ARMOR HOLDINGS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
-------------------------------------------------------

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2002, or
------------------

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-18863

ARMOR HOLDINGS, INC.
-------------------------------------------------------

(Exact name of registrant as specified in its charter)

DELAWARE 59-3392443
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1400 MARSH LANDING PARKWAY, SUITE 112
JACKSONVILLE, FLORIDA 32250
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (904) 741-5400

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
----

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

The number of shares outstanding of the registrant's Common Stock as of
November 7, 2002 is 29,456,702.

ARMOR HOLDINGS, INC.

FORM 10-Q

INDEX

Page

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS......................................................... 3

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................. 36

ITEM 4. CONTROLS AND PROCEDURES...................................................... 37

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

ITEM 1. LEGAL PROCEEDINGS........................................................... 38

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 38

SIGNATURES 39

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries include all
adjustments (consisting only of normal recurring accruals and the elimination of
all material intercompany accounts and transactions) which management considers
necessary for a fair presentation of operating results as of September 30, 2002
and for the three-month and nine-month periods ended September 30, 2002 and
September 30, 2001.

These unaudited condensed consolidated financial statements should be
read in conjunction with the financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2001.

3

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

SEPTEMBER 30, 2002
(UNAUDITED) DECEMBER 31, 2001*
------------------------- -------------------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 16,584 $ 47,489
Accounts receivable (net of allowance for
doubtful accounts of $1,146 and $1,620) 55,928 50,119
Costs and earned gross profit in excess of billings 3,254 5,451
Inventories 63,399 50,553
Prepaid expenses and other current assets 13,750 8,947
Current assets of discontinued operations (Note 2) 33,886 37,562
------------------------- -------------------------
Total current assets 186,801 200,121

PROPERTY, PLANT AND EQUIPMENT (net
of accumulated depreciation of $11,490 and
$8,096) 45,401 36,704

GOODWILL (net of accumulated amortization
of $4,024 and $4,024) 96,340 86,808

PATENTS, LICENSES AND TRADEMARKS
(net of accumulated amortization of $2,139 and $1,930) 7,307 6,695

Long-term assets of discontinued operations (Note 2) 39,877 50,341

OTHER ASSETS 5,901 7,388
------------------------- -------------------------
TOTAL ASSETS $ 381,627 $ 388,057
========================= =========================

* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.

4

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

SEPTEMBER 30, 2002
(UNAUDITED) DECEMBER 31, 2001*
---------------------- -------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt $ 2,389 $ 1,773
Short-term debt - 709
Accounts payable 21,233 21,444
Accrued expenses and other current liabilities 30,170 24,514
Income taxes payable 5,516 -
Current liabilities of discontinued operations (Note 2) 12,737 8,958
---------------------- -------------------------
Total current liabilities 72,045 57,398

Long-term liabilities of discontinued operations (Note 2) 201 415
LONG-TERM DEBT, less current portion 10,789 4,225
---------------------- -------------------------
Total liabilities 83,035 62,038

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 50,000,000 shares
authorized; 33,593,310 and 33,065,904 issued and
29,456,025 and 30,857,019 outstanding at
September 30, 2002 and December 31, 2001,
respectively 336 331
Additional paid-in capital 306,140 301,995
Retained earnings 47,073 51,745
Accumulated other comprehensive loss (5,324) (4,473)
Treasury stock (49,633) (23,579)
---------------------- -------------------------
Total stockholders' equity 298,592 326,019
---------------------- -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 381,627 $ 388,057
====================== =========================

* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.

5

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------- ------------------- ----------------------------------------

REVENUES:

Products $ 49,047 $ 39,315 $131,049 $ 107,583
Mobile Security 31,510 9,349 90,717 9,349
-------------------- ------------------- ------------------- -------------------
Total Revenues 80,557 48,664 221,766 116,932
-------------------- ------------------- ------------------- -------------------

COSTS AND EXPENSES:
Cost of sales 55,947 31,437 152,481 71,650
Operating expenses 12,852 10,537 37,046 26,078
Amortization 62 525 213 1,571
Integration and other non-recurring
charges 1,359 837 4,476 1,550
-------------------- ------------------- ------------------- -------------------

OPERATING INCOME 10,337 5,328 27,550 16,083

Interest expense, net 343 1,102 669 2,530
Other (income) expense, net (13) 146 (77) 146
-------------------- ------------------- ------------------- -------------------

INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 10,007 4,080 26,958 13,407

PROVISION FOR INCOME TAXES 7,043 1,607 13,603 5,282
-------------------- ------------------- ------------------- -------------------
INCOME FROM CONTINUING OPERATIONS 2,964 2,473 13,355 8,125
-------------------- ------------------- ------------------- -------------------
DISCONTINUED OPERATIONS (NOTE 2):
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
BEFORE PROVISION FOR INCOME TAXES (BENEFIT) (17,032) 1,058 (17,606) (6,024)

PROVISION FOR INCOME TAXES (BENEFIT) 639 (292) 421 (2,624)
-------------------- ------------------- ------------------- -------------------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (17,671) 1,350 (18,027) (3,400)
-------------------- ------------------- ------------------- -------------------
NET (LOSS) INCOME $(14,707) $ 3,823 $(4,672) $ 4,725
==================== =================== =================== ===================

NET INCOME/(LOSS) PER COMMON SHARE - BASIC
INCOME FROM CONTINUING OPERATIONS $ 0.10 $ 0.10 $ 0.44 $ 0.35

(LOSS) INCOME FROM DISCONTINUED OPERATIONS (0.60) 0.06 (0.59) (0.15)
-------------------- ------------------- ------------------- -------------------
BASIC (LOSS) EARNINGS PER SHARE $ (0.50) $ 0.16 $ (0.15) $ 0.20
==================== =================== =================== ===================

See notes to condensed consolidated financial statements.

6

NET INCOME/(LOSS) PER COMMON SHARE - DILUTED

INCOME FROM CONTINUING OPERATIONS $ 0.10 $ 0.10 $ 0.43 $ 0.34
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (0.59) 0.06 (0.58) (0.14)
-------------------- ------------------- ------------------- -------------------
DILUTED (LOSS) EARNINGS PER SHARE $ (0.49) $ 0.16 $ (0.15) $ 0.20
==================== =================== =================== ===================

WEIGHTED AVERAGE SHARES - BASIC 29,708 23,645 30,639 23,190
==================== =================== =================== ===================

WEIGHTED AVERAGE SHARES - DILUTED 30,037 24,317 31,373 23,905
==================== =================== =================== ===================

See notes to condensed consolidated financial statements.

7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ARMOR HOLDINGS, INC. AND SUBSIDIARIES (UNAUDITED)
(IN THOUSANDS)

NINE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $13,355 $ 8,125
Adjustments to reconcile income from continuing operations to cash used
in operating activities:
Depreciation and amortization 4,049 3,590
Loss on disposal of fixed assets 136 -
Deferred income taxes (680) (42)
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (3,130) (10,618)
Increase in inventories (10,203) (6,197)
Increase in prepaid expenses and other assets (3,569) (3,341)
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (6,775) 6,931
Increase in income taxes payable 6,345 1,175
----------------------- ------------------------
Net cash used in operating activities (472) (377)
----------------------- ------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of patents and trademarks (45) (34)
Purchase of property and equipment (4,548) (3,422)
Additional consideration for purchased businesses (2,652) (2,350)
Proceeds from sale of equity securities - 843
Purchase of businesses, net of cash acquired (7,411) (40,688)
----------------------- ------------------------
Net cash used in investing activities (14,656) (45,651)
----------------------- ------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 4,237 6,548
Repurchases of treasury stock (26,054) (722)
Proceeds from issuance of treasury shares for the exercise
of stock options - 686
Cash paid for offering costs (326) -
Repayments of long-term debt (591) (300)
Borrowings under line of credit 27,763 83,347
Repayments under line of credit (20,701) (33,932)
----------------------- ------------------------
Net cash provided by (used in) financing activities (15,672) 55,627

Effect of exchange rate changes on cash and cash equivalents (872) 365
Net cash used in discontinued operations (644) (5,331)
----------------------- ------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32,316) 4,633
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 53,719 7,257
----------------------- ------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,403 $ 11,890
======================= ========================

CASH AND CASH EQUIVALENTS, END OF PERIOD
CONTINUING OPERATIONS $ 16,584 $ 5,525
DISCONTINUED OPERATIONS 4,819 6,365
----------------------- ------------------------
$ 21,403 $ 11,890
======================= ========================

See notes to condensed consolidated financial statements.

