by
MACB to financial institutions are state-of-the-art training videos and crisis
response materials.

      The Company's Law Enforcement product line of chemical munitions consists
of, among others, defense sprays, tear gas smoke grenades, projectiles,
launchers, stun munitions and protective masks. The Company's Law Enforcement
Market includes law enforcement, correctional, or military organizations that
deal with violent individuals or situations.

DISTRIBUTION/MARKET SEGMENTS

      Distribution of the Company's products and services is aimed at two
distinct segments/markets: Consumer and Law Enforcement.

      The Company's sales efforts are coordinated by a team of in-house sales
and support personnel dealing with a network of manufacturers' representatives
and buyers for a variety of distributors and retail accounts.

Consumer Market

      The Company's in-house sales and support staff sells products through a
nationwide network of manufacturers' representative groups and sells directly to
wholesale distributors. Significant retail accounts are generally handled
directly by the Company as are mail order and specialty accounts.

      The Company's Consumer Market includes: mass merchants/department stores,
consumer catalogues and guns/sporting goods, hardware, auto, convenience, and
drug stores. Each market category is reached through in-house sales managers,
and/or through manufacturers' representatives. Market categories are also
reached through catalogue, magazine and trade publication advertising and
promoting at industry trade shows.

      Since late 1997, the Company has expanded its distribution channels to
include three retail stores called Mace Security Centers(TM), in Denver,
Colorado which carry the Company's Consumer products as well as a variety of
other safety products. The Company hopes that this new distribution channel will
result in additional sales and broader retail exposure of the Company's Consumer
products. The Company anticipates selling its first franchise of Mace Security
Centers(TM) in 1998.


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<PAGE>

      MACB's market includes financial institutions and related businesses
throughout the world. Sales efforts for MaceCash(TM) in the domestic market are
expected to be conducted through direct marketing and the use of independent
sales representatives and distributors as well as exhibition at national trade
shows and advertisement in trade publications. International marketing efforts
are expected to be conducted primarily through independent distributors.

Law Enforcement Market

      The Company's Law Enforcement sales are conducted mainly through
manufacturers' representative groups, wholesale law enforcement distributors and
directly to various governmental agencies. Additionally, sales are conducted
through smaller distributors and dealers specializing in the Law Enforcement
supply business. International Law Enforcement sales are primarily generated
through bidding processes from a variety of law enforcement, correctional and
military agencies. Law Enforcement sales continue to be "high profile" sales for
the Company and act as the foundation for the level of market recognition
enjoyed by the Mace(R) brand Consumer products.

      The Company markets its Law Enforcement products in over 50 countries
worldwide. The majority of the international sales for 1997 and 1996, which
totaled approximately $3,442,000 and $3,157,000 respectively, were from the
Federal Laboratories(R) product line.

      The Company expanded its training division course offerings with the
introduction in 1996 of an advanced level of training programs. The training
division acts in concert with the Law Enforcement sales group to generate
familiarity with the Company's product line for the Law Enforcement Market.

      On April 2, 1998, the Company entered into an agreement (the "Purchase
Agreement") with Armor Holdings, Inc. ("AHI") and its wholly-owned subsidiary
for the sale of substantially all of the assets of the Company's Law Enforcement
division to AHI (the "Transaction"). The terms of the Purchase Agreement require
that, in conjunction with the sale of assets, the Company license to AHI the use
of the Mace(R) and related trademarks and a patent for use by AHI in the Law
Enforcement market only. The sale is subject to, among other things, approval by
holders of a majority of the Company's Common Stock and receipt by the Company
of an opinion that the Transaction is fair, from a financial point of view. The
Transaction is expected to close in June 1998.

      AHI is a public company with its shares of common stock listed on the
American Stock Exchange under the symbol "ABE". It is engaged in the
manufacture, sale and marketing of ballistic resistant vests, tactical armor,
bomb disposal equipment, less-lethal munitions and anti-riot products and
providing security planning, advisory, and management services.(See "Acquisition
Proposal", "Management Discussions and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources" and "Subsequent Events").

COMPETITION

      The Company faces intense competition in both the Consumer and Law
Enforcement Markets.

      Domestically, there continues to be a number of companies marketing
defense sprays to civilian consumers. While the Company continues to offer
defense spray products that Management believes distinguish themselves through
brand name recognition, superior product features and formulations and research
and development, the Consumer division has experienced a sales decline for these
products. The Company attributes this decline not only to the strong
competition, but also to lower demand in general. In an attempt to reverse these
factors, the Company has entered the retail market with its new Mace Security
Centers(TM) in Denver, Colorado and anticipates selling its first franchised
Mace Security Center(TM) in 1998.


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<PAGE>

      The Law Enforcement Market is also highly competitive. The number of
competitors has expanded. Additionally departmental bidding processes and
related sales expenses continually put pressure on pricing and margins. Gross
profit margins in the Law Enforcement division have steadily declined. In 1996
the gross profit margin was 33.5% and in 1997 it was 24%. The Company believes
that it would be in its best interests to sell this division and to concentrate
its efforts on expanding its presence in the Consumer retail market through
Company owned and franchised Mace Security Centers(TM) and investing in
attractive opportunities that may be anticipated to provide reasonable growth,
which opportunities may not be consistent with the historical business of the
Company. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations").

PRODUCTION

      The Company has expanded its production line in Bennington, Vermont since
1994 with the transfer of the Federal Laboratories(R) production operations from
Saltsburg, Pennsylvania. Substantially all of the Company's manufacturing
processes are now performed at the Company's Bennington facility.

      The Company's Law Enforcement and Consumer defense spray products are
manufactured on one of three aerosol filling machines. Most Consumer Market
products are packaged in sealed, tamper resistant "clamshells."

      Production equipment for the Company's chemical munitions is expansive and
consists of: spin welders, presses, volumetric feeders, a prime, powder and wad
machine, a pneumatic black powder loader, silkscreen machines, crimpers and
vacuum heat sealers, among others.

      The KinderGard(R) product line is primarily manufactured by an unrelated
company and packaged off-site with the finished goods transferred to the Vermont
facility for distribution. Operating results of the KinderGard(R) product line
are immaterial at this time.

      The Company relies on domestic and foreign contractors to supply chemicals
for its defense sprays and chemical munitions and to manufacture certain other
components for its Law Enforcement division products. There are numerous
potential suppliers of the chemicals, components and parts required in the
Company's production process.

      The Company has developed strong beneficial long-term relationships with
many of its suppliers including the following: Allplax, Inc., Moldamatic, Inc.,
Piper Impact, Inc., Amber International, Inc. and Springfield Printing, Inc.

      In addition, the Company purchases for resale a variety of products
produced by others including gas masks, launchers, whistles, alarms, flashers,
and window locks, among others. With the addition of the Mace Security
Centers(TM), the products purchased for resale through those retail outlets will
include home security systems, child monitors, cellular phones and pagers and
other security devices. There are numerous suppliers available for each of these
items.

MAJOR CUSTOMERS

      The Company's top ten customers represented approximately 39.8% of the
total net sales in 1997. No single customer accounted for over 10.6% of those
sales.


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<PAGE>

TRADEMARKS/PATENTS

      The Company began marketing products in 1988 under the Mace(R) brand name
and related trademarks pursuant to an exclusive license for sales of defense
sprays to the Consumer Market in the continental United States, and a
non-exclusive license for sales to the Consumer Market worldwide. The license
agreement was renegotiated in 1992 to include a purchase option. The Company
exercised this option and purchased outright the Mace(R) brand name and related
trademarks (Pepper Mace(R), Chemical Mace(R), Mace . . . Just in Case(R), CS
Mace(TM) and Magnum Mace(TM)). In conjunction with this purchase, the Company
acquired a non-exclusive worldwide license to promote a patented pepper spray
formula in both markets. There are approximately six years remaining on the
license.

      The Company acquired a patent and trademark to the Big Jammer(R) door
brace, as part of its purchase of the assets of Home Protection Concepts, Inc.,
in July 1991.

      In 1995, the Company developed the trademark Cool-It!(TM) decontamination
spray. The Company also developed internally the trademarks: Window Jammer(TM),
Sonic Alert(TM), Safety Flasher(TM), Sport Strobe(TM), Child Safe Alarm(TM),
Window Alert(TM), Motion Alert(TM), Emergency Whistle(TM), and Auto Alert(TM).
The Company markets products manufactured by other companies under the foregoing
trademarks. The Company also acquired the trademarks Screecher(R),
Peppergard(R), Slam(R), and Mace (Mexico)(R).

      The Company developed the Viper(R) trademark in 1993. In August 1993, the
Company acquired an exclusive worldwide license to the patent for the safety top
device used on the Viper(R) brand defense spray. The Company no longer sells
products under the Viper(R) brand.

      As part of the March 1994 acquisition of the assets of the Federal
Laboratories division from TransTechnology Corporation, the Company acquired the
following trademarks: Federal Laboratories(R), TG Guard(TM), Guard(TM),
Triple-Chaser(R), Skat Shell(R), Ferret(R), Mini-Streamer(R) and MPG(TM). The
Company markets many products of its Law Enforcement division under the Federal
Laboratories(R) brand.

      In June 1994, as part of a license for a defense spray disarming device,
the Company acquired a co-exclusive license to manufacture and sell products
under U.S. Patent No. 5,310,086 until the expiration of the last patent covering
the invention. The Company does not intend to market products using this patent.

      As part of the August 1994 acquisition of the assets of KinderGard
Corporation, the Company acquired the trademark KinderGard(R) which is
registered in the United States and Japan.

      As part of a January 1995 license agreement for a child-to-parent strap,
which is part of the KinderGard(R) line, the Company acquired the following
trademarks: Zip-a-Babe(R), Hand n-Hand(R) and Safe-T-Zip(R).

      The Company received trademark registration for Muzzle(R) in Canada on
June 17, 1997.

      The Company has been issued letters patent on the locking mechanism for
the Mark VI defense spray unit.

      Except as described above, the Company holds no material patents or patent
licenses, although it endeavors to maintain the confidentiality, as trade
secrets, of certain formulations and processes.

      An essential part of the Company's business strategy has been to
capitalize on, promote aggressively, and


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<PAGE>

enhance the public's awareness and confidence in the Mace(R) trademark. The
Company relies on the trademark laws to protect its proprietary rights to the
Mace(R) trademark. The Company uses a newspaper clipping service to identify
significant unauthorized uses of the Mace(R) trademark and provides notice to
such users of the Company's willingness to take legal action for continued
unauthorized use. The Company also engages in trademark advertising in several
literary publications. All of the Company's distributors are authorized to use
the Mace(R) trademark for advertising. The Company is not aware of any
competitors repeatedly misusing the Mace(R) trademark in any material manner.
There can be no assurance, however, that the efforts taken by the Company to
protect its proprietary rights are or will be adequate to prevent
misappropriation or that the frequent use of the Mace(R) trademark by the public
as an encompassing description of defense sprays will not jeopardize its
proprietary status. The Company hopes that the license to AHI to use the Mace(R)
trademark on products sold to the Law Enforcement Market will continue the high
profile and market recognition to enhance the value of the Mace(R) brand name
(See "Acquisition Proposal", "Management Discussions and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources" and
"Subsequent Events").

REGULATORY MATTERS

      The distribution, sale, ownership and use of Consumer defense sprays are
legal in all 50 states and the District of Columbia. On January 1, 1996,
California eased restrictions on defense sprays. On November 1, 1996, New York
lifted an overall ban on defense sprays allowing for the sale of oleoresin
capsicum (OC) pepper sprays in licensed pharmacies and licensed gun stores only.
Massachusetts requires both users and sellers to be licensed. Wisconsin allows
the sale of oleoresin capsicum (OC) pepper sprays only and they must be sold
from behind a counter or under glass. Michigan does not permit sales of
chloroacetophenone (CN) sprays. Nevada permits sales of
orthochlorobenzalmalononitrile (CS) sprays only. The Company has been successful
notwithstanding these state regulations. There can be no assurance, however,
that broader, more severe restrictions will not be enacted that would have an
adverse impact on the Company's financial condition.

      The Company generates hazardous waste as a by-product of manufacturing
certain products of its Law Enforcement division. The Company believes that it
is in compliance with all state and local statutes governing the disposal of
such hazardous material through its contract with a licensed hazardous material
disposal company. The disposal of hazardous waste expense is not a significant
cost of manufacturing.

      The Company has constructed a self-contained testing chamber for its
products which is located inside its Bennington, Vermont facility.

      In early 1997 the Company completed the installation of the air filtration
and recirculation equipment in its manufacturing facility. The Company believes
it is in compliance with all federal, state, and local environmental laws.

RESEARCH AND DEVELOPMENT

      Research and development expenses were approximately $81,000 in 1997 and
$53,000 in 1996. The Company has an on-site laboratory.