8

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
of Armor Holdings, Inc. and its wholly-owned subsidiaries (the "Company", "we",
"us") have been prepared in accordance with generally accepted accounting
principles for interim information and the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals and the elimination of all material intercompany
accounts and transactions) considered necessary by management to present a fair
presentation have been included. The results of operations for the three and
nine month periods are not necessarily indicative of the results to be expected
for the full year and should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2001.

As discussed in Note 2 and elsewhere in this Form 10-Q, we announced
our intention to sell our ArmorGroup Services division (the "Services
division"). As a result, the assets and liabilities of the Services division
have been classified as assets and liabilities of discontinued operations on our
balance sheet and the results of their operations classified as income from
discontinued operations in the accompanying unaudited condensed consolidated
financial statements. Certain prior year amounts have been reclassified to
conform to this presentation.

NOTE 2 - DISCONTINUED OPERATIONS

On July 15, 2002, we announced plans to sell the Services division and
the retention of Merrill Lynch & Company to assist in the sale. In accordance
with Statement of Accounting Standards 144, Accounting for Impairment or
Disposal of Long-Lived Assets, the assets and liabilities of the Services
division have been classified as held for sale, with its operating results in
the current and prior periods reported in discontinued operations for the three
and nine month periods ending September 30, 2002 and 2001. USDS, Inc., a
subsidiary providing certain training services, formerly reported as a part of
Services is not included in the amounts classified as assets held for sale. The
assets and liabilities as well as the operating results of USDS, Inc. have been
reclassified to Armor Holdings Products where management oversight currently
resides.

For the period ended September 30, 2002, we reviewed the carrying value
of our Services division and based upon an analysis of preliminary bids and
discussions with our investment bankers, we decided to reduce the carrying value
of our Services division. As noted elsewhere in this Form 10-Q, the results of
our discontinued operations included an $11.9 million after-tax impairment
charge to reflect management's current estimate of the carrying value of our
Services division, less estimated disposal costs. As required by Statement of
Accounting Standards 144, we have based our estimated realizable value of our
Services division on the best information currently available, however, the
actual proceeds from the disposal of our Services division may differ materially
from management's estimates and therefore could result in either a gain or a
loss upon final disposal. Further, we are considering a sale of the systems
integration component of our Services division on a stand-alone basis to
maximize the overall value of the sale of our Services division.

9

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

The following is a summary of the operating results of our discontinued
operations for the three and nine months ended September 30, 2002 and 2001.

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------- -------------------- -------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)

Revenue $ 23,747 $ 25,082 $ 74,273 $ 69,744
Cost of sales 19,730 17,419 55,840 46,913
Operating expenses 8,018 6,108 22,582 17,685
Amortization expenses - 318 - 1,050
Charge for impairment of
long-lived assets 11,905 - 11,905 -
Restructuring and related charges - - - 9,959
Integration and other non-recurring
charges 836 127 1,225 250
-------------------- -------------------- -------------------- -------------------
Operating (loss) income (16,742) 1,110 (17,279) (6,113)
Interest expense, net 34 23 127 109
Other expense (income), net 256 29 200 (198)
-------------------- -------------------- -------------------- -------------------
(Loss) income from discontinued
operations before provision (benefit)
for income taxes (17,032) 1,058 (17,606) (6,024)
Provision (benefit) for income taxes(a) 639 (292) 421 (2,624)
-------------------- -------------------- -------------------- -------------------
(Loss) income from discontinued
operations $ (17,671) $ 1,350 $ (18,027) $ (3,400)
==================== ==================== ==================== ===================

(a) The taxes reflected here report the balance of the consolidated tax
provision not reflected in continuing operations. On a separate return
basis, the tax provision here would reflect additional expense of $3,300
for the three and nine months ended September 30, 2002, that is required by
paragraphs 26 and 27 of SFAS No. 109 (as discussed elsewhere herein) to be
included in income from continuing operations on a consolidated basis.

OTHER DISCLOSURES RELATED TO DISCONTINUED OPERATIONS

- ----------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
- ----------------------------------------------------------------------------------------

Increase (decrease):
- ----------------------------------------------------------------------------------------
Accounts Receivable $ (2,211) $ 5,799
- ----------------------------------------------------------------------------------------
Net assets related to tax accounts $ (251) $ 804
- ----------------------------------------------------------------------------------------
Property, Plant and Equipment $ 1,913 $ 2,569
- ----------------------------------------------------------------------------------------
Long-lived assets impairment and amortization $(11,905) $ (7,260)
- ----------------------------------------------------------------------------------------

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

- ----------------------------------------------------------------------------------------
Net liabilities related to tax accounts $ 1,305 $ (1,616)
- ----------------------------------------------------------------------------------------
Accrued liabilities and short-term debt $ 2,369 $ 3,645
- ----------------------------------------------------------------------------------------

10

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

The following is a summary of the assets and liabilities of our
discontinued operations:

SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(IN THOUSANDS)

Assets
Cash and cash equivalents $ 4,819 $ 6,230
Accounts receivable, net 21,829 24,040
Other current assets 7,238 7,292
------------------ -----------------
Total current assets 33,886 37,562
Property, plant and equipment, net 11,271 9,358
Goodwill, net 25,326 36,865
Other assets 3,280 4,118
------------------ -----------------
Total assets of discontinued operations $ 73,763 $ 87,903
================== =================

Liabilities
Current portion of long-term debt $ 387 $ 282
Short-term debt 445 681
Accounts payable 2,708 2,692
Accrued expenses and other current liabilities 9,197 5,303
------------------ -----------------
Total current liabilities 12,737 8,958
Long-term debt 201 415
------------------ -----------------
Total liabilities of discontinued operations $ 12,938 $ 9,373
================== =================

11

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 3 - COMPREHENSIVE INCOME

The components of comprehensive income, net of tax benefits of $26,000
and $496,000 for the three months ended September 30, 2002 and 2001,
respectively, and $197,000 and $999,000 for the nine months ended September 30,
2002 and 2001, respectively, are listed below:

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------- ------------------- -------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)

Net (loss) income $(14,707) $ 3,823 $ (4,672) $ 4,725
Other comprehensive loss:
Foreign currency translations, net
of tax (617) (881) (852) (1,776)
------------------- ------------------- -------------------- -------------------
Comprehensive (loss) income: $(15,324) $2,942 $ (5,524) $ 2,949
=================== =================== ==================== ===================

12

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 4 - INVENTORIES

Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and are summarized as follows:

SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(IN THOUSANDS)

Raw material $33,686 $ 28,796
Work-in-process 14,495 12,941
Finished goods 15,218 8,816
------------------------ -----------------------
Total inventories $ 63,399 $ 50,553
======================== =======================

NOTE 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are summarized as
follows:

SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------ -----------------------
(IN THOUSANDS)

Accrued expenses and other current liabilities $ 20,745 $ 16,987
Deferred consideration for acquisitions 1,841 525
Customer deposits 7,584 7,002
------------------------ -----------------------
$ 30,170 $ 24,514
======================== =======================

13

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 6 - ACQUISITIONS

During the third quarter of 2002, we completed three acquisitions:
B-Square, Inc. ("B-Square"), Evi Paq, Inc. ("Evi Paq") and Sachsenring
Fahrzeugbau GmbH ("Trasco").

B-SQUARE

On, August 13, 2002, we acquired 100% of the outstanding stock of
B-Square. Based in Fort Worth, Texas, B-Square is a leading designer,
manufacturer and marketer of quality aluminum and steel sight mounts, tools and
accessories for the law enforcement, military and sporting goods (hunting and
target shooting) markets. In addition to the B-Square brand, the Company sells
sight mounts under the Lynx and Hillver brand names. In consideration for all of
the outstanding stock of B-Square, we paid $2.9 million in cash, with $675,000
of purchase price deferred and we incurred $2.3 million of goodwill. B-Square
had $2.8 million in revenues for its fiscal year ended December 31, 2001.

EVI-PAQ

On, August 13, 2002, we acquired substantially all of the assets of
Evi-Paq. Based in Tuscon, Arizona, Evi-Paq designs, manufactures and sells a
niche line of innovative crime scene supplies, including patented evidence
marking items, evidence collection products and bullet trajectory products,
targeted towards homicide investigators. In consideration for substantially all
of the assets of Evi-Paq, we paid $549,000 in cash, with $110,000 of purchase
price deferred, and we incurred $592,000 of goodwill.