      Research and development is used by the Company to maintain its reputation
in the defense spray and chemical munitions industries. The Company is
continually reviewing ideas and potential licensing arrangements to expand its
product lines. Particularly, the Company spent a significant portion of its 1997
research and development budget in the creation of MaceCash(TM) and other Mace
Anti Crime Bureau products.


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<PAGE>

EMPLOYEES

      As of April 8, 1998, the Company employed 90 individuals of whom 3 were
part time. The Company's employees are not subject to a collective bargaining
agreement.

ACQUISITION PROPOSAL

      On April 2, 1998, the Company entered into an agreement (the "Purchase
Agreement") with Armor Holdings, Inc. ("AHI") and its wholly-owned subsidiary
for the sale of substantially all of the assets of the Company's Law Enforcement
division to AHI (the "Transaction"). The terms of the Purchase Agreement require
that, in conjunction with the sale of assets, the Company license to AHI the use
of Mace(R) brand and relating trademarks and a patent for use by AHI in the Law
Enforcement market only. The sale is subject to, among other things, approval by
holders of a majority of the Company's Common Stock and receipt by the Company
of an opinion that the Transaction is fair, from a financial point of view. The
Transaction is expected to close in June 1998.

      AHI is a public company with its shares of common stock listed on the
American Stock Exchange under the symbol "ABE". It is engaged in the
manufacture, sale and marketing of balistic resistant vests, tactical armor,
bomb disposal equipment, less-lethal munitions and anti-riot products and
providing security planning, advisory, and management services. (See "Management
Discussions and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and "Subsequent Events").

      A consent solicitation statement describing the proposed transaction will
be sent to all shareholders of record as of April 1, 1998. Jon E. Goodrich, the
Company's President and Chief Executive Officer has entered into an agreement
with AHI pursuant to which he has agreed to vote, or submit a consent with
respect to, all of his shares of the Company (2,259,246 shares constituting
approximately 32% of the Company's outstanding stock) in favor of the
Transaction.

ITEM 2. PROPERTIES

      The Company leases its headquarters in Bennington, Vermont. Substantially
all of the Company's operations, including administration and sales, and
virtually all of its production facilities are located at the Bennington
facility. The facility consists of approximately 220,000 square feet; 60,000
square feet is referred to as the South Wing of the Holden-Leonard Mill (the
"South Wing") and is leased from one landlord while the remaining 160,000 square
feet is leased from another owner (made up of the "Center Wing" and "North
Wing"). The Company acquired from G&G Realty Inc. a purchase option with respect
to the South Wing and has entered into a real estate purchase agreement with the
Vermont Economic Development Authority for the Center and North Wings.

      The term of the South Wing lease expires on January 31, 2000, and requires
monthly payments of $6,064, plus the Company's proportionate share of taxes,
insurance, utilities and an annual cost of living increase. The purchase option
may be exercised for $600,000 at the end of the lease term.

      The purchase agreement with respect to the Center and North Wings
contemplates that the Company will purchase the property for $1,000,000 after
certain contingencies are satisfied, including specific environmental
contingencies to be met by the seller. If these contingencies are not
satisfactorily met or waived, the Company has a right to lease the Center &
North Wings through August 2007. The lease requires monthly payments of $4,000
together with all utilities, assessments, taxes and maintenance. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 10 to "Notes to Financial
Statements").


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<PAGE>

      The Company subleases a portion of the South and North Wings of the
Holden-Leonard Mill. One of the sublease agreements is with a tenant owned
partially by Jon Goodrich, the Company's President and CEO. Rental income from
this tenant was $24,000 in both 1996 and 1997. Total sublease rental income was
$93,231 and $65,160 in 1997 and 1996, respectively.

      The Company does not have any current plan to invest in other real estate,
however, the Company may invest in various parcels of real estate from time to
time without stockholder approval.

      The Company believes that all of its properties are adequately covered by
insurance and believes its properties are suitable and adequate for its current
and near term needs.

ITEM 3. LEGAL PROCEEDINGS

      The following discloses all pending litigation against the Company, other
than routine ligitation, involving claims for damages in excess of $730,000,
which constitutes ten (10%) percent of the Company's current assets at December
31, 1997, and also discloses the disposition of claims previously disclosed.

      As disclosed in the Company's 1994 Form 10-KSB, on January 25, 1994 a suit
was filed by Carmeta Gentles on her own behalf and as personal representative of
the estate of Robert Gentles in Ontario Court (General Division), Ontario,
Canada, claiming intentional or negligent manufacture and distribution of the
Mark V Mace(R) brand defense spray unit and that its contents contributed to the
suffering and death of Robert Gentles while in the Kingston Penitentiary in
October 1993. The Company was added as a party defendant on February 8, 1995.
The plaintiff seeks five million dollars in damages. The Company forwarded this
suit to its insurance carrier for defense. The Company does not anticipate that
this claim will result in the payment of damages in excess of the Company's
insurance coverage.

      As disclosed in the Company's Form 10-QSB for the quarter ended June 30,
1995, on April 19, 1995 a suit was filed by Elaine Thomlinson, et al., in
Ontario Court (General Division), Ontario, Canada, claiming unspecified damages
to multiple school children for personal injuries, pain and suffering, emotional
trauma and financial loss and expense in consequence of their exposure to
noxious and hazardous substances while participating in a simulated emergency
exercise conducted at a local school by municipal authorities. The Company
forwarded this suit to its insurance carrier for defense. The Company does not
anticipate that this claim will result in the payment of damages in excess of
the Company's insurance coverage.

      On August 10, 1995, a suit was filed by B.P. Apparel, Inc., Easley, South
Carolina, in the Court of Common Pleas, County of Lexington, South Carolina. The
Complaint alleged breach of contract, fraud and negligent misrepresentation by
the Company as a result of the actions of a Company employee in facilitating the
sale of an airplane formerly leased by the Company from G&G Realty, Inc.,
Lillington, North Carolina. The plaintiff sought damages in the amount of
$200,000 as well as punitive damages and attorney's fees. This case was
dismissed June 3, 1997.

      Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays have been mischievously or
improperly used, in some cases by minors, have not been instantly effective or
have been ineffective against enraged or intoxicated individuals. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.


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<PAGE>

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

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

      The Company's Common Stock is traded on the NASDAQ Stock Market under the
symbol MACE.

      The following table sets forth for the calendar periods indicating the
high and low sales price for the Common Stock for each quarter within the last
two fiscal years.

QUARTER ENDED                                       HIGH          LOW
-------------                                       ----          ---

March 31, 1996                                      1 3/4           3/4
June 30, 1996                                       1 3/4         1
September 30, 1996                                  2 1/4         1
December 31, 1996                                   1 5/8         1
March 31, 1997                                      1 3/4         1 1/8
June 30, 1997                                       1 3/8           7/8
September 30, 1997                                  1 5/16         25/32
December 31, 1997                                   1 1/4           7/8
March 31, 1998                                      1 9/16          7/8

      The past performance of the Company's securities is not necessarily
indicative of future performance.

      As of April 8, 1998, there were approximately 245 holders of record of the
Company's Common Stock.

      The Company has not paid cash dividends on its Common Stock since its
initial public offering. The Company's current bank financing imposes certain
restrictions on the Company's ability to pay dividends. Payment of dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend on, among other factors, earnings, bank restrictions, capital
requirements and the results of operations and financial condition of the
Company. The Company does not intend to pay dividends in the foreseeable future.

      Pursuant to Part III, Section 5(a)(5), of Schedule D of the NASD By-Laws,
to remain eligible for continued inclusion on the NASDAQ Stock Market, among
other things, a security must have a bid price of at least $1.00 per share, the
Company's net tangible assets must be at least $4,000,000 and the market float
(all outstanding shares other than those held by directors, officers, related
parties and persons or entities holding 10% or more of the outstanding shares)
must be as least $5,000,000. To the extent these requirements are not satisfied,
the security is subject to being removed from the NASDAQ Stock Market and listed
on the NASDAQ Small Cap Market.


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<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The following can be interpreted as including forward looking statements
under the Private Securities Litigation Reform Act of 1995. Such statements are
typically identified by the words "intends", "plans", "effort", "anticipates",
"believes", "expects", or words of similar import. Various important factors
that could cause actual results to differ materially from those expressed in the
forward looking statements are identified below and may vary significantly based
on a number of factors including, but not limited to, marketing success, product
development, production, manufacturing costs, competitive conditions, and the
change in economic conditions of the various markets the Company serves. Actual
future results may differ materially from those suggested in the following
statements.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 compared to Year Ended December 31, 1996.

      The following discussion should be read in conjunction with the
accompanying Financial Statements and Notes thereto.

      Net sales decreased by $993,612 or 9.2% in 1997 compared to 1996. The
major component contributing to this decrease is a 40.1% decline in the Consumer
division sales from $4,437,020 in 1996 to $2,657,354 in 1997. This decline was
offset in part by an increase in Law Enforcement sales to $6,917,627 in 1997
from $6,387,183 in 1996, as well as the additional net sales of $255,609
provided by the Company's new subsidiaries acquired in 1997. Substantially all
categories of the Consumer defense spray market realized a sales decrease in
1997 as compared to 1996, which coincides with the continuing trend exhibited by
the declining defense spray market.

      Gross profit as a percent of sales decreased to 28.7% as compared to 39.1%
in 1996. Gross profit from the Law Enforcement division decreased to 24.0% in
1997 from 33.5% in 1996. Gross profit from the Consumer Division deceased to
38.1% in 1997 from 47.1% in 1996. Decreases in gross profit margins for the Law
Enforcement Division were attributable to a combination of items including the
strength of the US dollar and its negative impact on export pricing, continued
strong competitive bidding for international business, book to physical
inventory adjustments and additions to inventory reserves for slow moving and
obsolete items. Decreases to gross profit margins for the Consumer Division were
attributable to a change in product mix to lesser margin buy-sell products as
well as additions to inventory reserves for slow moving and obsolete items.

      General, administrative and selling expenses overall increased 0.6% in
1997 compared to 1996. As a percentage of net sales, these expenses increased to
45.8% in 1997 from 41.4% in 1996.

      General and administrative expenses increased by $75,483 or 2.9% in 1997
compared to 1996. As a percent of net sales, these expenses increased to 27.3%
in 1997 from 24.1% in 1996 as a result of lower sales in 1997.

      Selling expenses decreased by $49,059 or 2.6% in 1997 compared to 1996. As
a percentage of net sales, these expenses increased to 18.6% in 1997 from 17.3%
in 1996 as a result of additional promotional expenses for the newly acquired
Company owned stores and MaceCash(TM).

      Operating loss as a percentage of net sales increased to 17.2% in 1997
from 2.3% in 1996.

      Other income/expense(net) was income of $8,448 in 1997 compared to income
of $7,175 in 1996. These net amounts are comprised of interest income and rents
from sublets on the Company's leased facility and interest expense on the
Company's term loan with FNB. (See "-Liquidity and Capital Resources")


                                       11
<PAGE>

      The Company is currently considering acquisition opportunities in the
event the Transaction with AHI is consumated. Acquisitions will be necessary to
fill the void from the disposal of the Company's Law Enforcement division.


                                       12
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      In October 1996, the Company entered into a credit agreement with KeyBank
National Association ("Key") which provided for a maximum of $2,000,000 of
credit (the "credit agreement") and was subject to a borrowing base formula. The
amounts outstanding under the credit agreement were secured by virtually all of
the Company's then owned and after-acquired assets.

      The credit agreement was separated into two "facilities". One facility
provided for a $750,000 term loan maturing October 1, 2000, calling for monthly
principal payments of $15,625 plus accrued interest at the Key's "base rate"
plus 1.25% (9.5% on December 31, 1996). The Company drew fully on the term loan
and used the proceeds to pay off the term loan with Vermont National Bank that
totaled $395,823, including interest, and used the remaining $354,177 for
working capital purposes.

      The second facility, a $250,000 line of credit, which originally matured
on October 1, 1998 and called for interest to be paid monthly at Key's "base
rate" plus 1.25% (9.25% as of December 31, 1996) was canceled in early 1997. No
amounts were drawn on this facility.

      The credit agreement contained various covenants which included the
maintenance of certain financial ratios and limitations on capital expenditures,
debt and dividends. As of December 31, 1996, the Company was in violation of
most of the financial ratio covenants. The Company obtained a waiver of these
violations for the year ended December 31, 1996 and for the 10 months ended
October 31, 1997.

      In April 1997, the Company's President and the Company's Chairman of the
Board supplied the Company with lines of credit for up to $375,000 each
($750,000 in total) with interest at prime plus 1.25%. The lines of credit
expired in September 1997. No amounts were drawn on these lines.

      In September 1997, the Company refinanced its long-term debt with the
First National Bank of New England ("FNB") Two term loans totaling $1,800,000
bearing interest at prime plus 1.50% (10.0% at December 31, 1997) payable in
monthly installments of $23,791, including interest, due October 1, 2007, were
obtained. Of the proceeds, $593,750 was used to pay off the Key long-term debt.
Additionally, a $250,000 line of credit bearing interest at prime plus 1% (9.5%
at December 31, 1997) due May 31, 1998 was obtained. No amounts have been drawn
on this line of credit.

      These facilities include certain dividend restrictions and are
collateralized by the following: (a) assignment of life insurance owned by the
Company on the life of the current President and Chief Executive Officer; and
(b) first priority security interest in all inventory and all other assets of
the Company. All three facilities are personally guaranteed by the current
President and Chief Executive Officer of the Company. The Company plans to pay
off the loan to FNB simultaneously with the closing of the Transaction with AHI
(See below and "Subsequent Events").

      Prior to this refinancing event, promissory notes to TransTechnology
Corporation relating to the acquisition of the assets of Federal Laboratories,
was paid in full with cash from operations.

      At December 31, 1997, the Company's open orders totalled $1,099,455 as
compared to $1,681,463 for the prior year-end. Open orders are orders that have
not yet been manufactured but are scheduled for production and delivery.

      Inventory decreased $1,251,174 in 1997.

      For the year ended December 31, 1997, capital expenditures were $238,726
compared to $304,403 in 1996. In 1998 the Company intends to open a fourth Mace
Security Center (TM) in the Denver area. Capital outlay for the store is
estimated at $200,000.


                                       13
<PAGE>

      Additionally, the Company is a party to a real estate purchase agreement
with the Vermont Economic Development Authority (VEDA) for the purchase of the
Center and North Wings of its headquarters, after the satisfaction or waiver of
certain contingencies by VEDA. The Company cannot predict when, or if, these
contingencies will be met. The purchase price is $1,000,000, payable by delivery
of $150,000 in cash and a promissory note to VEDA for $850,000 at 4% interest
per annum, based on a 20 year amortization schedule with a balloon payment of
$100,000 due at the end of ten years. (See "Properties"). The Company has
deposited $75,000 of the total cash portion into an escrow account as required
by the agreement. (See Note 10 to "Notes to Financial Statements").

      On April 2, 1998, the Company entered into an agreement (the "Purchase
Agreement") with Armor Holdings, Inc. ("AHI") and its wholly-owned subsidiary
for the sale of substantially all of the assets of the Company's Law Enforcement
division to AHI (the "Transaction"). The terms of the Purchase Agreement require
that, in conjunction with the sale of assets, the Company license to AHI the use
of Mace(R) and related trademarks and a patent for use by AHI in the Law
Enforcement market only. The sale is subject to, among other things, approval by
holders of a majority of the Company's Common Stock and receipt by the Company
of an opinion that the Transaction is fair, from a financial point of view. The
Transaction is expected to close in June 1998.

      The Company expects to apply approximately $1,750,000 of the purchase
price received to pay off the amount due to FNB under its term loans. In
addition, $600,000 of the purchase price will be retained by AHI to secure among
other things, the Company's obligations under the representations and warranties
in the Purchase Agreement. The remainder of the purchase price will be available
to the Company for the purposes deemed to be appropriate by the Company's Board
of Directors. While the Company has no definitive plans, some or all of the
remaining purchase price may be used for acquisitions, among other things. Such
acquisitions may include companies or assets not consistent with the Company's
historical business.

      Pursuant to the terms of the Purchase Agreement, the Company will sell to
AHI all of the fixed assets, intangibles and inventory of the Law Enforcement
division. AHI will also receive a 99-year paid-up license to utilize the Mace(R)
brand and other related trademarks in the law enforcement market only, which is
made up of law enforcement, military, correctional and certain governmental
agencies. The assets of the law Enforcement division constitute a substantial
part of the Company's assets.

      The purchase price for the fixed assets and intangibles, including the
license fee for the 99-year paid-up license, is $3,117,325 representing the book
value as of December 31, 1997 plus an additional amount of $200,000, to cover
certain expenses of the transaction. The purchase price for inventory is
$2,636,526 representing the book value at December 31, 1997, increased by
inventory purchases since December 31, 1997, valued at the Company's standard
cost and decreased by (i) sales of inventory from December 31, 1997 and (ii)
inventory related to unshipped orders that AHI has not agreed to fill.

      The Company will retain its cash and accounts receivable from the Law
Enforcement division, estimated at approximately $2,000,000. The purchase price
will be paid in cash or other immediately available funds. The Company does not
anticipate any material tax implications resulting from the Transaction. To the
extent there is taxable gain resulting from the Transaction, the Company will
utilize its net operating loss carry forward to cover the taxes, if any,
resulting from the sale.


                                       14
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

Financial Statements filed as a part of this report:

      Reports of Independent Accountants                               F-2, F-2A
                                                                       
      Consolidated Balance Sheets at December 31, 1997 and 1996        F-3
                                                                       
      Consolidated Statements of Operations for the Years Ended        
        December 31, 1997 and 1996                                     F-4
                                                                       
      Consolidated Statements of Stockholders' Equity for the          
       Years Ended December 31, 1997 and 1996                          F-5
                                                                       
      Consolidated Statements of Cash Flows for the Years Ended        
        December 31, 1997 and 1996                                     F-6
                                                                       
      Notes to Consolidated Financial Statements                       F-7
                                                                       
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      On August 13, 1997, at the direction of its Board of Directors, the
Company advised Coopers & Lybrand, LLP ("Coopers") that due to cost containment
efforts, its engagement of Coopers as its independent public accountants was
terminated, subject to ratification by the Company's shareholders. The Company's
Board of Directors engaged Urbach Kahn & Werlin PC as its new independent public
accountants, to be finally effective upon shareholder approval.

      The Company's decision to dismiss Coopers was based solely on cost
considerations. There were no disagreements with Coopers on any matter of
accounting principles or practices, financial statement disclosure or otherwise.
None of the Company's financial statements contained an adverse opinion or
disclaimer of opinion.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following persons are directors and officers of the Company as of April 8,
1998.

Name                             Age   Title
----                             ---   -----

Marvin P. Brown .................68    Chairman of the Board
Jon E. Goodrich..................52    CEO, President and Director
Mark A. Capone...................49    CFO, Treasurer, Vice President of Finance
Bernard D. Graney, Jr............37    Vice President of Operations, Secretary
Kenneth J. Blakey................53    Vice President of Sales
Howard S. Edelman................62    Director, Vice President of Franchising
Virginia de Ganahl Russell.......66    Director
Neil J. Campolungo...............58    Director
Lewis Cohen......................48    Director
R. David Garwood.................56    Director


                                       15
<PAGE>

      Marvin P. Brown was elected President, Chief Executive Officer, and
director of the Company in January 1997. On March 14, 1997, Mr. Brown resigned
as President and CEO and assumed the position of Chairman of the Board. Since
1993 he has been associated with Wolff Investment Company, Inc., a brokerage
firm member of the National Association of Securities Dealers, Inc., as Director
of Corporate Finance and Senior Vice President. From 1988 through 1992 he had
been a senior vice president of Tucker Anthony, a member of the New York Stock
Exchange. Prior to that period, he had held senior officer positions with
various members of the New York Stock Exchange. He also has served as president
of Zenith Laboratories, Inc., formerly a leading independent manufacturer of
generic pharmaceuticals from 1968 to 1969. Wolff Investment Group, Inc. has
served as a financial consultant to the Company on several occasions from 1993
to 1996. (See "Certain Relationships and Related Transactions" and
"Employment/Consulting Contracts and Termination of Employment and
Change-In-Control arrangements").

      Jon E. Goodrich served as Chairman of the Board of Directors of the
Company from its inception in 1987 until June 1995. He served as President of
the Company from its inception until January 15, 1996 when he tendered his
resignation and was renamed Chairman of the Board. On March 14, 1997, he was
reappointed as President and CEO and resigned as Chairman of the Board. He was
also a vice president of Gould & Goodrich Leather, Inc., a manufacturer of
holsters, belts and related products and president of G&G Realty, Inc., a real
estate management corporation until January of 1997 when he resigned from his
positions and terminated his interest in both companies. (See "Certain
Relationships and Related Transactions" and "Employment/Consulting Contracts and
Termination of Employment and Change-in-Control Arrangements").

      Mark A. Capone, a CPA, was employed by the Company on September 2, 1997,
as the Company's Chief Financial Officer, and holds the titles of Vice President
of Finance and Treasurer of the Company. Prior to joining the Company, Mr.
Capone operated his own accounting firm providing business consulting and tax
preparation services. He has over 25 years experience in the accounting
profession which includes holding a Senior Financial position with International
Paper Company. Mr. Capone is responsible for all of the Company's accounting and
treasury functions, as well as corporate development.

      Bernard D. Graney, Jr., is Vice President of Operations. He has been
employed by the Company for more than five years and has, during that time, held
a variety of managerial positions. He served as the Company's Secretary from
August 1993 until June 1995 and was reappointed Secretary on March 14, 1997.

      Kenneth J. Blakey, is Vice President of Law Enforcement Sales. He has been
employed by the Company since 1994. Prior to joining the Company he was employed
by TransTechnology Corporation as the International and Domestic Law Enforcement
Sales Director of the Federal Laboratories division for at least 5 years prior
to joining the Company. Prior to that he was domestic sales manager for Smith &
Wesson chemical company - tear gas division.

      Lewis C. Cohen has been a director of the Company since August 7, 1997.
Mr. Cohen is the president and sole shareholder of Apahouser Access Systems,
Inc. since 1976. Apahouser Access Systems, Inc. supplies and services security
hardware and electronic systems to industry, institutions and governmental
entities throughout New England and in the Middle East. Mr. Cohen also serves as
Treasurer and is on the Boards of Trustees of Sterling College in Vermont, the
Corporation at Babson College, Wellesley, Massachusetts, the Institute for
Community and Religion at Brandeis University and the National Foundation for
Jewish Culture.

      Neil J. Campolungo has been a director of the Company since May 10, 1997.
Since 1992, has been the Chief Executive Officer and sole shareholder of NJC
Associates, a consulting/marketing firm providing various sales, marketing,
business development, training and entrepreneurial programs to public and
private sector companies. From 1991 to 1996 he was the Division President of
Prentice Hall Legal & Financial Services, a Fortune 500 company. Prior to that
time he served in various senior management positions at Infosearch, Inc., which
was sold


                                       16
<PAGE>

to Paramount Communications.

      Howard S. Edelman became a director on September 26, 1997. Mr. Edelman, a
CPA, has been employed by the Company since July 1, 1997 in connection with the
acquisition by the Company of MSP, Inc., an importer and distributor of unique
pepper sprays and related personal protection products primarily to civilian
overseas markets, entrepreneurs, small retail stores and mail order catalog
firms. Since September 26, 1997, Mr. Edelman has been serving as Vice President
of Franchising, and in that capacity is responsible to develop and manage the
Company's franchise program. Mr. Edelman was the president, a director and major
stockholder of MSP, Inc. (Formerly known as Global International Security
Products) from 1990 until its acquisition by the Company (See "Certain
Relationships and Related Transactions").

      R. David Garwood was appointed as a director of the Company on February
27, 1998 to fill a vacancy created when the Board of Directors resolved to
increase the size of the Board to seven members. Mr. Garwood is, and has been
since 1974, the president and founder of R. D. Garwood, Inc., a management firm
based in Atlanta, Georgia that assists manufacturing and marketing firms. Mr.
Garwood's clients include Coca-Cola, Eastman Kodak, Sara Lee, Georgia Pacific,
M&M, Monsanto and others.

      Virginia de Ganahl Russell was appointed a director in January 1997. Ms.
Russell, who previously had served as a director of the Company in 1995, is
president of the Vermont Source of National Elegance, a leading nationwide
marketer of marble products. Ms. Russell is Chairman of the Board of the Vermont
Leadership Center of East Charleston, VT and is a member or serves on the board
of various organizations, including the Vermont Chamber of Commerce.

BOARD OF DIRECTORS

      The number of directors on the Board is currently fixed at seven. Each
director serves for a term of one year or until a successor is elected and
qualified. Officers are appointed by, and serve at the discretion of, the Board
of Directors. No director missed more than two board meetings held during 1997.

      The Chairman receives a fee of $750 and each director $500 per day plus
out of pocket travel, meals and lodging expenses for attendance at each board
meeting. Messrs. Brown , Goodrich and Edelman have waived their right to the
fees. All directors, other than Messrs. Brown and Goodrich have been granted
options to purchase 10,000 shares of Common Stock. In addition, in the event all
or substantially all of the assets of the Company are sold, as would be the case
in the event the Company sells its Law Enforcement division to AHI (see
"Business" and "Subsequent Events") all directors, including Messrs. Brown and
Goodrich, will receive additional options to purchase 10,000 shares.