TRASCO

On September 24, 2002, we acquired substantially all of the assets of
Trasco through a German bankruptcy proceeding. Based in Bremen, Germany, Trasco
is a leading high-end armored vehicle manufacturer for a variety of customers in
Europe, Asia and the Middle East. In consideration for substantially all of the
assets of Trasco, the purchase price was (Eurodollar)5.8 million in cash, which
was paid subsequent to September 30, 2002. We did not incur any goodwill since
our purchase price was below the net assets of Trasco.

Assuming the acquisitions above were consummated at the beginning of
2001 and 2002, the pro forma results would not be materially different from the
results reported.

14

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 7 - INFORMATION CONCERNING BUSINESS SEGMENTS AND
GEOGRAPHICAL SALES

We are a leading manufacturer and provider of security products,
vehicle armor systems, and security training services. Our products and services
are used by military, law enforcement, security and corrections personnel
throughout the world, as well as governmental agencies, multinational
corporations and non-governmental organizations. Our continuing operations are
organized and operated under two business segments: Armor Holdings Products and
Armor Mobile Security. Our Services division has been classified as discontinued
operations and is no longer included in this presentation (See Note 2).

Armor Holdings Products. Our Armor Holdings Products division
manufactures and sells a broad range of high quality equipment marketed under
brand names that are well known and respected in the military and law
enforcement communities. Products manufactured by this division include body
armor, tactical armor, hard armor, duty gear, less-lethal munitions, anti-riot
products, police batons, forensic products and weapon maintenance products.
USDS, Inc., a small subsidiary providing certain training services formerly
reported as a part of the Services division, is not included in the amounts
classified as assets held for sale or discontinued operations and has been
reclassified to our Armor Holdings Products division where management oversight
currently resides.

Armor Mobile Security. Our Armor Mobile Security division manufactures
and installs ballistic and blast protection armoring systems for military
vehicles, commercial vehicles, military aircraft and missile components. Under
the brand name O'Gara-Hess & Eisenhardt ("O'Gara"), we are the sole-source
provider to the U.S. military for the supply of armoring and blast protection
systems as well as maintenance services for the High Mobility Multi-purpose
Wheeled Vehicle (HMMWV, commonly known as the Humvee). Additionally, we have
been subcontracted to develop a ballistically armored and sealed truck cab for
the High Mobility Artillery Rocket System (HIMARS) currently in development for
the U.S. Army. We armor a variety of commercial vehicles including limousines,
sedans, sport utility vehicles, commercial trucks and cash-in-transit vehicles,
to protect against varying degrees of ballistic and blast threats. The Armor
Mobile Security division was created in connection with our acquisition of
O'Gara on August 22, 2001 (the "O'Gara acquisition").

We have invested substantial resources outside of the United States
and plan to continue to do so in the future. The Armor Mobile Security division
has invested substantial resources in Europe and South America. These operations
are subject to the risk of new and different legal and regulatory requirements
in local jurisdictions, tariffs and trade barriers, potential difficulties in
staffing and managing local operations, currency risks, potential imposition of
restrictions on investments, potentially adverse tax consequences, including
imposition or increase of withholding and other taxes on remittances and other
payments by subsidiaries, and local economic, political and social conditions.
Governments of many developing countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. Government
actions in the future could have a significant adverse effect on economic
conditions in a developing country or may otherwise have a material adverse
effect on us and our operating companies. We do not have political risk
insurance in the countries in which we currently conduct business. Moreover,
applicable agreements relating to our interests in our operating companies are
frequently governed by foreign law. As a result, in the event of a dispute, it
may be difficult for us to enforce our rights. Accordingly, we may have little
or no recourse upon the occurrence of any of these developments.

15

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

Revenues, operating income and total assets for each of our continuing
segments are as follows:

NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------- -------------------------
(IN THOUSANDS)

Revenues:
Products $ 131,049 $ 107,583
Mobile Security 90,717 9,349
=========================== ==========================
Total revenues $ 221,766 $ 116,932
=========================== ==========================

Operating income:
Products $ 24,068 $ 19,839
Mobile Security 9,156 739
Corporate (5,674) (4,495)
--------------------------- --------------------------
Total operating income $ 27,550 $ 16,083
=========================== ==========================

Total assets:
Products $ 176,951 $ 148,459
Mobile Security 112,136 93,425
Corporate 18,777 9,093
--------------------------- --------------------------
Total assets $ 307,864 $ 250,977
=========================== ==========================

16

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

The following unaudited information with respect to revenues, operating
income from continuing operations (geographic operating income from continuing
operations before amortization expense and integration and other non-recurring
charges) and total assets to principal geographic areas are as follows:

NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------ -------------------------
(IN THOUSANDS)

Revenues:
North America $157,069 $ 91,442
South America 21,983 2,236
Africa 1,344 2,007
Europe/Asia 41,370 21,247
------------------------- --------------------------
Total revenue $221,766 $116,932
========================= ==========================

Geographic operating income:
North America $23,928 $ 13,766
South America 1,690 377
Africa 430 713
Europe/Asia 6,191 4,348
------------------------- --------------------------
Total geographic operating income $32,239 $19,204
========================= ==========================

Total assets:
North America $258,123 $220,137
South America 9,856 4,580
Africa - -
Europe/Asia 39,885 26,260
------------------------- --------------------------
Total assets $307,864 $250,977
========================= ==========================

A reconciliation of consolidated geographic operating income from
continuing operations to consolidated operating income from continuing
operations follows:

NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------ -------------------------
(IN THOUSANDS)

Consolidated geographic operating income $ 32,239 $ 19,204
Amortization (213) (1,571)
Integration and other non-recurring charges (4,476) (1,550)
------------------------ -------------------------
Operating income $ 27,550 $ 16,083
======================== =========================

17

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 8. EARNINGS PER SHARE

The following details the numerators and denominators of the basic and
diluted earnings per share computations for net income from continuing
operations:

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------------- ---------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Numerator for basic and diluted earnings
per share:

Income from continuing operations $ 2,964 $ 2,473 $ 13,355 $ 8,125
---------------- ---------------- -------------- -----------------
Denominator for basic earnings per share -
weighted average shares outstanding: 29,708 23,645 30,639 23,190

Effect of shares issuable under stock option
and stock grant plans, based on the
treasury stock method 329 672 734 715
---------------- ---------------- -------------- -----------------
Denominator for diluted earnings per
share- Adjusted weighted average shares
outstanding 30,037 24,317 31,373 23,905
---------------- ---------------- -------------- -----------------

Basic earnings per share from continuing $ 0.10 $ 0.10 $0.44 $ 0.35
operations ================ ================ ============== =================

Diluted earnings per share from continuing $ 0.10 $ 0.10 $0.43 $0.34
operations ================ ================ ============== =================

The diluted earnings per share amounts shown herein for the three and
nine months ended September 30, 2002 reflect a change in the number of weighted
average shares outstanding on a fully diluted basis to 30,037 and 31,373,
respectively, from 29,708 and 30,639, respectively, as reported in our earnings
press release for the quarter ended September 30, 2002 issued on November 5,
2002.

18

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 9. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. This statement specifies that certain acquired intangible assets in a
business combination be recognized as assets separately from goodwill and that
existing intangible assets and goodwill be evaluated for these new separation
requirements. The adoption of this statement did not have a material impact on
our consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, ceased upon adoption
of this statement. In addition, this statement requires that goodwill be tested
for impairment at least annually at the reporting unit level. We implemented
SFAS No. 142 on January 1, 2002. In connection with the adoption of SFAS 142,
the Company completed in the second quarter the transitional goodwill
impairment test that compared the fair value of each reporting unit to its
carrying value and determined that no impairment existed. The goodwill resulting
from acquisitions made by us subsequent to June 30, 2001 was immediately subject
to the non-amortization provisions of SFAS 142. Had we been accounting for
goodwill under SFAS 142 for all periods presented, our net income and earnings
per share would have been as follows:

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------------- ---------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Reported net income $(14,707) $ 3,823 $(4,672) $ 4,725
Add back goodwill amortization, net of tax - 693 - 2,170
---------------- ---------------- -------------- -----------------
Actual/pro forma adjusted net income $ (14,707) $ 4,516 $ (4,672) $ 6,895
================ ================ ============== =================

Basic earnings per share
Reported basic earnings per share $(0.50) $0.16 $(0.15) $0.20
Goodwill amortization, net of tax - 0.03 - 0.10
---------------- ---------------- -------------- -----------------
Actual/pro forma basic earnings per share $ (0.50) $0.19 $ (0.15) $0.30
================ ================ ============== =================

Diluted earnings per share
Reported diluted earnings per share $(0.49) $0.16 $(0.15) $0.20
Goodwill amortization, net of tax - 0.03 - 0.09
---------------- ---------------- -------------- -----------------
Actual/pro forma diluted earnings per share $ (0.49) $0.19 $ (0.15) $0.29
================ ================ ============== =================

19

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS 143 requires the recognition of the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. If a reasonable estimate of fair
value cannot be made in the period the asset retirement obligation is incurred,
the liability shall be recognized when a reasonable estimate of fair value can
be made. The fair value of a liability for an asset retirement obligation is the
amount at which that liability could be settled in a current transaction between
willing parties, that is, other than in a forced or liquidation transaction.
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The provisions of SFAS 143 will become effective for us on
January 1, 2003. The effects of adopting this standard will not have a material
effect on the Company.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
SFAS 144 requires that a long-lived asset to be (1) abandoned, (2) exchanged for
a similar productive asset, or (3) distributed to owners in a spin-off be
considered held and used until it is abandoned, exchanged, or distributed. SFAS
144 requires (1) that spin-offs and exchanges of similar productive assets to be
recorded at the lower of carrying value or fair value, and that such assets be
classified as held and used until disposed of and (2) that any impairment loss
resulting from a spin-off or exchange of similar productive assets be recognized
upon asset disposition. SFAS 144 also states that the total assets and total
liabilities of discontinued business segments shall be presented in separate
captions in assets and liabilities. SFAS 144 also provides that future losses,
if any, of discontinued business segments shall be reported as incurred.
Effective January 1, 2002, we adopted SFAS 144. The reclassification of the
Services division to discontinued operations and subsequent reduction in its
carrying value was a result of our adoption of SFAS 144.

In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Recission on FASB 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections" (SFAS 145). Under SFAS 145, gains and losses
related to the extinguishment of debt should no longer be segregated on the
income statement from continuing operations. The provisions of SFAS 145 are
effective for fiscal years beginning after May 15, 2002 with early adoption
encouraged. The effects of adopting this standard will not have a material
effect on the Company.

In June 2002, the FASB issued Statement of Financial Accounting
Standard 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." FAS 146 is effective for exit or disposal activities
initiated on or after December 31, 2002. The effects of adopting this standard
will not have a material effect on the Company.

20

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(UNAUDITED)

NOTE 10. SUBSEQUENT EVENT

On October 4, 2002, we acquired certain assets, including the intellectual
property, previously owned by 911 Emergency Products, Inc. ("911 EP") from EP
Survivors, LLC, a limited liability company organized by former secured
creditors of 911 EP. Based in St. Cloud Minnesota, 911 EP is the leader in the
use of light emitting diodes ("LEDs") for emergency vehicle lighting market.

The transaction was valued at approximately $3.0 million including $1.12
million in cash at closing, $285,000 in cash or stock of Armor Holdings, Inc.
one year from closing, and a $1.58 million 10-year note, together with deferred
consideration in the form of an earn out and licensing fees. 911 EP has a run
rate of approximately $4 million in revenues annually. We expect the acquisition
to be accretive to earnings per share in 2003.

21

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

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

The following is a discussion of the results of operations and analysis
of financial condition for the three and nine months ended September 30, 2002.
The results of operations for purchase business combinations are included since
their effective acquisition dates. The following discussion may be understood
more fully by reference to the financial statements, notes to the financial
statements, and management's discussion and analysis contained in our Annual
Report on Form 10-K for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES (INCLUDING NEW ACCOUNTING PRONOUNCEMENTS):

Revenue Recognition. We record revenue from our Armor Holdings Products
division at the time of shipment. Returns are minimal and do not materially
effect the financial statements. We record training service revenue as the
services are performed over the term of the contract.

We record revenue from our Mobile Security division when the vehicles
are shipped, except a) for larger commercial contracts typically longer than
four months in length and b) the contract for the delivery of HMMWVs to the U.S.
Government which continues through 2005. Revenue from such contracts is
recognized on the percentage of completion, units-of-work performed method.
HMMWV units sold to the U.S. Government are considered complete when the onsite
Department of Defense officer finishes the inspection of the HMMWV and approves
it for delivery. Should such contracts be in a loss position, the entire
estimated loss would be recognized for the balance of the contract at such time.
Current contracts are profitable.

Foreign Currency Translation. In accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation," assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the current rate of exchange as of the balance sheet date and revenues and
expenses are translated at the average monthly exchange rates. The cumulative
change in the translation adjustment, which represents the effect of translating
assets and liabilities of our foreign operations, was a pre-tax loss of
approximately $6.7 million as of September 30, 2002 and $6.1 million as of
December 31, 2001.

Discontinued Operations. In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), a component classified as held for sale is
reported in discontinued operations when the following conditions are met: (a)
the operations and cash flows of the component have been (or will be) eliminated
from the ongoing operations of the entity as a result of the disposal
transaction and (b) the entity will not have any significant continuing
involvement in the operations of the component after the disposal transaction.
In a period in which a component of an entity either has been disposed of or is
classified as held for sale, the income statement for current and prior periods
reports the results of operations of the component, including any gain or loss
recognized in accordance with SFAS 144 paragraph 37, in discontinued operations.
The results of discontinued operations, less applicable income taxes (benefit),
is reported as a separate component of income before extraordinary items and the
cumulative effect of accounting

22

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

changes (if applicable). The assets and liabilities of a disposal group
classified as held for sale is presented separately in the asset and liability
sections, respectively, of the statement of financial position.

NEW ACCOUNTING PRONOUNCEMENTS:

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. This statement specifies that certain acquired intangible assets in a
business combination be recognized as assets separately from goodwill and that
existing intangible assets and goodwill be evaluated for these new separation
requirements. The adoption of this statement did not have a material impact on
our consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, ceased upon adoption
of this statement. In addition, this statement requires that goodwill be tested
for impairment at least annually at the reporting unit level. We implemented
SFAS No. 142 on January 1, 2002. In connection with the adoption of SFAS 142,
the Company completed in the second quarter the transitional goodwill
impairment test that compared the fair value of each reporting unit to its
carrying value and determined that no impairment existed. The goodwill resulting
from acquisitions made by us subsequent to June 30, 2001 was immediately subject
to the non-amortization provisions of SFAS 142. Had we been accounting for
goodwill under SFAS 142 for all periods presented, our net income and earnings
per share would have been as follows:

THREE MONTHS ENDED NINE MONTHS ENDED

SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------------- ---------------- -------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Reported net income $(14,707) $ 3,823 $(4,672) $ 4,725
Add back goodwill amortization, net of tax - 693 - 2,170
---------------- ---------------- -------------- -----------------
Actual/pro forma adjusted net income $ (14,707) $ 4,516 $ (4,672) $ 6,895
================ ================ ============== =================
Basic earnings per share
Reported basic earnings per share $(0.50) $0.16 $(0.15) $0.20
Goodwill amortization, net of tax - 0.03 - 0.10
---------------- ---------------- -------------- -----------------
Actual/pro forma basic earnings per share $ (0.50) $0.19 $ (0.15) $0.30
================ ================ ============== =================

Diluted earnings per share
Reported diluted earnings per share $(0.49) $0.16 $(0.15) $0.20
Goodwill amortization, net of tax - 0.03 - 0.09
---------------- ---------------- -------------- -----------------
Actual/pro forma diluted earnings per share $ (0.49) $0.19 $ (0.15) $0.29
================ ================ ============== =================

23

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a "primary-asset" approach to determine
the cash flow estimation period for a group of assets and liabilities that
represents the unit of accounting for a long-lived asset to be held and used.
SFAS 144 requires that a long-lived asset to be (1) abandoned, (2) exchanged for
a similar productive asset, or (3) distributed to owners in a spin-off be
considered held and used until it is abandoned, exchanged, or distributed. SFAS
144 requires (1) that spin-offs and exchanges of similar productive assets to be
recorded at the lower of carrying value or fair value, and that such assets be
classified as held and used until disposed of and (2) that any impairment loss
resulting from a spin-off or exchange of similar productive assets be recognized
upon asset disposition. SFAS 144 also states that the total assets and total
liabilities of discontinued business segments shall be presented in separate
captions in assets and liabilities. SFAS 144 also provides that future losses,
if any, of discontinued business segments shall be reported as incurred.
Effective January 1, 2002, we adopted SFAS 144. The reclassification of the
Services division to discontinued operations and subsequent reduction in its
carrying value was a result of our adoption of SFAS 144.