      The Board of Directors has the following standing Committees, among
others: the Audit Committee, the Compensation Committee, the Planning Committee
and the Nominating Committee. The Audit Committee consists of Messrs. Brown,
Cohen and Campolungo. The Audit Committee recommends matters involving the
engagement and discharge of independent auditors, reviews the plans for and
results of the Company's procedures for internal auditing, and reviews the
continuing status of the Company's system of internal accounting controls. The
Compensation Committee consists of Messrs. Brown and Cohen, and Ms. deGanahl
Russell and makes recommendations regarding management compensation and
administers the Company's Non-qualified Stock Option Plan. The Planning
Committee consists of Messrs. Goodrich, Cohen and Ms. deGanahl Russell and is
responsible for recommending long-term strategies to the Board. The Nominating
Committee recommends persons to serve as directors of the Company and consists
of Messrs. Brown and Goodrich.


                                       17
<PAGE>

      Mr. Brown and the Company have a verbal agreement pursuant to which Mr.
Brown provides executive services to the Company on an as needed basis and
receives a salary of $500 per day and reimbursement of business expenses.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

      Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to the Company during its fiscal year ended December 31, 1997, no person (other
than Messrs. Gould, Goodrich and Capone) known to be a director, officer or the
beneficial owner of more than 10% of the Company's outstanding Common Stock,
failed to file on a timely basis, reports required to be filed by Section 16(a)
of the Exchange Act during the most recent fiscal year. All such reports have
since been filed. Mr. Gould, a former director and significant shareholder, no
longer owns more than 10% of the Company's outstanding stock.

ITEM 10. EXECUTIVE COMPENSATION

      The following table sets forth the aggregate compensation, cash and
non-cash, awarded to, earned by or paid by the Company to all persons who served
as its Chief Executive Officer at any time during the most recent fiscal year.
No other executive officers received annual compensation (consisting solely of
base salary and bonus, if any) in excess of $100,000 for the year ended December
31, 1997:

                           Summary Compensation Table

                             Year
                             Ended      Annual                         Other

Name and Principal Position  December 31          Salary    Bonus  Compensation
---------------------------  -----------          ------    -----  ------------

Jon E. Goodrich(1)           1997      $125,214  $  --
President and Chief          1996       124,023  $25,000      --
 Executive Officer           1995       161,000     --        --
 
Robert D. Norman(2)          1997      $ 54,615  $  --        --
Former President and Chief   1996        71,655     --    $27,800(3)
 Executive Officer           1995          --       --        --

Marvin Brown(4)              1997      $ 70,000  $  --        --
Chairman of the Board,       1996          --       --        --
 Former CEO and President    1995          --       --        --

(1)   Mr. Goodrich served as President and CEO until January 15, 1996, and, for
      the remainder of 1996, served as an advisor to the Board of Directors. He
      was reappointed as President and CEO on March 14, 1997.

(2)   Tendered his resignation effective 1/10/97.

(3)   Represents the issuance of 20,000 shares of the Company's common stock in
      connection with his employment as President, valued at $1.39 per share.

(4)   Mr. Brown served as President and CEO from January 10, 1997 to March 14,
      1997, and continued to serve as the President's Advisor throughout 1997.


                                       18
<PAGE>

Options/Warrants

      In September 1993, the Board of Directors of the Company adopted the Mace
Security International, Inc. Non-qualified Stock Option Plan (the "Plan"), which
was approved by the stockholders of the Company. The Plan provides for the
issuance of up to 630,000 shares of Common Stock upon exercise of the options.
The options are considered non-qualified stock options and are not transferable
by the recipient.

      The Plan is administered by the Compensation Committee of the Board of
Directors, which may grant options to employees, former employees, directors and
distributors for, and consultants to, the Company. The term of each option may
not exceed fifteen years from the date of grant. Immediately exercisable options
to purchase approximately 437,800 shares of Common Stock were outstanding to
employees, former employees, consultants, and former directors as of December
31, 1997 under the Plan. To date no options have been exercised.

      The following table shows certain information with respect to options
granted in 1997 to the named current and former executive officers of the
Company.

                       Options Granted in last Fiscal Year

                      Number         Percentage       Exercise      Expiration
Name                  of Options      of Total         Price           Date
----                  ----------     ----------       --------      ----------
                                                                    
Jon E. Goodrich         ---              ---            ---             ---
Marvin P. Brown       100,000           61.5%          $1.50          5/10/12
Robert D. Norman        ---              ---            ---             ---
                                                                    
      The following table shows certain information with respect to the year-end
value of options held by the named current and former executive officers of the
Company. No options were exercised during 1997.

                          Fiscal Year-End Option Values

                                                         Value of Unexercised
                             Number of Unexercised           In the Money
Name                         Options at 12/31/97(1)      Options at 12/31/97(2)
----                         ---------------------       ----------------------

Jon E. Goodrich                    -----                          -----
Robert D. Norman(3)                10,000                          $0
Marvin P. Brown(4)                100,000                           0

(1)   All options are immediately exercisable

(2)   Based upon a 12/31/97 closing price of $.875 per share

(3)   Options issued in connection with his role as a director

(4)   Options issued in connection with his role as the former President and CEO

      In connection with the Company's initial public offering, the Company
granted C.L. King & Associates, Inc., its underwriter, warrants to purchase
75,000 shares of the Company's Common Stock at a per share exercise price of
$6.60, and certain "demand" and "piggyback" registration rights with respect to
such shares, for a four year period which began November 12, 1994.

      In connection with the acquisition of the trademarks and assets of
KinderGard Corporation, the Company granted to the stockholders of KinderGard
Corporation warrants to purchase 60,000 shares of the Company's Common Stock at
a per share exercise price equal to $4.25 exercisable until August 2004.


                                       19
<PAGE>

Employment/Consulting Contracts and Termination of Employment and
Change-in-Control Arrangements

      Jon E. Goodrich was employed by the Company under an employment agreement
until January 1996. Thereafter he was retained as an advisor to the Board under
an advisory employment agreement. Mr. Goodrich is currently employed as
President and CEO under an employment agreement dated as of March 14, 1997. The
agreement supersedes the September 1, 1993 employment agreement between Mr.
Goodrich and the Company as well as the Advisory Employment Agreement dated as
of January 17, 1996 and is effective until September 1, 1998. Mr. Goodrich is
entitled to an annual salary of $125,000. The agreement prohibits Mr. Goodrich
from accepting employment with any other entity and further prohibits him from
competing with the Company for a two year period following his voluntary
termination of employment with the Company or termination of his employment by
the Company for cause, as defined in the agreement. Should Mr. Goodrich's
employment be terminated without cause, he would be entitled to all payments for
the term of the agreement.

      Robert D. Norman, a former director, the former President and CEO and
stockholder, entered into a two-year employment agreement with the Company to
serve as President/Chief Executive Officer dated as of January 16, 1996. The
agreement provided Mr. Norman with an annual salary of $110,000, an annual bonus
equal to $1,000 for every $100,000 of net income for each fiscal quarter, and
20,000 shares of Common Stock which have been issued. Notwithstanding, Mr.
Norman agreed to an annualized salary reduction to $42,000, commencing July 1996
through December, 1996. The agreement prohibits him from competing with the
Company for a two year period following his voluntary termination of employment
with the Company or termination of his employment by the Company for cause, as
defined in the agreement. Mr. Norman resigned in January 1997 in response to a
request from the Board. Mr. Norman received his contractual severance payment
equal to fourteen weeks pay, plus an additional $25,000. Such payment was made
in recognition that his resignation was requested without cause.

Change In Control

      On January 9, 1997, a voting agreement was signed representing in excess
of 51% of the Company's outstanding stock. The Agreement dated January 9, 1997,
was among Jon E. Goodrich, the Company's President and Chief Executive Officer,
Robert P. Gould, a former director and former significant shareholder, and
Marvin P. Brown, a former director and newly appointed Chairman of the Board.
The Agreement was terminated on or about December 30, 1997.

      On January 10, 1997, at the request of the parties to the voting
agreement, six members of the Board of Directors (Messrs. Foote, Logan, Norman,
Duboff, Mitchell, and Rosberg), the then president, Robert D. Norman, and the
then Executive Vice President, General Counsel and Secretary, Richard Galt,
resigned; Marvin Brown was appointed as President; the size of the Board was
reduced from nine to five members and Ms. Virginia de Ganahl Russell was
appointed as a director.

      On March 14, 1997, Robert Gould resigned from the Board and Jon Goodrich,
who had been acting under an advisory agreement with the Company, was reelected
to serve as President and CEO. Marvin Brown resigned as President and accepted
the position of Chairman of the Board.

      On May 10, 1997, Mr. Campolungo was appointed to the Board to fill the
vacancy resulting from the resignation of Mr. Gould. On August 7, 1997, the
Board resolved to increase its size to six members and Mr. Cohen was appointed
to fill the newly created position. Mr. Edelman was elected to the Board at the
annual shareholders' meeting on September 26, 1997. Mr. Garwood was appointed to
the Board on February 27, 1998, to fill a vacancy created when the Board of
Directors resolved to increase the size of the Board to seven members.

      On March 17, 1998, Jon E. Goodrich entered into a voting agreement with
AHI pursuant to which he agreed to vote all of his shares (2,259,246 shares,
constituting approximately 32% of the Company's outstanding stock) in


                                       20
<PAGE>

favor of the Transaction and, to secure his agreement, granted to AHI a proxy to
submit a consent on his behalf in connection with the Transaction pursuant to
the consent solicitation to be distributed to all shareholders of record on
April 1, 1998 (See (See "Acquisition Proposal", "Management Discussions and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" and "Subsequent Events").

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth, as of April 8, 1998 certain information
with respect to beneficial ownership of the Common Stock of the Company (the
only outstanding security) by each director, each executive officer and all
directors and executive officers as a group and by each person known by the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock. The address for all executive officers and directors is 160
Benmont Avenue, Bennington, Vermont

                                  Amount and Nature Of
Owner                             Beneficial/Ownership    Percent(1)
-----                             ---------------------   ----------

Jon E. Goodrich(2)                      2,259,246             31.9%
Marvin P. Brown(3)                        370,388              5.2%
Neil J. Campolungo(4)                      20,000                *
Mark Capone(5)                             15,000                *
Lewis C. Cohen(4)                          46,000                *
Howard Edelman(4),(6)                     118,000              1.6%
R. David Garwood(4)                        10,000                *
Virginia de Ganahl Russell(4)              50,000                *
Kenneth J. Blakey(4)                       30,000                *
Bernard D. Graney, Jr.(4)                  10,000                *
Timothy D. Smith(4)                        10,000                *

All executive officers and
directors as a group (11 persons)       2,816,634(7)          38.1%

Ronald I. Heller(3)                       695,375              9.8%
M. H. Meyerson & Co., Inc. 
525 Washington Blvd., 34th Floor
Jersey City, NJ 07310

David S. Nagleberg(9)                     695,375              9.8%
M.H.Meyerson & Co., Inc. 
525 Washington Blvd., 34th Floor
Jersey City, NJ 07310

TransTechnology Corporation               580,000              8.2%
700 Liberty Avenue
Union, New Jersey 07083

*Indicates beneficial ownership of less than 1%

(1)   Calculation based on 7,081,666 outstanding shares plus shares issuable to
      the named person under options exercisable within 60 days.

(2)   Excludes shares held by the named persons' spouses. The named directors do
      not have shared voting or dispositive power with respect to such shares.

(3)   Includes immediately exercisable options to purchase 100,000 shares of
      Common Stock granted by the Company and options to purchase 100,000 shares
      from each of two private individuals.

(4)   Includes immediately exercisable options to purchase 10,000 shares of
      Common Stock.

(5)   Includes immediately exercisable options to purchase 15,000 shares of
      Common Stock.


                                       21
<PAGE>

(6)   Includes 80,000 shares paid in connection with the acquisition of MSP,
      Inc., which are held in escrow and subject to a put option by the Company
      in the event MSP Inc. does not achieve certain pre-tax profit goals, and
      options to purchase 20,000 shares of the Company's common stock issued in
      connection with Mr. Edelman's employment agreement with the Company. (See
      "Certain Relationships and Related Transactions"). These options are
      subject to forfeiture in the event MSP, Inc. does not achieve certain
      pre-tax profit goals.

(7)   The denominator for this calculation is 7,396,666, which includes shares
      underlying options held by directors and executive officers that are
      exercisable within 60 days but excludes 100,000 shares underlying options
      granted to Mr. Brown by Mr. Goodrich to avoid double counting.

(8)   Includes shares held by the named person's spouse over which the names
      person disclaims beneficial ownership.

(9)   Includes 695,375 shares held by a trust for which the named person and his
      spouse are the trustees.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Mr. Brown, who serves as Chairman of the Board, and the Company have a
verbal agreement pursuant to which Mr. Brown provides executive services to the
Company on an as needed basis and receives a salary of $500 per day and
reimbursement of business expenses.

      The Company has entered into an employment agreement with Mr. Edelman, a
Vice President of the Company and a director, pursuant to which Mr. Edelman is
responsible to develop and manage a franchise program for the Company. The
agreement is dated as of July 1, 1997, has a one-year term and provides Mr.
Edelman with an annual salary of $78,000 plus options to purchase 20,000 shares,
exercisable for a five year period commencing with the one year anniversary of
his agreement at an exercise price of $1.25. The options are subject to
forfeiture in the event MSP, Inc., a subsidiary acquired from Mr. Edelman, does
not achieve certain pre-tax profit goals. In the event the pre-tax profit of
MSP, Inc. exceeds certain goals, Mr. Edelman is entitled to receive additional
options to purchase the Company's common stock.

      In January 1997, the Company retained the law firm of Donovan & O'Connor,
LLP, a firm at which Mr. Goodrich's brother is a principal, to render legal
services in litigation matters and general corporate matters. The Company paid
$54,354 to such firm in fiscal year ended December 31, 1997.

      The Company believes that all transactions with related individuals and
entities were on terms at least as favorable to the Company as those that would
have been reached with unrelated third parties.

SUBSEQUENT EVENTS:

      On April 2, 1998, the Company entered into an agreement (the "Purchase
Agreement") with Armor Holdings, Inc. ("AHI") and its wholly-owned subsidiary
for the sale of substantially all of the assets of the Company's Law Enforcement
division to AHI (the "Transaction"). The terms of the Purchase Agreement require
that, in conjunction with the sale of assets, the Company license to AHI the use
of Mace(R) and relatedtrademarks and a patent for use by AHI in the Law
Enforcement market only. The sale is subject to, among other things, approval by
holders of a majority of the Company's Common Stock and receipt by the Company
of an opinion that the Transaction is fair, from a financial point of view. The
Transaction is expected to close in June 1998.

      The Company expects to apply approximately $1,750,000 of the purchase
price received to pay off the amount due to FNB under its term loans. In
addition, $600,000 of the purchase price will be retained by AHI to secure,
among other things, the Company's obligations under the representations and
warranties in the Purchase Agreement. The remainder of the purchase price will
be available to the Company for the purposes deemed to be appropriate by the
Company's Board of Directors. While the Company has no definitive plans, some or
all of the remaining purchase price may be used for acquisitions, among other
things. Such acquisitions may include companies or assets not consistent with
the Company's historical business. (See "Acquisition Proposal" and "Management
Discussions and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital


                                       22
<PAGE>

Resources").

      Pursuant to the terms of the Purchase Agreement, the Company will sell to
AHI all of the fixed assets, intangibles and inventory of the Law Enforcement
division. AHI will also receive a 99-year paid-up license to exploit the Mace(R)
brand and other related trademarks in the law enforcement market only, which is
made up of law enforcement, military, correctional and certain governmental
agencies. The assets of the law Enforcement division constitute a substantial
part of the Company's assets.

      The purchase price for the fixed assets and intangibles, including the
license fee for the 99-year paid-up license, is $3,117,325 representing the book
value as of December 31, 1997 plus an additional amount of $200,000, to cover
certain expenses of the Transaction. The purchase price for inventory is
$2,636,325 representing the book value at December 31, 1997 , increased by
inventory purchases since December 31, 1997, valued at the Company's standard
cost and decreased by (i) sales of inventory from December 31, 1997 and (ii)
inventory related to unshipped orders that AHI has not agreed to fill.

   The Company will retain its cash and accounts receivable from the law
Enforcement division, estimated at approximately $2,000,000. The purchase price
will be paid in cash or other immediately available funds. The Company does not
anticipate any material tax implications resulting from the Transaction. To the
extent there is taxable gain resulting from the Transaction, the Company will
utilize its net operating loss carry forward to cover the taxes, if any,
resulting from the sale.


                                       23
<PAGE>

                                     PART IV

                    ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Reports on Form 8-K

      No reports on Form 8-K were filed during the last quarter of 1997.

(b)   Exhibits

      3(i)      Articles of Incorporation - Vermont(1)
      3(i)2     Articles of Incorporation - Delaware(1)
      3(i)3     Merger Agreement(1)
      3(i)4     Certificate of Amendment for Name Change(1)
      3(ii)     By-Laws(1)
      3(ii)2    Amendment No. 1 to By-Laws, effective 11/12/93(1)
      3(ii)3    Amendment No. 2 to By-Laws, effective 2/24/96(5)
      9.1       Shareholders Voting Agreement between 321 Investments, Inc.,
                Rajan Shamdasani, Jon E. Goodrich, Robert P. Gould and
                Robert D. Norman dated March 22, 1996(5)
      10.1      Employment Agreement between the Company and Jon E. Goodrich
                dated as of September 1, 1993(1)
      10.2      Consulting Agreement between the Company and Robert P. Gould
                dated as of September 1, 1993(1)
      10.3      1993 Non-Qualified Stock Option Plan(1)
      10.4      Form of Underwriter Warrants(1)
      10.5      Form of Selected Dealers Agreement(1)
      10.6      Sales Agreement dated May 1, 1992 between the Company and
                Mosler Inc.(1)
      10.7      Purchase and Sales Agreement dated July 19, 1991 between the
                Company and Home Protection Concepts, Inc.(1)
      10.8      Purchase and Sales Agreement dated April 1, 1993 between the
                Company and Personal Protection Consultants, Inc.(1)
      10.9      Purchase Agreement between the Company and Defense
                Technology Corp. of America dated October 24, 1992(1)
      10.10     Amendment to Purchase Agreement of October 24, 1992 between
                Defense Technology Corporation of America and the Company
                dated as of August 15, 1993(1)
      10.11     Purchase and Sales Agreement between the Company and
                Personal Security, Inc., dated as of July 1, 1993(1)
      10.12     Purchase and Sale Agreement between the Company and Messrs.
                Diamond and Helmrich, dated August 16, 1993(1)
      10.13     Lease Agreement between the Company and G&G Realty, Inc.
      10.14     Form of Lock-up Agreement(1)
      10.15     Term Loan with Vermont National Bank(1)
      10.16     Working Capital Line of Credit with Vermont National Bank
                for $500,000(1)
      10.17     Loan with Vermont National Bank for $400,00
      10.18     Guarantees of Messrs. Gould and Goodrich under the loans
                with Vermont National Bank(1)
      10.19     Waiver/amendment of capital expenditure limitation contained
                in the term loan agreement with Vermont National Bank(1)


                                       24
<PAGE>

      10.20     Amended and Restated Employment Agreement between the
                Company and Jon E. Goodrich(1)
      10.21     Aircraft Lease dated as of June 1, 1993 between the Company
                and G&G Realty, Inc.(1)
      10.22     Trademarks(1)
      10.23     Amendment No. 1 to Amended and Restated Employment
                Agreement(1)
      10.24     Asset Purchase Agreement between the Company and
                TransTechnology Corporation dated March 1, 1994(2)
      10.25     Agreement for Sale between KinderGard Corporation and Mace
                Security International, Inc.(3)
      10.26     Consulting Agreement between Sheldon Hibbard and Mace
                Security International, Inc.(3)
      10.27     Consulting agreement between P.D.M. Corporation and Mace
                Security International, Inc.(3)
      10.28     Warrants in connection with the acquisition of the assets of
                the KinderGard Corporation(3)
      10.29     Purchase and Sale Agreement between Robert Mainhardt and
                Mace Security International, Inc.(3)
      10.30     Consulting and Sales Representative Agreement between Robert
                Mainhardt and Mace Security International, Inc.(3)
      10.31     License Agreement between Robert MainhardtMace Security
                International, Inc.(3)
      10.32     Assignment and Assumption Agreement between G&G Realty, Inc.
                and Mace Security International, Inc.(3)
      10.33     Lease Agreement and Option to Purchase between G&G Realty,
                Inc. and James Comi and Rhoda Comi(3)
      10.34     Real Estate Purchase Agreement between Vermont Economic
                Development Authority and Mace Security International, Inc.(3)
      10.35     Consulting Agreement effective April 1, 1994 between Robert
                R. Rosberg and Mace Security International, Inc.(4)
      10.36     Supplemental Agreement effective January 1, 1995 between
                Robert R. Rosberg and Mace Security International, Inc.(4)
      10.37     Aircraft Lease effective June 1, 1994 between G&G Realty,
                Inc. and Mace Security International, Inc.(4)
      10.38     Aircraft Lease Termination Agreement effective March 31,
                1995 between G&G Realty, Inc. and Mace Security
                International, Inc.(4)
      10.39     Line of Credit Note for $1,500,000 with Vermont National Bank(5)
      10.40     Term Note for $1,500,000 with Vermont National Bank(5) 
      10.41     Security Agreement with Vermont National Bank(5)
      10.42     Advisory Employment Agreement between Mace Security 
                International, Inc. and Jon E. Goodrich, dated as of January 17,
                1996(6)
      10.43     Employment Agreement between Mace Security International,
                Inc. and Robert D. Norman, dated as of January 16, 1996(6)
      10.44     Letter of Intent between Mace Security International, Inc.
                and Gould & Goodrich Leather, Inc., dated March 22, 1996(6)
      10.45     Letter of Intent between Mace Security International, Inc.
                and 321 Investments, Inc., dated March 22, 1996(6)
      10.46     Letter of Intent between Mace Security International, Inc.
                and Rajan Shamdasani, dated March 22, 1996(6)
      10.47     Employment Agreement between the Company and Richard A. Galt
                dated as of August 22, 1996(7).
      10.48     Amendment 1 to Employment Agreement between the Company


                                       25
<PAGE>

                and Richard A. Galt dated as of August 22, 1996(7).
      10.49     Employment Agreement between the Company and Richard A. Galt
                dated as of January 22, 1997.(8)
      10.50     Amendment 1 to Employment Agreement between the Company and
                Richard A. Galt dated as of January 22, 1997.(8)
      10.51     Employment Agreement between the Company and Jon E. Goodrich
                dated as of March 14, 1997.(8)
      10.52     Loan Agreement between the Company and KeyBank National
                Association dated March 31, 1997.(8)
      10.53     Waiver and Modification of Loan Agreement between the
                Company and KeyBank National Association dated April 11,
                1997.(8)
      10.54     Line of Credit Agreement between the Company and Marvin
                Brown dated April 14, 1997.(8)
      10.55     Line of Credit Agreement between the Company and Jon E.
                Goodrich dated April 14, 1997.(8)
      10.56     Waiver and Second Modification of Loan Agreement between the
                Company and Key Bank National Association dated June 30,
                1997(9)
      10.57     Stock Purchase Agreement between the Company and Howard S.
                Edelman dated July 1, 1997(9) 
      10.58     First National Bank of New England Loan closing documents dated
                September 25, 1997 - the $800,000 note.(10)
      10.59     First National Bank of New England Loan closing documents
                dated September 25, 1997 - the $1,000,000 note.(10)
      10.60     First National Bank of New England Loan closing documents
                dated September 25, 1997 - the $250,000 line of credit.(10)
      10.61     Asset purchase Agreement between the Company and MSP Retail,
                Inc. dated September 10, 1997.(10)
      10.62     First National Bank of New England loan closing documents
                dated February 5, 1998 relating to the $800,000 loan
                guaranteed by the U.S. Department of Agriculture.(11)
      10.63     Purchase Agreement between the Company and Armor Holdings,
                Inc. and its subsidiary dated April 2, 1998.(11)
      10.64     Fairness Opinion relating to the sale of substantially all
                the assets of the Law Enforcement division to Armor
                Holdings, Inc.(11)
      11        Statement re: computation of per share earnings(11)

      (1)   Incorporated by reference to the exhibit of the same number filed
            with the Company's registration statement on Form SB-2 (33-69270)
            that was declared effective on November 12, 1993.

      (2)   Incorporated by reference to the Company's report on Form 8-K filed
            March 14, 1994.

      (3)   Incorporated by reference to the Company's Form 10-QSB report for
            the quarter ended 9/30/94 filed on November 14, 1994. It should be
            noted that Exhibits 10.25 through 10.34 were previously numbered
            10.1 through 10.10 in that report.

      (4)   Incorporated by reference to the Company's Form 10-KSB for the year
            ended 12/31/94.

      (5)   Incorporated by reference to the Company's Form 10-KSB for the year
            ended December 31, 1995.

      (6)   Incorporated by reference to the Company's Form 10-QSB for the
            quarter ended March 31, 1996.

      (7)   Incorporated by reference to the Company's Form 10-QSB for the
            quarter ended September 30, 1996.


                                       26
<PAGE>

      (8)   Incorporated by reference to the Company's Form 10-KSB for the year
            ended December 31, 1996.

      (9)   Incorporated by reference to the Company's Form 10-QSB for the
            quarter ended June 30, 1997.

      (10)  Incorporated by reference to the Company's Form 10-QSB for the
            quarter ended September 30, 1997.

      (11)  Filed herewith.


                                       27
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.

                                       MACE SECURITY INTERNATIONAL, INC.


                                       By: /s/ Jon E. Goodrich
                                           --------------------------------
                                           Jon E. Goodrich
                                           President and CEO


Date:  March 31, 1998


      In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.