In June 2002, the FASB issued Statement of Financial Accounting
Standard 146, "Accounting for Costs Associated with Exit or Disposal Activities"
(SFAS 146). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." FAS 146 is effective for exit or disposal activities
initiated on or after December 31, 2002. The effects of adopting this standard
will not have a material effect on the Company.

24

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001.

Net (loss) income. Net (loss) income decreased $18.5 million to a net
loss of $14.7 million for the three months ended September 30, 2002 compared to
net income of $3.8 million for the three months ended September 30, 2001. Net
(loss) income for the three months ended September 30, 2002 includes income from
continuing operations of $3.0 million and a loss from discontinued operations of
$17.7 million, compared to income from continuing operations of $2.5 million and
income from discontinued operations of $1.3 million for the three months ended
September 30, 2001.

CONTINUING OPERATIONS

Products revenues. Products division revenues increased $9.7 million,
or 24.8%, to $49.0 million in the three months ended September 30, 2002,
compared to $39.3 million in the three months ended September 30, 2001. For the
three months ended September 30, 2002, Products division revenue increased 19.2%
internally, including year over year changes in acquired businesses, and 5.6%
due to the acquisitions of Identicator, Inc. ("Identicator"), Guardian Personal
Security Products, Inc. ("Guardian"), Speedfeed, Inc. ("Speedfeed"), the
Foldable Products Group ("Foldable"), Evi-Paq, Inc. ("Evi-Paq") and B-Square,
Inc. ("B-Square"), all of which were completed subsequent to the second quarter
of 2001. Products division revenues includes $5.1 million and $2.0 million from
USDS, Inc. for the three months ended September 30, 2002 and September 30, 2001,
respectively. In our filings prior to June 30, 2002, we reported USDS, Inc. as a
part of the Services division.

Mobile Security revenues. Mobile Security division revenues increased
$22.2 million, or 237.0% to $31.5 million in the three months ended September
30, 2002, compared to $9.3 million in the three months ended September 30, 2001.
The Mobile Security division was created through the acquisition of O'Gara,
which was completed on August 22, 2001 and only included in our financial
statements from the date of acquisition. Revenues for the three months ended
2001 included only one month of operations, from the date of acquisition.
Including the two months of operations under prior ownership, Mobile Security
division revenue increased 23.8% internally from approximately $25.4 million
during the three months ended September 30, 2001.

Cost of sales. Cost of sales increased $24.5 million, or 78.0%, to
$55.9 million for the three months ended September 30, 2002 compared to $31.4
million for the three months ended September 30, 2001. This increase was due
primarily to the O'Gara acquisition as well as overall revenue growth for the
three months ended September 30, 2002 compared to the three months ended
September 30, 2001. As a percentage of total revenues, cost of sales increased
to 69.5% of total revenues for the three months ended September 30, 2002 from
64.6% for the three months ended September 30, 2001. This increase as a
percentage of total revenues was primarily due to the inclusion of the Mobile
Security division which operates at lower average gross margins than the
Products division.

For the three months ended September 30, 2002, gross margins in the
Products division were 36.7% compared to 38.3% reported in the same period last
year, while the gross margins in the Mobile

25

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

Security division were 21.0% in the three-months ended September 30, 2002,
compared to 23.3% for the stub portion of the September 30, 2001 quarter after
the acquisition date. The decrease in the Products division gross margins is
attributable to the impact of higher proportional revenue of USDS, Inc., which
operates at margins, which are significantly lower than the gross margins
experienced within the other Products division companies. The decrease in gross
margins in the Mobile Security division was primarily due to a less favorable
mix of commercial vehicle sales in Cincinnati compared to the same period the
prior year, a heavier mix of "lower margin" cash-in-transit vehicles in 2002
compared to 2001, and a larger number of base unit sales included in revenue in
the 2002 period.

Operating expenses. Operating expenses increased $2.3 million, or
22.0%, to $12.9 million (16.0% of total revenues) for the three months ended
September 30, 2002 compared to $10.5 million (21.7% of total revenues) for the
three months ended September 30, 2001. This increase was primarily due to the
operating expenses associated with the operations of O'Gara, acquired in August
2001, which were not included for the full three months ended September 30,
2001. Operating expenses also increased due to acquisitions in the Products
division, as well as general internal growth of the business. Operating expenses
as a percent of sales decreased because the Mobile Security division operates
with a lower level of operating expenses as a percentage of sales than does the
Products division.

Amortization. Amortization expense decreased $463,000, or 88.2%, to
$62,000 for the three months ended September 30, 2002 compared to $525,000 for
the three months ended September 30, 2001. This decrease results from the
implementation of SFAS 142, which eliminated goodwill amortization for all
acquisitions completed after July 1, 2001, as well as for all fiscal years
ending after January 1, 2002. Remaining amortization expense is related to
patents and trademarks with finite lives.

Integration and other non-recurring charges. Integration and other
non-recurring charges increased $522,000, or 62.4%, to $1.4 million for the
three month period ended September 30, 2002 compared to $837,000 in the three
months ended September 30, 2001. These charges relate primarily to the
integration of O'Gara, but also include certain non-recurring expenses related
to the integration of our body armor operations, as well as costs related to the
integration of the Products division's acquisitions completed subsequent to the
second quarter of 2001. Integration and other non-recurring charges during the
three month period ended September 30, 2002 also included direct costs and
expenses associated with an acquisition that did not close.

Operating income. Operating income from continuing operations increased
$5.0 million to $10.3 million for the three months ended September 30, 2002
compared to $5.3 million in the three months ended September 30, 2001 due to the
factors discussed above. USDS, Inc. contributed operating income that was
previously reported as a part of the Services division of $500,000 and $240,000
for the three months ended September 30, 2002 and 2001, respectively.

Interest expense, net. Interest expense, net decreased $759,000, or
68.9% to $343,000 for the three months ended September 30, 2002 compared to $1.1
million for the three months ended September 30, 2001. This decrease was due
primarily to the repayment of long-term debt under our revolving credit facility
with the net proceeds of the secondary common stock offering completed in
December 2001.

Other (income) expense, net. Other (income) expense, net, was $(13,000)
for the three months ended September 30, 2002, compared to other (income)
expense, net of $146,000 for the three months ended September 30, 2001 due to a
gain on sale of fixed assets.

26

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes increased by
$5.9 million to $10.0 million for the three months ended September 30, 2002
compared to $4.1 million for the three months ended September 30, 2001 due to
the reasons discussed above.

Provision for income taxes. Provision for income taxes was $7.0 million
for the three months ended September 30, 2002 compared to $1.6 million for the
three months ended September 30, 2001. The provision for income taxes for the
three months ended September 30, 2002 included charges of $3.3 million related
to the establishment of valuation allowances for certain foreign deferred tax
assets of our discontinued operations. The effect of these charges was to
increase our effective tax rate for the three months ended September 30, 2002 to
70.4% compared to 39.4% for the three months ended September 30, 2001. Without
these charges, our effective tax rate for the three months ended September 30,
2002 would have been 37.1%. The decrease in what our effective tax rate would
have been without the tax charges related to our discontinued operations is due
primarily to the cessation of amortization of non-deductible goodwill for book
purposes as well as an increase in the income earned in foreign jurisdictions
with lower overall tax rates resulting, primarily from the acquisition of
O'Gara. Our expected effective tax rate for fiscal 2002 is 50.5% including the
tax charges and 38.1% without the tax charges related to our discontinued
operations. Our expected effective tax rate is not necessarily indicative of
what our actual effective rate will be due to the changing concentration and mix
of income in the various countries in which we continue to operate.

Income from continuing operations. Income from continuing operations
increased $491,000 to $3.0 million for the three months ended September 30, 2002
compared to $2.5 million for the three months ended September 30, 2001 due to
the factors discussed above.

DISCONTINUED OPERATIONS

Services revenues. Services division revenue decreased $1.3 million, or
5.3%, to $23.7 million for the three months ended September 30, 2002 compared to
$25.1 million for the three months ended September 30, 2001. For the three
months ended September 30, 2002, revenue increased 7.5% due to the acquisition
of International Training, Inc. ("ITI"), which was acquired as part of the
acquisition of O'Gara and is included in the Services division from the date of
acquisition. The revenue reduction is a result of lower revenues in the
Integrated Systems business in the USA and the Security business both in Latin
America and Russia due to the completion of several large contracts.