     Signature                         Title                    Date
     ---------                         -----                    ----


/s/ Jon E. Goodrich                    President, CEO           March 31, 1998
------------------------------         And Director             
Jon E. Goodrich                        


/s/ Marvin P. Brown                    Chairman of the          March 31, 1998
------------------------------         Board
Marvin P. Brown                        


/s/ Virginia de Ganahl Russell         Director                 March 31, 1998
------------------------------         
Virginia de Ganahl Russell        


/s/ Howard S. Edelman                  Director                 March 31, 1998
------------------------------         
Howard S. Edelman


/s/ Neil J. Campolungo                 Director                 March 31, 1998
------------------------------         
Neil J. Campolungo


/s Lewis C. Cohen                      Director                 March 31, 1998
------------------------------         
Lewis C. Cohen


/s/ R. David Garwood                   Director                 March 31, 1998
------------------------------         
R. David Garwood


/s/ Mark A. Capone
------------------------------         Treasurer/Chief          March 31, 1998
Mark A. Capone                         Financial Officer
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    Page No.

Reports of Independent Accountants                                   F-2, F-2A

Consolidated Balance Sheets at December 31, 1997 and 1996            F-3

Consolidated Statements of Operations
  for the Years Ended December 31, 1997 and 1996                     F-4

Consolidated Statements of Stockholders' Equity
  for the Years Ended December 31, 1997 and 1996                     F-5

Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1997 and 1996                                   F-6

Notes to Consolidated Financial Statements                           F-7


                                       F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
  Mace Security International, Inc.

We have audited the accompanying consolidated balance sheet of Mace Security
International, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mace Security
International, Inc. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


/s/ URBACH KAHN & WERLIN PC

Albany, New York
February 26, 1998, except for Note 16 for which the date is 
April 2, 1998.


                                       F-2
<PAGE>

                        [LETTERHEAD OF COOPERS & LYBRAND]

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
    Mace Security International, Inc.

We have audited the accompanying balance sheet of Mace Security International,
Inc. as of December 31, 1996 and the related statement of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mace Security International,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.


                                    /s/ COOPERS & LYBRAND, L.L.P.

Albany, New York
March 25, 1997, except for Note 7, for which the date is April 14, 1997.


                                      F-2A
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996

                                                       1997            1996
                                                   ------------    ------------
ASSETS
Current assets:
  Cash and cash equivalents ....................   $  1,146,212    $    345,554
  Accounts receivable, net .....................      1,880,565       2,567,920
  Inventories:
    Finished goods .............................      1,712,082       1,729,882
    Work in process ............................        788,247       1,184,590
    Raw material and supplies ..................      1,474,376       2,311,407
  Prepaid expenses and other ...................        314,438         171,271
                                                   ------------    ------------
    Total current assets .......................      7,315,920       8,310,624
Property and equipment, net ....................      2,697,961       2,919,230
Intangibles, net ...............................      2,718,423       2,761,193
Other assets ...................................        136,362         131,543
                                                   ------------    ------------
    Total Assets ...............................   $ 12,868,666    $ 14,122,590
                                                   ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable ................................   $     30,728    $         --
  Current maturities of long-term debt .........        113,210         949,827
  Accounts payable .............................        333,735       1,012,777
  Accrued liabilities ..........................        556,624         411,233
                                                   ------------    ------------
    Total current liabilities ..................      1,034,297       2,373,837
Long-term debt, net of current maturities ......      1,660,205         143,271
                                                   ------------    ------------
    Total liabilities ..........................      2,694,502       2,517,108
                                                   ------------    ------------
Commitments and contingencies (Note 10)

Stockholders' equity:
  Preferred stock, par value $.01 per share;
    authorized 2,000,000 shares; no shares
    issued
  Common stock, par value $.01 per share;
    authorized 18,000,000 shares; issued
    and outstanding 7,081,666 shares
    in 1997, 6,825,000 shares in 1996 ..........         70,817          68,250
  Additional paid-in capital ...................     13,333,191      13,080,133
  Deficit ......................................     (3,229,844)     (1,542,901)
                                                   ------------    ------------
    Total Stockholders' equity .................     10,174,164      11,605,482
                                                   ------------    ------------
    Total Liabilities and Stockholders' equity .   $ 12,868,666    $ 14,122,590
                                                   ============    ============


                   The accompanying notes are an integral part
                          of the financial statements.

                                       F-3
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 1997 and 1996

                                                      1997              1996
                                                 ------------      ------------
Net sales ..................................     $  9,830,591      $ 10,824,203

Cost of sales ..............................        7,011,829         6,596,992
                                                 ------------      ------------
      Gross profit .........................        2,818,762         4,227,211

Operating expenses:
  General and administrative ...............        2,681,528         2,606,045
  Selling ..................................         1,824,82         1,873,884
                                                 ------------      ------------
      Operating loss .......................       (1,687,591)         (252,718)

Other income (expense):
  Write down of long-lived assets ..........               --           (28,453)
  Interest income ..........................           32,130            22,646
  Interest expense .........................         (121,877)          (97,998)
  Other income .............................           98,195           110,980
                                                 ------------      ------------
                                                        8,448             7,175
                                                 ------------      ------------

      Loss before income tax expense .......       (1,679,143)         (245,543)

Income tax expense .........................            7,800             6,805
                                                 ------------      ------------
      Net loss .............................     $ (1,686,943)     $   (252,348)
                                                 ============      ============
      Net loss per common share ............     $       (.24)     $       (.04)
                                                 ============      ============
      Weighted average number of
      common shares outstanding ............        6,920,023         6,819,918
                                                 ============      ============


                   The accompanying notes are an integral part
                          of the financial statements.

                                       F-4
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 For the Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                               Common Stock       Additional
                                            Shares       Par    Paid-in Capital   Deficit
                                            ------       ---    ---------------   -------
<S>                                        <C>         <C>        <C>           <C>         
Balance at January 1, 1996 ...........     6,805,000   $68,050    $13,025,471   $(1,290,553)

Shares issued to officer .............        20,000       200         27,600            --

Fair value of 30,000 stock options
issued to consultants ................            --        --         27,062            --

Net loss .............................            --        --             --      (252,348)
                                           ---------   -------    -----------   ------------
Balance at December 31, 1996 .........     6,825,000    68,250     13,080,133    (1,542,901)

Shares issued for MSP Retail, Inc.
  acquisition ........................       176,666     1,767        163,858            --

Shares issued for MSP, Inc. 
  acquisition ........................        80,000       800         89,200            --

Net loss .............................            --        --             --    (1,686,943)
                                           ---------   -------     ----------    -----------
Balance at December 31, 1997 .........     7,081,666   $70,817    $13,333,191   ($3,229,844)
                                           =========   =======    ===========   ===========
</TABLE>


                   The accompanying notes are an integral part
                          of the financial statements.
       
                                       F-5
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1997 and 1996

                                                          1997           1996
                                                     -----------    -----------
Operating activities:
    Net loss ......................................  $(1,686,943)   $  (252,348)
    Adjustments to reconcile net loss to net
      cash provided by operating activities:
           Depreciation ...........................      454,247        445,018
           Amortization ...........................      268,994        267,222
           Allowance for bad debts ................      (47,905)        53,003
           Gain on sale of assets .................       (1,996)       (10,249)
           Write down of long-lived assets ........           --         28,453
           Fair value of stock options issued
             to consultants .......................           --         27,062
           Shares issued as compensation ..........           --         27,800
    Changes in:
           Accounts receivable ....................      735,260     (1,530,941)
           Inventories ............................    1,334,307        702,869
           Prepaid expenses and other .............     (115,087)       265,594
           Accounts payable .......................     (679,042)       394,124
           Accrued liabilities ....................      145,391       (123,683)
           Other assets ...........................      (12,459)       (12,483)
                                                     -----------    -----------
             Net cash provided by 
               operating activities................      394,767        281,441
                                                     -----------    -----------

Investing activities:
    Purchases of property and equipment ...........     (238,726)      (304,403)
    Proceeds from sale of property and equipment ..       13,744         29,850
    Acquisition of subsidiaries ...................      (51,372)            --
                                                     -----------    -----------
             Net cash used in 
               investing activities ...............     (276,354)      (274,553)
                                                     -----------    -----------

Financing activities:
    Payment of principal on long-term debt ........     (525,933)      (392,080)
    Proceeds from long-term debt ..................    1,206,250        375,753
    Payment of notes payable ......................       (3,272)      (127,797)
    Proceeds from notes payable ...................       34,000             --
    Debt issue costs ..............................      (28,800)       (22,848)
                                                     -----------    -----------
            Net cash provided by (used in)
               financing activities ...............      682,245       (166,972)
                                                     -----------    -----------

Net increase (decrease) in cash and
 cash equivalents .................................      800,658       (160,084)

Cash and cash equivalents:
    Beginning of year .............................      345,554        505,638
                                                     -----------    -----------
    End of year ...................................  $ 1,146,212    $   345,554
                                                     ===========    ===========


                   The accompanying notes are an integral part
                          of the financial statements.
       
                                       F-6
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
                        NOTES TO CONSOLIDATED STATEMENTS

1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Description of organization:

            Mace Security International, Inc. (Mace) is incorporated under the
      laws of the state of Delaware. Mace and its subsidiaries' revenues are
      generated primarily through the manufacture, distribution and sale of
      defense sprays, tear gas grenades, projectiles, cartridges and other
      self-defense and personal safety products for the consumer and law
      enforcement markets.

      Summary of significant accounting policies:

      Principles of consolidation:

            The consolidated financial statements include the accounts of Mace
      and its wholly-owned subsidiaries, MSP, Inc., MSP Retail, Inc., and Mace
      Security Centers, Inc. (collectively referred to as the Company). All
      intercompany accounts and transactions have been eliminated.

      Revenue recognition:

            Substantially all revenue from domestic sales is recognized when
      shipments are made and export sales are recognized when title has passed.

      Cash and cash equivalents:

            Cash and cash equivalents consist of cash and highly liquid
      short-term investments with original maturities of three months or less.

      Accounts receivable:

            Accounts receivable are presented net of an allowance for doubtful
      accounts approximating $54,000 at December 31, 1997 ($102,000 at December
      31, 1996).

      Inventories:

            Inventories are stated at the lower of cost (first-in, first-out
      method) or market.

            Cost of sales for the year ended December 31, 1997 includes
      approximately $1,017,000 attributable to lower of cost or market write
      downs. This adjustment was made in the fourth quarter of 1997.

      Property and equipment:

            Property and equipment are stated at cost.

            Depreciation is recorded using the straight-line method over the
      estimated useful lives of the assets.

            Significant additions or improvements extending assets' useful lives
      are capitalized; normal maintenance and repair costs are expensed as
      incurred.

            The cost of fully depreciated assets remaining in use are included
      in the respective asset and accumulated depreciation accounts. When items
      are sold or retired, related gains or losses are included in operations.

      Intangibles:

            Trademarks are stated at cost and are amortized on a straight-line
      basis over 15 years.

            The excess purchase price over fair values assigned to assets
      acquired is amortized on a straight-line basis over 15 years.


                                       F-7
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   (Continued)

      Research expense:

            Research and development expense, which is charged to operations as
      incurred, was approximately $81,000 in 1997 and $53,000 in 1996.

      Income taxes:

            The Company accounts for income taxes using the asset and liability
      method. Under the asset and liability method, deferred income taxes are
      recognized for the tax consequences of temporary differences by applying
      enacted statutory tax rates applicable for future years to differences
      between financial statement and tax bases of existing assets and
      liabilities. The effect of tax rate changes on deferred taxes is
      recognized in the income tax provision in the period that includes the
      enactment date.

            The provision for taxes is reduced by investment and other tax
      credits in the years such credits become available.

      Advertising:

            The Company expenses the production costs of advertising the first
      time the advertising takes place. Advertising expense was approximately
      $249,000 and $213,000 in 1997 and 1996, respectively.

      Net loss per common share:

            Loss per common share amounts have been computed using the weighted
      average number of common shares outstanding for the respective periods.
      Effective December 31, 1997, the Company adopted Statement of Financinal
      Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). This
      standard requires the presentation of basic and diluted earnings, when
      applicable, per share. All outstanding options and warrants are
      anti-dilutive at December 31, 1997.

      Use of Estimates:

            The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities and the reported amounts
      of revenues and expenses. Actual results could differ from those
      estimates.

      Disclosures about Fair Value of Financial Instruments:

            All financial instruments are held for purposes other than trading.
      The following methods and assumptions were used to estimate the fair value
      of each class of financial instruments for which it is practicable to
      estimate that value:

            Cash and Cash Equivalents

                  The carrying amount approximates fair value because of the
            short term maturity of those instruments.

            Long Term Debt

                  The carrying value approximates fair value for variable rate
            debt.

      Impairment of long-lived assets

            During 1996, the Company adopted Statement of Financial Accounting
      Standards No. 121, (SFAS No. 121),"Accounting for the Impairment of
      Long-Lived Assets and For Long-Lived Assets to Be Disposed Of".