Cost of sales. Cost of sales increased $2.3 million, or 13.3%, to
$19.7 million for the three months ended September 30, 2002 compared to $17.4
million for the three months ended September 30, 2001. This increase was due
primarily to the acquisition of ITI. As a percentage of total revenue, cost of
sales increased to 83.1% of total revenues for the three months ended September
30, 2002 from 69.4% for the three months ended September 30, 2001. This increase
in cost of sales as a percentage of total revenue was primarily due to the
weakness in our Integrated Systems business resulting in poor margins from
increased inventory reserves, the loss of high margin oil industry security work
in Latin America and the scaling down of business in the Democratic Republic of
Congo.

Operating expenses. Operating expenses increased $1.9 million, or
31.3%, to $8.0 million (33.8% of total revenues) for the three months ended
September 30, 2002 compared to $6.1 million (24.4% of total revenues) for the
three months ended September 30, 2001. This increase was due to

27

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

increased accounts receivable reserves, other asset write-downs, and other
non-recurring charges in the Integrated Systems and Security businesses as well
as additional operating expenses associated with ITI's operations, acquired in
August 2001.

Amortization. Amortization expense decreased $318,000, or 100.0%, to
$0 for the three months ended September 30, 2002 compared to $318,000 for the
three months ended September 30, 2001. This decrease was a result of the
implementation of SFAS 142, which eliminated goodwill amortization for
acquisitions completed after July 1, 2001 and for fiscal years beginning January
1, 2002.

Integration and other non-recurring charges. Integration and other
non-recurring charges increased $709,000, or 558.3%, to $836,000 for the three
months ended September 30, 2002 compared to $127,000 for the three months ended
September 30, 2001. These charges reflect certain severance expenses, software
write-off costs and other expenses associated with preparing the division for
sale, as well as integration expenses associated with integrating ITI into the
Services division.

Charge for impairment of long-lived asset. Charges for impairment of
long-lived assets increased $11.9 million, or 100%, to $11.9 million for the
three months ended September 30, 2002 compared to $0 for the three months ended
September 30, 2001. The impairment charge is the result of the $11.9 million
reduction in carrying value of the Services division as required by SFAS 144. We
believe the $11.9 million reduction in carrying value relates largely to the
Systems Integration business component.

Operating (loss) income. Operating losses were $16.7 million for the
three months ended September 30, 2002, compared to operating income of $1.1
million for the three months ended September 30, 2001 due to the factors
discussed above.

Interest expense, net. Interest expense, net increased $11,000, or
47.8%, to $34,000 for the three months ended September 30, 2002 compared to
$23,000 for the three months ended September 30, 2001. This increase was due to
increased utilization of the Services division's line of credit.

Other (income) expense, net. Other (income) expense, net, was $256,000
for the three months ended September 30, 2002, compared to other (income)
expense, net of $29,000 for the three months ended September 30, 2001. The
increase was a result of losses on the disposal of fixed assets and other asset
write-offs.

(Loss) income from discontinued operations before provision for income
taxes (benefit). Loss from discontinued operations before provision for income
taxes (benefit) was $17.0 million for the three months ended September 30, 2002
and $1.1 million for the three months ended September 30, 2001 due to the
reasons discussed above.

Provision for income taxes (benefit). Income tax provision was $639,000
for the three months ended September 30, 2002 compared to a benefit of $292,000
for the three months ended September 30, 2001. The effective tax rate for the
three months ended September 30, 2002 was a provision of 3.8% compared to a
benefit of 27.6% for the three months ended September 30, 2001. The decrease in
benefit is primarily due to the inclusion in taxable income of certain expenses
not deductible for tax purposes, including an $11.9 million charge for the
impairment of long-lived assets. Our expected effective tax rate for
discontinued operations in fiscal 2002 is a benefit of 10.7% including the
previously mentioned non-deductible items. Our expected effective tax rate is
not necessarily indicative of what our actual

28

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

effective rate will be due to the changing concentration and mix of income in
the various countries in which we continue to operate and the timing or amount
of any sale of the division.

(Loss) income from discontinued operations. Loss from discontinued
operations was $17.7 million for the three months ended September 30, 2002
compared to income from discontinued operations of $1.4 million for the three
months ended September 30, 2001 due to the factors discussed above. As many of
the above items involve accounting estimates, the loss (income) and amounts
above will be revaluated in the future for any changes, which might be
appropriate.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001.

Net (loss) income. Net (loss) income decreased $9.4 million to a net
loss of $4.7 million for the nine months ended September 30, 2002 compared to
net income of $4.7 million for the nine months ended September 30, 2001. Net
(loss) income for the nine months ended September 30, 2002 includes income from
continuing operations of $13.4 million and a loss from discontinued operations
of $18.0 million, compared to income from continuing operations of $8.1 million
and a loss from discontinued operations of $3.4 million for the nine months
ended September 30, 2001.

CONTINUING OPERATIONS

Products revenues. Products division revenues increased $23.5 million,
or 21.8%, to $131.0 million in the nine months ended September 30, 2002,
compared to $107.6 million in the nine months ended September 30, 2001. For the
nine months ended September 30, 2002, Products division revenue increased 16.5%
internally, including year over year changes in acquired businesses, and 5.3%
due to the acquisitions of Identicator, Inc. ("Identicator"), Guardian Personal
Security Products, Inc. ("Guardian"), Speedfeed, Inc. ("Speedfeed"), the
Foldable Products Group ("Foldable"), Evi-Paq, Inc. ("Evi-Paq") and B-Square,
Inc. ("B-Square"), all of which were completed subsequent to the second quarter
of 2001. Products division revenues includes $12.4 million and $4.5 million from
USDS, Inc. for the nine months ended September 30, 2002 and September 30, 2001,
respectively. In our filings prior to June 30, 2002, we reported USDS, Inc. as a
part of the Services division.

Mobile Security revenues. Mobile Security division revenues increased
$81.4 million, or 870.3% to $90.7 million in the nine months ended September 30,
2002, compared to $9.3 million in the nine months ended September 30, 2001. The
Mobile Security division was created through the acquisition of O'Gara, which
was completed on August 22, 2001 and only included in our financial statements
from the date of acquisition. Revenues for the nine months ended 2001 included
only one month of operations, from the date of acquisition. Including the eight
months of operations under prior ownership, Mobile Security division revenue
increased 24.1% internally from approximately $73.1 million during the nine
months ended September 30, 2001.

Cost of sales. Cost of sales increased $80.8 million, or 112.8%, to
$152.5 million for the nine months ended September 30, 2002 compared to $71.7
million for the nine months ended September 30, 2001. This increase was due
primarily to the O'Gara acquisition as well as overall revenue growth for the
nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001. As a percentage of total revenues, cost of sales increased
to 68.8% of total revenues for the nine months ended September 30, 2002 from
61.3% for the nine months ended September 30, 2001. This increase as

29

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

a percentage of total revenues was primarily due to the inclusion of the Mobile
Security division, which operates at lower average gross margins than the
Products division.

For the nine months ended September 30, 2002, gross margins in the
Products division were 37.5% compared to 40.1% reported in the same period last
year, while the gross margins in the Mobile Security division were 21.0% in the
nine months ended September 30, 2002, compared to 23.3% for the stub portion of
the September 30, 2001 quarter after the acquisition date. The decrease in the
Products division gross margins is attributable to the impact of higher
proportional revenue of USDS, Inc., which operates at margins which are
significantly lower than the gross margins experience within the other Products
division companies. The decrease in gross margins in the Mobile Security
division was primarily due to a less favorable mix of commercial vehicle sales
in Cincinnati compared to the same period in the prior year, a heavier mix of
"lower margin" cash-in-transit vehicles in 2002 compared to 2001 and a larger
number of base unit sales included in revenue in the 2002 period.

Operating expenses. Operating expenses increased $11.0 million, or
42.1%, to $37.0 million (16.7% of total revenues) for the nine months ended
September 30, 2002 compared to $26.1 million (22.3% of total revenues) for the
nine months ended September 30, 2001. This increase was primarily due to the
operating expenses associated with the operations of O'Gara, acquired in August
2001, which were not included for most of the nine months ended September 30,
2001, acquisitions in the Products division as well as internal growth of the
business. Operating expenses as a percent of sales decreased because the Mobile
Security division operates with a lower level of operating expenses as a
percentage of sales than does the Products division.

Amortization. Amortization expense decreased $1.4 million, or 86.4%,
to $213,000 for the nine months ended September 30, 2002 compared to $1.6
million for the nine months ended September 30, 2001. This decrease results from
the implementation of SFAS 142, which eliminated goodwill amortization for all
acquisitions completed after July 1, 2001, as well as for all fiscal years
ending after January 1, 2002. Remaining amortization expense relates to patents
and trademarks with finite lives.

Integration and other non-recurring charges. Integration and other
non-recurring charges increased $2.9 million, or 188.8%, to $4.5 million for
the nine month period ended September 30, 2002 compared to $1.6 million in the
nine months ended September 30, 2001. These charges relate primarily to the
integration of O'Gara, but also include certain non-recurring expenses related
to the integration of our body armor operations, as well as costs related to the
integration of Identicator, Guardian, Speedfeed, Foldable, Evi-Paq, and
B-Square, all of which were acquired subsequent to the second quarter of 2001.
Integration and other non-recurring charges during the nine month period ended
September 30, 2002 also included direct costs and expenses associated with an
acquisition that did not close.

Operating income. Operating income from continuing operations increased
$11.5 million to $27.6 million for the nine months ended September 30, 2002
compared to $16.1 million in the nine months ended September 30, 2001 due
primarily to the factors discussed above.

Interest expense, net. Interest expense, net decreased $1.9 million, or
73.6% to $669,000 for the nine months ended September 30, 2002 compared to $2.5
million for the nine months ended September 30, 2001. This decrease was due
primarily to the repayment of long-term debt under our revolving credit facility
with the net proceeds of the secondary common stock offering completed in
December 2001.

30

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

Other (income) expense, net. Other (income) expense, net, was $(77,000)
for the nine months ended September 30, 2002, compared to other (income)
expense, net of $146,000 for the nine months ended September 30, 2001.

Income from continuing operations before provision for income taxes.
Income from continuing operations before provision for income taxes increased by
$13.6 million to $27.0 million for the nine months ended September 30, 2002
compared to $13.4 million for the nine months ended September 30, 2001 due to
the reasons discussed above.

Provision for income taxes. Provision for income taxes was $13.6
million for the nine months ended September 30, 2002 compared to a provision of
$5.3 million for the nine months ended September 30, 2001. The provision for
income taxes for the nine months ended included $3.3 million in charges related
to the establishment of valuation allowances for certain foreign deferred tax
assets of our discontinued operations. The effect of these charges was to
increase our effective tax rate for the nine months ended September 30, 2002 to
50.5% compared to 39.4% for the nine months ended September 30, 2001. Without
these charges, our effective tax rate for the nine months ended September 30,
2002 would have been 38.1%. The decrease in what our effective tax rate would
have been without the tax charges related to our discontinued operations is due
primarily to the cessation of amortization of non-deductible goodwill for book
purposes as well as an increase in the income earned in foreign jurisdictions
with lower overall tax rates resulting primarily from the acquisition of O'Gara.
Our expected effective tax rate for fiscal 2002 is 50.5% including the tax
charges related to our discontinued operations. Our expected effective tax rate
is not necessarily indicative of what our actual effective rate will be due to
the changing concentration and mix of income in the various countries in which
we continue to operate.

Income from continuing operations. Income from continuing operations
increased $5.2 million to $13.4 million for the nine months ended September 30,
2002 compared to $8.1 million for the nine months ended September 30, 2001 due
to the factors discussed above.

DISCONTINUED OPERATIONS

Services revenues. Services division revenue increased $4.5 million, or
6.5%, to $74.3 million for the nine months ended September 30, 2002 compared to
$69.7 million for the nine months ended September 30, 2001. For the nine months
ended September 30, 2002, revenue increased 9.3% due to the acquisition of
International Training, Inc. ("ITI"), which was acquired as part of the
acquisition of O'Gara and is included in the Services division for the entire
nine month period in 2002, but only one month from the date of acquisition in
2001.

Cost of sales. Cost of sales increased $8.9 million, or 19.0%, to
$55.8 million for the nine months ended September 30, 2002 compared to $46.9
million for the nine months ended September 30, 2001. This increase was due
primarily to the acquisition of ITI. As a percentage of total revenue, cost of
sales increased to 75.2% of total revenues for the nine months ended September
30, 2002 from 67.3% for the nine months ended September 30, 2001. This increase
in cost of sales as a percentage of total revenue was primarily due to the
weakness in the Integrated Systems business resulting in poor margins from
increased inventory reserves, the loss of high margin oil industry security work
in Latin America and the scaling down of business in the Democratic Republic of
Congo.

31

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

Operating expenses. Operating expenses increased $4.9 million, or
27.7%, to $22.6 million (30.4% of total revenues) for the nine months ended
September 30, 2002 compared to $17.7 million (25.4% of total revenues) for the
nine months ended September 30, 2001. This increase was due to increased
accounts receivable reserves, other asset write-downs, and other non-recurring
charges in the Integrated Systems and Security businesses as well as additional
operating expenses associated with ITI's operations, acquired in August 2001.

Amortization. Amortization expense decreased $1.1 million, or 100%, to
$0 for the nine months ended September 30, 2002 compared to $1.1 million for the
nine months ended September 30, 2001. This decrease was a result of the
implementation of SFAS 142, which eliminated goodwill amortization for
acquisitions completed after July 1, 2001 and for fiscal years beginning January
1, 2002.

Restructuring and related charges. The Services division incurred $10.0
million of restructuring and related charges for the nine-month period ended
September 30, 2001 related to the January 2001 restructuring plan. In January
2001, our Services division approved a restructuring plan to close its U.S.
investigative businesses, realign the division's organization, eliminate excess
facilities, and reduce overhead in its businesses worldwide. In connection with
this restructuring plan, the division performed a review of its long-lived
assets to identify potential impairments. Pursuant to this restructuring plan,
the Services division i) eliminated 26 employees, primarily from its
investigative businesses, ii) eliminated an additional 24 employees from its
security business, iii) incurred lease and other exit costs as a result of the
closure of its investigative businesses, and iv) wrote-down the value of both
tangible and intangible assets as a result of the impairment review. Most of the
significant actions contemplated by the restructuring plan have been completed.

As of September 30, 2002, we had a remaining liability of $281,000
relating to lease termination costs. The remaining liability has been classified
as accrued expenses and other current liabilities in liabilities of discontinued
operations on the consolidated balance sheet.

Integration and other non-recurring charges. Integration and other
non-recurring charges increased $975,000, or 390.0%, to $1.2 million for the
nine months ended September 30, 2002 compared to $250,000 for the nine months
ended September 30, 2001. These charges reflect certain severance expenses and
software write-off costs as well as integration expenses associated with
integrating ITI into the Services division.

Charge for impairment of long-lived asset. Charge for impairment of
long-lived asset increased $11.9 million, or 100%, to $11.9 million for the nine
months ended September 30, 2002 compared to $0 for the nine months ended
September 30, 2001. The impairment charge is the result of the $11.9 million
reduction in carrying value of the Services division. We believe the $11.9
million reduction in carrying value relates largely to the Systems Integration
business component.

Operating (loss) income. Operating losses were $17.3 million for the
nine months ended September 30, 2002, compared to operating losses of $6.1
million for the nine months ended September 30, 2001 due to the factors
discussed above. Operating losses for the nine months ended September 30, 2001
included $10.0 million of costs associated with the January 2001 restructuring
plan.

32

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

Interest expense, net. Interest expense, net increased $18,000, or
16.5%, to $127,000 for the nine months ended September 30, 2002 compared to
$109,000 for the nine months ended September 30, 2001. This increase was due to
increased utilization of the Services division's line of credit.

Other expense (income), net. Other expense, net, was $200,000 for the
nine months ended September 30, 2002, compared to other income, net of $198,000
for the nine months ended September 30, 2001. The increase was a result of
losses on the disposal of fixed assets and other asset write-offs.

(Loss) income from discontinued operations before provision for income
taxes (benefit). Loss from discontinued operations before income taxes (benefit)
were $17.6 million for the nine months ended September 30, 2002 compared to $6.0
million for the nine months ended September 30, 2001, due primarily to the
reasons discussed above.

Provision for Income tax (benefit). Income tax provision was $421,000
for the nine months ended September 30, 2002 compared to a benefit of $2.6
million for the nine months ended September 30, 2001. The effective tax rate for
the nine months ended September 30, 2002 was a provision of 2.4% compared to a
benefit of 43.6% for the nine months ended September 30, 2001. The decrease in
benefit is primarily due to the inclusion in taxable income of certain expenses
not deductible for tax purposes and including an $11.9 million charge for the
impairment of long-lived assets. Our expected effective tax rate for
discontinued operations in fiscal 2002 is a benefit of 10.7% including the
previously mentioned non-deductible items. Our expected effective tax rate is
not necessarily indicative of what our actual effective rate will be due to the
changing concentration and mix of income in the various countries in which we
continue to operate and the timing or amount of any sale of the division.