            SFAS No. 121 requires that long-lived assets, including related
      goodwill, be reviewed for impairment and written down to fair value
      whenever events or changes in circumstances indicate that the carrying
      value may not be recoverable.

            Adoption of SFAS No. 121 resulted in an impairment charge included
      in other expense of $28,453 in 1996. The impaired assets were primarily
      trademarks.


                                       F-8
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   (Continued)

            Measurements of the impairment loss is based on fair value of the
      asset. Generally, fair value is determined using valuation techniques such
      as the present value of expected future cash flows.

      Recent Accounting Pronouncements

            In June 1997, the Financial Accounting Standards Board (the "FASB")
      issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
      "Reporting Comprehensive Income", which establishes standards for
      reporting comprehensive income and its components in annual and interim
      financial statements. SFAS No. 130 is effective for fiscal years beginning
      after December 15, 1997. Reclassification of financial statements for
      earlier periods is required. The Company anticipates that adoption of SFAS
      No. 130 may expand or modify disclosures but will not have an impact on
      reported consolidated financial position, results of operations or cash
      flows.

            In June 1997, the FASB issued SFAS No. 131, "Disclosures about
      Segments of an Enterprise and Related Information", which establishes
      standards for companies to report information about operating segments in
      annual financial statements, based on the approach that management
      utilizes to organize the segments within the Company for management
      reporting and decision making. In addition, SFAS No. 131 requires that
      companies report selected information about operating segments in interim
      financial reports. It also establishes standards for related disclosures
      about products and services, and major customers. SFAS No. 131 is
      effective for financial statements for fiscal years beginning after
      December 15, 1997. Financial statement disclosures for prior periods are
      required to be restated. The Company anticipates that adoption of SFAS No.
      131 will expand disclosures but will not have an impact on reported
      consolidated financial position, results of operations or cash flows.

2. SUPPLEMENTARY CASH FLOW INFORMATION

            In September 1997, the Company obtained long-term debt from the
      First National Bank of New England (See Note 7). As part of this
      refinancing, the Key Bank long-term debt of $593,750 was paid. This
      non-cash transaction has been excluded from proceeds from long-term debt,
      as well as payment of principal on long-term debt.

            In October 1996, the Company refinanced $395,823 of its long-term
      debt with Vermont National Bank through the issuance of long-term debt
      from KeyBank (See Note 7). This non-cash transaction has been excluded
      from payment of principal on long term debt and proceeds from long-term
      debt.

3. PROPERTY AND EQUIPMENT

            The components of property and equipment are summarized below:

                                                          1997          1996
                                                      -----------   -----------
            Office furniture ......................   $   128,959   $   127,144
            Computer equipment ....................       428,769       386,608
            Vehicles ..............................        46,501        37,285
            Leasehold improvements ................     1,628,553     1,539,976
            Machinery and equipment ...............     2,217,610     2,130,302
                                                      -----------   -----------
               Total property and equipment .......     4,450,392     4,221,315
            Less: Accumulated depreciation ........    (1,752,431)   (1,302,085)
                                                      -----------   -----------
               Property and equipment, net ........   $ 2,697,961   $ 2,919,230
                                                      ===========   ===========
        
            Depreciation expense was $454,247 in 1997 and $445,018 in 1996.
      Expenditures for maintenance and repairs are charged to income as incurred
      and amounted to $113,429 in 1997 and $38,290 in 1996. 


                                      F-9
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. INTANGIBLES

            The components of intangibles are summarized below:

                                                            1997         1996
                                                         ----------   ----------
                 Trademarks ..........................   $3,099,208   $3,099,208
                 Trademark protection costs ..........      154,088      154,088
                 Excess purchase price over fair value
                         assigned to assets acquired .      634,470      422,405
                                                         ----------   ----------
                    Total intangibles ................    3,887,766    3,675,701
                 Less: Accumulated amortization ......    1,169,343      914,508
                                                         ----------   ----------
                   Intangibles, net ..................   $2,718,423   $2,761,193
                                                         ==========   ==========

            Amortization expense was $254,834 in 1997 and $251,794 in 1996.

5. NOTES PAYABLE

            Notes payable at December 31, 1997 consist of an obligation to a
      financing company, payable in monthly installments with interest at 10.2%
      in 1997, and due Septemer 1998.

            In September 1997, the Company obtained a $250,000 working capital
      line of credit from First National Bank of New England bearing interest at
      prime plus 1% (9.5% at December 31, 1997) due May 31, 1998. No amounts
      have been drawn on this line of credit. The Company is using this line for
      the issuance of letters of credit for international purchases. The Company
      had $52,500 in letters of credit outstanding at December 31, 1997.

6. ACCRUED LIABILITIES

            The components of accrued liabilities are summarized below:

                                                 1997       1996
                                               --------   --------
            Commissions ...................    $130,833   $ 51,924
            Customer prepayments ..........     107,643     70,482
            Payroll and related expenses...     109,552    120,661
            Compensated absences ..........       8,524     22,101
            Professional fees .............      65,000     54,297
            Advertising ...................      64,571     30,000
            Other .........................      70,501     61,768
                                               --------   --------
                                               $556,624   $411,233
                                               ========   ========

7. LONG-TERM DEBT

      Long-term debt at December 31 consists of the following:

                                                            1997        1996
                                                            ----        ----
      Notes payable--First National Bank of          
        New England, bearing interest at             
        prime plus 1.50% (10.0% at December          
        31, 1997) payable in monthly                 
        installments of $23,791, including           
        interest, due October 1, 2007,               
        collateralized by all assets of the          
        Company.                                         $1,773,415          --
                                                     
      Note payable--stockholder, payable in          
        quarterly installments of $33,957            
        plus interest at prime in effect at          
        the beginning of each quarter (8.25%         
        at December 31, 1996) maturing               
        January 1997.                                            --      33,957
                                                     
      Note payable--stockholder, payable in          
        quarterly installments in an amount          
        equal to seven percent of annualized         
        net sales of the Federal Laboratories        
        division in excess of an agreed upon         
        base plus interest at prime in effect        
        at the beginning of each                     
                                               

                                      F-10
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. LONG TERM DEBT (continued)

        quarter (8.25% at December 31, 1996)         
        with no set maturity date;                   
        collateralized by the equipment              
        purchased in connection with the             
        Federal Laboratories division                
        acquisition. This liability was              
        satisfied in 1997.                                       --     340,391
                                                     
      Note payable--KeyBank bearing interest         
        at the Bank's "base rate" plus 1.25%         
        (9.5% at December 31, 1996) payable          
        in monthly installments of $15,625           
        plus interest, due October 1, 1998,          
        collateralized by all assets of the          
        Company. This liability was                  
        satisfied in 1997.                                       --     718,750
                                                         ----------  ----------
                                                          1,773,415   1,093,098
      Less: Current maturities                              113,210     949,827
                                                         ----------  ----------
      Total long-term debt                               $1,660,205  $  143,271
                                                         ==========  ==========
                                     
      Scheduled principal repayments on long-term debt are as follows:

      1998                                                  113,210
      1999                                                  125,073
      2000                                                  138,170
      2001                                                  152,638
      2002                                                  168,621
      Thereafter                                          1,075,703
                                                          ---------
                                                          1,773,415
                                                          =========
                                               
      Interest paid was $129,770 in 1997 and $102,408 in 1996.

            In October 1996, the Company entered into a credit agreement with
      KeyBank National Association ("Key") which provided for a maximum of
      $2,000,000 of credit (the credit agreement) and was subject to a borrowing
      base formula. The amounts outstanding under the credit agreement were
      secured by virtually all of the Company's then owned and after-acquired
      assets.

            The credit agreement was separated into two "facilities". One
      facility provided for a $750,000 term loan maturing October 1, 2000,
      calling for monthly principal payments of $15,625 plus accrued interest at
      the Key's "base rate" plus 1.25% (9.5% on December 31, 1996). The Company
      drew fully on the term loan and used the proceeds to pay off the term loan
      with Vermont National Bank that totaled $395,823, including interest, and
      used the remaining $354,177 for working capital purposes.

            The second facility, a $250,000 line of credit, which originally
      matured on October 1, 1998 and called for interest to be paid monthly at
      the Key's "base rate" plus 1.25% (9.25% as of December 31, 1996) was
      canceled in early 1997. No amounts were drawn on this facility.

            The credit agreement contained various covenants which included the
      maintenance of certain financial ratios and limitations on capital
      expenditures, debt and dividends. As of December 31, 1996, the Company was
      in violation of most of these covenants. The Company obtained a waiver of
      these violations for the year ended December 31, 1996 and for the 10
      months ended October 31, 1997.

            In April 1997, the Company's President and the Company's Chairman of
      the Board supplied the Company with lines of credit for up to $375,000
      each ($750,000 in total) with interest at prime plus 1.25%. The lines of
      credit expired in September 1997. No amounts were drawn on these lines.

            In September 1997, the Company refinanced its long-term debt with
      the First National Bank of New England. Two term loans totaling $1,800,000
      bearing interest at prime plus 1.50% (10.0% at December 31, 1997) payable
      in monthly installments of $23,791, including interest, due October 1,
      2007, were obtained. Of the proceeds, $593,750 was used to pay off the
      KeyBank long-term debt. Additionally, a $250,000 line of credit bearing
      interest at prime plus 1% (9.5% at December 31, 1997) due May 31, 1998 was
      obtained. No amounts have been drawn on this line of credit.

            These facilities contain certain restrictions on the payment of
      dividends and are collateralized by the following: (a) assignment of life
      insurance owned by the Company on the life of the current President and
      Chief Executive Officer; and (b) first priority security interest in all
      inventory and all other assets of the Company. All three facilities are
      personally guaranteed by the current President and Chief Executive Officer
      of the Company.

            Prior to this refinancing event, the obligation to a stockholder
      relating to the acquisition of the assets of Federal Laboratories, was
      paid in full with cash from operations.


                                           F-11
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. INCOME TAXES

      The components of income tax expense are:

                                                           1997       1996   
                                                          ------     ------
            Current                                       $7,800     $6,805
            Deferred                                          --         --
                                                          ------     ------
             Total income tax expense                     $7,800     $6,805
                                                          ======     ======
                                           
            The significant components of deferred income tax expense attributed
      to loss from operations for the years ended December 31, 1997 and 1996 are
      as follows:

                                                         1997         1996
                                                      ---------    ---------
            Current deferred tax expense              $  37,336    $ 152,618
            Loss carry forward                         (615,707)    (247,244)
            Valuation allowance for deferred        
             tax assets                                 578,371       94,626
                                                      ---------    ---------
                                                      $      --    $      --
                                                      =========    =========

            A comparison of the federal statutory rate to the Company's
      effective rate is as follows:

                                                          1997    1996
                                                          ----    ----
            U.S. statutory rate                           (34%)   (34%)
            State taxes, net of federal benefit             1%      2%
            Miscellaneous permanent differences             1%      2%
            Valuation allowance for deferred tax as ets    34%     34%
            Adjustments for prior year taxes               (1%)    (1%)
                                                          ---     ---
            Effective tax rate                              1%      3%
                                                          ---     ---

            The significant components of deferred tax assets and liabilities
      are as follows:

                                                              1997       1996
                                                           ---------  ---------
            Current assets (liabilities):
            Allowance for doubtful accounts                $  21,587  $  40,077
            Inventories                                       65,869     92,764
            Accrued expenses                                   9,128     42,407
            Other                                             12,163      7,449
                                                           ---------  ---------
                  Current deferred assets                    108,747    182,697
            Valuation allowance                             (108,747)  (182,697)
                                                           ---------  ---------
                  Net current deferred tax assets          $      --  $      --
                                                           =========  =========
            
            Noncurrent assets (liabilities):
            Intangibles                                       (4,758)    (7,586)
            Plant, equipment and depreciation               (234,372)  (268,158)
            Net operating loss carry forwards              1,152,000    536,293
                                                           ---------  ---------
                  Net noncurrent deferred assets             912,870    260,549
            Valuation allowance                             (912,870)  (260,549)
                                                           ---------  ---------
                  Net noncurrent deferred tax assets       $      --  $      -- 
                                                           =========  =========
        

                                      F-12
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. INCOME TAXES (continued)

            A valuation allowance is provided to reduce the deferred tax assets
      to a level which, more likely than not, will be realized. The deferred tax
      assets recorded reflects management's estimate of the amount which will be
      realized based upon current operating results and contingencies.

            During the year ended December 31, 1997, the valuation allowance
      increased by $578,371.

            At December 31, 1997, the Company has net operating loss carry
      forward for federal income tax purposes of approximately $2,880,000. The
      federal net operating loss carry forward, if unused, will begin to expire
      during the year ended December 31, 2009.

            Net taxes refunded were $64,628 in 1996.

9. RELATED PARTY TRANSACTIONS

            The Company paid legal and management/consulting fees to officers
      and directors approximating $57,350 and $35,360 in 1997 and 1996,
      respectively.

10. COMMITMENTS AND CONTINGENCIES

            The Company is a party to various legal proceedings related to its
      normal business activities. In the opinion of the Company's management,
      none of these proceedings are material in relation to the Company's
      results of operations, liquidity, cash flows or financial condition.

            Operating lease expense for equipment, vehicles and real estate
      amounted to $170,231 and $171,947 for 1997 and 1996, respectively. Certain
      of these leases contain purchase options, renewal provisions, and
      contingent rentals for proportionate share of taxes, utilities, insurance
      and annual cost of living increases. Future minimum rental payments
      required under operating leases that have initial or remaining
      noncancelable lease terms in excess of one year as of December 31, 1997
      are:

            1998                            116,526
            1999                            103,977
            2000                             28,760
                                         ----------
                                         $  249,263
                                         ==========

            The Company has entered into month to month and long-term sublease
      agreements with tenants of their operating facility in Bennington,
      Vermont, including a related party. Total sublease rental income was
      $93,231 and $65,160 in 1997 and 1996, respectively.

            Future minimum rental receipts required under operating subleases
      that have initial or remaining noncancelable lease terms in excess of one
      year as of December 31, 1997 are:

            1998                            73,404
            1999                            76,404
            2000                            44,569
                                          --------
                                          $194,377
                                          ========
                                     
            The Company was obligated under a consulting agreement with a
      director/stockholder calling for a monthly consulting fee of $1,930 for
      the period January 1, 1996 to December 31, 1996.

            During 1994, the Company paid $75,000 to a related entity to acquire
      all of the rights and obligations under a lease agreement, including an
      option to purchase the south wing of its principal operating facility.
      Amortization of this deferred cost was $13,440 in 1997 and 1996,
      respectively. The term of the lease expires on January 31, 2000, and
      requires monthly payments of $6,064, plus the Company's proportionate
      share of taxes, insurance, utilities and an annual cost of living
      increase. The option may be exercised for $600,000 at the end of the lease
      term.


                                      F-13
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

            The Company is party to a Real Estate Purchase Agreement with the
      Vermont Economic Development Authority (VEDA) for the purchase of the
      center and north wings of its headquarters, after the satisfaction of
      certain contingencies by VEDA. The purchase price is $1,000,000, payable
      in cash of $150,000 and a $850,000 promissory note to VEDA at 4% interest,
      based on a 20 year amortization schedule with a balloon payment of
      $100,000 due at the end of ten years. The Company has temporarily elected
      to lease the facility for $4,000 per month, together with taxes, insurance
      and utilities. The Company is currently renegotiating its option to extend
      its lease for an additional five year period.

11. STOCK OPTIONS AND WARRANTS

            During September 1993, the Company adopted the 1993 Stock Option
      Plan (the Plan). The Plan provides for the issuance of up to 630,000
      shares of common stock upon exercise of the options. The Company has
      reserved 630,000 shares of common stock to satisfy the requirements of the
      Plan. The options are non-qualified stock options and are not transferable
      by the recipient. The Plan is administered by the Compensation Committee
      of the Board of Directors, which may grant options to employees, directors
      and consultants to the Company. The term of each option may not exceed
      fifteen years from the date of grant. Options are exercisable over either
      a 10 or 15 year period and exercise prices are not less than the market
      value of the shares on the date of grant.

            The Company applies Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees", in accounting for the stock
      option plans. Accordingly, no employee compensation cost has been
      recognized in 1997 and 1996. Had compensation cost and fair value been
      determined pursuant to Statement of Financial Accounting Standards No. 123
      (SFAS No. 123), "Accounting for Stock-Based Compensation", net loss would
      increase from $1,686,943 to $1,886,293 in 1997 and from $252,348 to
      $454,085 in 1996. Net loss per share would increase from $.24 to $.27 in
      1997 and from $.04 to $.07 in 1996. The weighted average fair value of
      options granted during 1997 and 1996, for the purpose of SFAS No. 123, is
      $1.15 and $.85 per share, respectively.

            In accordance with SFAS No. 123, the fair value of each option
      granted is estimated on the grant date using the Black-Scholes Single
      Option model, assuming no dividend yield and an expected volatility of
      92.2% and 77.6% in 1997 and 1996, respectively. The weighted-average
      remaining contractual life of outstanding options under the plan at
      December 31, 1997 is 13 years. The risk- free interest rate ranges from
      6.06% to 6.86% in 1997 and from 5.95% to 6.78% in 1996.

            Activity with respect to these plans is as follows:

<TABLE>
<CAPTION>
                                            1997              1996
                                     -----------------  -----------------
                                              Weighted           Weighted
                                              Average            Average
                                              Exercise           Exercise
                                     Number   Price     Number   Price
                                     ------   -----     ------   -----
<S>                                  <C>      <C>        <C>     <C>  
Shares under option, January 1       276,400  $1.54      90,100  $5.34
Options granted                      162,500   1.40     270,000   1.44
Options exercised                         --     --          --     --
Options canceled                       1,100   5.50      83,700   5.32
                                     -------- ------    -------  -----
Shares under option, December 31     437,800   1.48     276,400   1.54
                                     =======  =====     =======  =====

Options exercisable, December 31     437,800   1.48     276,400   1.54
                                     =======   ====     =======   ====
Shares available for granting 
  of options, December 31            192,200            353,600
                                     =======            =======
</TABLE>


                                      F-14
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. STOCK OPTIONS & WARRANTS (continued)

            The following is a summary of the status of options outstanding at
      December 31, 1997:

                        Outstanding Options                 Exercisable Options
                        -------------------                 -------------------
                                   Weighted
                                   Average      Weighted             Weighted
             Exercise              Remaining    Average              Average
             Price                 Contractual  Exercise             Exercise
             Range       Number    Life         Price        Number  Price
             ------------------------------------------------------------------
             $5.50        5,300      5.87       $5.50         5,300  $5.50
              1.50      320,000     13.69        1.50       320,000   1.50
              1.25       62,500     14.54        1.25        62,500   1.25
              1.19       50,000     13.64        1.19        50,000   1.19
                                
            In connection with the initial public offering of the Company's
      securities in November 1993, the Company issued a total of 75,000 common
      stock purchase warrants to the underwriters of the securities. These
      warrants are exercisable over a four-year period which began in November
      1994 at $6.60 per share.

            In August 1994, the Company issued warrants to purchase 60,000
      shares of Mace Security International, Inc. common stock at $4.25 per
      share in connection with the purchase of certain assets of a business. The
      warrants are exercisable over a ten year period, expiring on August 24,
      2004.

            During the exercise periods, the Company will reserve a sufficient
      number of shares of its common stock to provide for the exercise of the
      rights represented by option and warrant holders.

12. CONCENTRATION OF CREDIT RISK

            The Company maintains its cash accounts in high quality financial
      institutions. At times, these balances may exceed insured amounts.

            The Company limits the concentration of credit risk in receivables
      from retailers by closely monitoring credit and collection policies. Risk
      of losses from international sales are minimized by requiring the majority
      of customers to provide irrevocable confirmed letters of credit and/or
      cash advances. Management believes that the allowance for doubtful
      accounts is adequate to absorb estimated losses.

13. EMPLOYEE BENEFIT PLAN

            The Company maintains a voluntary 401(k) plan covering substantially
      all of its employees. Employees may contribute from 1% to 20% of their
      regular wages, up to the limit permitted by the Department of Labor. The
      Company matches 25% of each dollar contributed by employees up to 4% of
      their wages. The cost of the plan amounted to $28,354 and $30,573 in 1997
      and 1996, respectively.

14. ACQUISITIONS AND SUBSIDIARIES

            In July 1997, the Company acquired all of the issued and outstanding
      common stock of MSP, Inc. (MSP), an Aurora, Colorado marketer of a
      diversified line of consumer safety and security products. This
      transaction was recorded as a purchase, and the operations of MSP have
      been included with the Company's from the acquisition date. In the event
      MSP achieves certain financial goals, an additional 15,000 shares of the
      Company's common stock is issuable. The purchase cost of $90,000 was
      represented by 80,000 shares of the Company's stock valued at $1.125 per
      share.

            In September 1997, the Company acquired all of the issued and
      outstanding common stock of MSP Retail, Inc. (MSPR), an operator of two
      retail stores in the Denver, Colorado area, specializing in the sale of
      security products for personal and home protection. This transaction was
      recorded as a purchase, and the operations of MSPR have been included with
      the Company's from the acquisition date. The purchase price of $212,000
      was represented by 176,666 shares of the Company's common stock valued at
      $.9375 per share and cash of $46,300.


                                      F-15
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. AQUISITIONS AND SUBSIDIARIES (Continued)

            Pro forma results of the MSP and MSPR acquisitions, assuming they
      had been made at the beginning of the periods presented, would not be
      materially different from the results reported.

            The excess of the purchase price over the fair values assigned to
      the assets acquired, approximating $207,000, is being amortized over 15
      years.

            In September 1997, the Company established Mace Security Centers,
      Inc.,a subsidiary corporation formed for the purpose of offering
      franchises for the operation of retail stores which will sell personal
      protection and security products. There has been no operating activity in
      this corporation through December 31, 1997.

15. SEGMENT INFORMATION

            The Company operates in principally two industry segments: (1), the
      manufacture, distribution and sale of Mace(R) brand defense sprays and
      personal safety products to the civilian consumer market, "Consumer"; and
      (2), the manufacture, distribution and sale of tear gas grenades, defense
      sprays, projectiles and cartridges to law enforcement agencies, "Law
      Enforcement". The Law Enforcement segment represented 70.4% and 59% of
      sales for the Company in 1997 and 1996, respectively. Intersegment sales
      are not material and operating income represents total revenues less
      operating expenses. Identifiable assets are those assets employed in each
      segment's operation, including an allocated value to each segment of cost
      in excess of net assets acquired.

            Information concerning the Company's business segments in fiscal
      1997 and 1996 is as follows:

                                                     1997              1996
                                                 ------------      ------------
NET SALES
 Consumer                                        $  2,912,964      $  4,437,020
 Law Enforcement                                    6,917,627         6,387,183
                                                 ------------      ------------
    Total net sales                              $  9,830,591      $ 10,824,203
                                                 ============      ============
OPERATING (LOSS) INCOME
  Consumer                                           (490,169)          252,739
  Law Enforcement                                  (1,197,422)         (505,457)
                                                 ------------      ------------
     Total operating loss                        $ (1,687,591)     $   (252,718)
                                                 ============      ============
IDENTIFIABLE ASSETS
  Consumer                                          3,273,180         3,953,740
  Law Enforcement                                   7,257,803         8,969,970
  Unallocated, corporate                            2,337,683         1,198,880
                                                 ------------      ------------
     Total assets                                  12,868,666      $ 14,122,590
                                                 ============      ============
DEPRECIATION AND AMORTIZATION
  Consumer                                            263,554           266,854
  Law Enforcement                                     459,687           445,380
                                                 ------------      ------------
    Total depreciation and amortization          $    723,241      $    712,234
                                                 ============      ============
CAPITAL EXPENDITURES
   Consumer                                            78,508            41,563
   Law Enforcement                                    111,302           225,783
   Unallocated, corporate                              48,916            37,057
                                                 ------------      ------------
     Total capital expenditures                  $    238,726      $    304,403
                                                 ============      ============


                                      F-16
<PAGE>

                        MACE SECURITY INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. SEGMENT INFORMATION (Continued)

            The Company sells its products on a worldwide basis with its
      principal markets listed in the table below where information on export
      sales is summarized for 1997 and 1996 by geographic area for the Company
      as a whole:

                                                      1997               1996
                                                   ----------         ----------
         GEOGRAPHIC AREA
           Central/South America                   $1,739,000         $1,356,000
           Middle East                              1,170,000            761,000
           Asia                                       213,000            660,000
           Canada                                     136,000            151,000
           Europe                                     126,000            137,000
           Other                                       58,000             92,000
                                                   ----------         ----------
           Total Export Sales                      $3,442,000         $3,157,000
                                                   ==========         ==========

16. SUBSEQUENT EVENTS

      On April 2, 1998, the Company entered into a purchase agreement with Armor
Holdings, Inc. (AHI) for the sale of substantially all of the assets of the
Company's Law Enforcement division. The terms of the Agreement provide for
certain Law Enforcement division assets, including fixed assets and intangibles,
to be sold at December 31, 1997 book value, plus an additional amount of
$200,000 for certain expenses of the transaction. The purchase price for the
fixed assets and intangibles, inclusive of a license fee, will approximate
$3,117,000. The purchase price for inventory, which is subject to purchase and
cost adjustments between December 31, 1997 and the closing date, will be
determined based on the Company's standard costs at the date of closing. The
Company will retain its cash and accounts receivable from the Law Enforcement
division, approximating $2,000,000, and will retain responsibility for all Law
Enforcement division payables and other liabilities.

      The transaction is expected to close in June 1998.


                                      F-17