(Loss) income from discontinued operations. Losses from discontinued
operations were $18.0 million for the nine months ended September 30, 2002
compared to loss from discontinued operations of $3.4 million for the nine
months ended September 30, 2001 due to the factors discussed above. As many of
the above items involve accounting estimates, the loss (income) and amounts
above will be revaluated in the future for any changes, which might be
appropriate.

LIQUIDITY AND CAPITAL RESOURCES

On August 22, 2001, we entered into an Amended and Restated Credit
Agreement (the "Credit Agreement") with Bank of America, Canadian Imperial Bank
of Commerce, First Union National Bank, Suntrust Bank, Republic Bank, Keybank
National Association, and ING (U.S.) Capital LLC. Pursuant to the Credit
Agreement, the lenders established a $120,000,000 line of credit for our benefit
expiring on February 12, 2004. The Credit Agreement, among other things,
provides for (i) total maximum borrowings of $120,000,000 and (ii) the
capability for borrowings in foreign currencies. All borrowings under the Credit
Agreement bear interest at either (i) a base rate, plus an applicable margin
ranging from .000% to .375%, depending on certain conditions, (ii) a eurodollar
rate, plus an applicable margin ranging from 1.125% to 1.875%, depending on
certain conditions, or (iii) with respect to foreign currency loans, a fronted
offshore currency rate, plus an applicable margin ranging from 1.125% to 1.875%,
depending on certain conditions. In addition, the Credit Agreement includes both
negative and affirmative covenants customary for a credit facility of this
nature, such as limitations on capital expenditures, indebtedness, and sales of
assets, minimum fixed charge coverage, maintenance of net worth, a limitation on
senior indebtedness to capitalization, and a restriction against paying
dividends.

33

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

The Credit Agreement also provides that Bank of America will make
swing-line loans to us of up to $5,000,000 for working capital purposes and will
issue letters of credit on our behalf of up to $20,000,000. As of September 30,
2002, we had $7.2 million in outstanding borrowings under our Credit Facility,
and Bank of America had issued $11.5 million in letters of credit on our behalf
under the Credit Agreement. All indebtedness under the Credit Agreement will
mature on February 12, 2004. On September 30, 2002, we had approximately $13.2
million in total long-term debt for continuing operations, consisting primarily
of $7.2 million in outstanding borrowings under our Credit Facility and $3.9
million in industrial development revenue bonds.

In March 2002, our Board of Directors approved a stock repurchase
program that allows us to repurchase up to 10% of our outstanding shares.
Through November 14, 2002, we have repurchased 1.9 million shares of our common
stock under this program at an average price per share of $13.46. We expect to
continue our policy of repurchasing our common stock at opportune intervals. In
addition, our Credit Agreement permits us to repurchase shares of our common
stock if our ratio of Consolidated Total Indebtedness to Consolidated EBTIDA (as
such terms are defined in the Credit Agreement) for any rolling twelve month
period is less than 2:00 to 1, and there is no limitation under the Credit
Agreement on the amount of stock that we can repurchase within these guidelines.

Working capital, excluding amounts relating to discontinued operations,
was $93.6 million and $114.1 million as of September 30, 2002 and December 31,
2001, respectively.

Our fiscal 2002 capital expenditures for continuing operations are
expected to be approximately $8.0 million, of which we have spent approximately
$4.5 million through the nine months ended September 30, 2002. Our fiscal 2002
capital expenditures for discontinued operations are expected to be
approximately $3.6 million, of which we have already spent approximately $3.3
million through nine months ended September 30, 2002. Such expenditures include,
leasehold improvements, information technology and communications infrastructure
equipment and software, and manufacturing machinery and equipment.

We anticipate that the cash generated from operations, cash on hand,
net proceeds from our stock offering completed in December 2001 and borrowings
under the Credit Agreement will enable us to meet liquidity, working capital and
capital expenditure requirements during the next 12 months. We may, however,
require additional financing to pursue our strategy of growth through
acquisitions. If such financing is required, there are no assurances that it
will be available, or if available, that it can be obtained on terms favorable
to us or on a basis that is not dilutive to our stockholders.

34

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED

FORWARD LOOKING AND CAUTIONARY STATEMENTS

Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, but not
limited to, our failure to continue to develop and market new and innovative
products and services and to keep pace with technological change; competitive
pressures; failure to obtain or protect intellectual property rights; the
ultimate effect of various domestic and foreign political and economic issues on
our business, financial condition or results of operations; quarterly
fluctuations in revenues and volatility of stock prices; contract delays; cost
overruns; our ability to attract and retain key personnel; currency and customer
financing risks; dependence on certain suppliers; changes in the financial or
business condition of our distributors or resellers; our ability to successfully
manage acquisitions, alliances and integrate past and future business
combinations; regulatory, legal, political and economic changes, our ability to
sell the Services division on favorable terms and other risks, uncertainties and
factors inherent in our business and otherwise discussed elsewhere in this Form
10-Q and in our other filings with the Securities and Exchange Commission or in
materials incorporated therein by reference.

35

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our global operating and financial activities, we are
exposed to changes in raw material prices, interest rates and foreign currency
exchange rates, which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in raw material prices,
interest rates, and foreign currency exchange rates through our regular
operating and financing activities. We do not utilize financial instruments for
trading or other speculative purposes, nor do we utilize leveraged financial
instruments or other derivatives for such purposes.

MARKET RATE RISK

The following discussion about our market rate risk involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates, foreign currency exchange rates, and
equity security price risk. We do not use derivative financial instruments for
speculative purposes or to hedge these risks.

Interest Rate Risk. Our exposure to market rate risk for changes in
interest rates relate primarily to borrowings under our credit facilities and
our short-term monetary investments. To the extent that, from time to time, we
hold short-term money market instruments, there is a market rate risk for
changes in interest rates on such instruments. To that extent, there is inherent
rollover risk in the short-term money market instruments as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. However, there is no risk of loss of principal in the
short-term money market instruments, only a risk related to a potential
reduction in future interest income. Derivative instruments are not presently
used to adjust our interest rate risk profile. We do not use derivative
financial instruments to hedge this interest rate risk. However, in the future,
we may consider the use of financial instruments to hedge interest rate risk.

Foreign Currency Exchange Rate Risk. The majority of our business is
denominated in U.S. dollars. There are costs associated with our operations in
foreign countries that require payments in the local currency. Where appropriate
and to partially manage our foreign currency risk related to those payments we
receive payment from customers in local currencies in amounts sufficient to meet
our local currency obligations. We do not use derivatives or other financial
instruments to hedge foreign currency risk.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

We do business in numerous countries, including emerging markets in
Africa, Asia, South America, Russia, and the former CIS. We have invested
substantial resources outside of the United States and plan to continue to do so
in the future. Our international operations are subject to the risk of new and
different legal and regulatory requirements in local jurisdictions, tariffs and
trade barriers, potential difficulties in staffing and managing local
operations, potential imposition of restrictions on investments, potentially
adverse tax consequences, including imposition or increase of withholding and
other taxes on remittances and other payments by subsidiaries, and local
economic, political and social

36

ARMOR HOLDINGS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

conditions. Governments of many developing countries have exercised and continue
to exercise substantial influence over many aspects of the private sector.
Government actions in the future could have a significant adverse effect on
economic conditions in a developing country or may otherwise have a material
adverse effect on us and our operating companies. We do not have political risk
insurance in the countries in which we currently conducts business, but
periodically analyze the need for and cost associated with this type of policy.
Moreover, applicable agreements relating to our interests in our operating
companies are frequently governed by foreign law. As a result, in the event of a
dispute, it may be difficult for us to enforce our rights. Accordingly, we may
have little or no recourse upon the occurrence of any of these developments.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation of our disclosure controls and procedures
as of a date within 90 days of the filing of this Report on Form 10-Q, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.

There were no significant changes in our internal controls or in other
factors that could significantly affect such controls subsequent to the date of
their evaluation.

37

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

PART II

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Item 3, Legal Proceedings, in our Annual Report on
Form 10-K for the year ended December 31, 2001 for a description of legal
proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The following exhibits are filed as part of this quarterly report on
Form 10-Q.

99.1 Written Statements by the Chief Executive Officer and Chief
Financial Officer of Armor Holdings, Inc.

(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the
quarter for which this report is filed.

38

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

ARMOR HOLDINGS, INC.

/s/ Jonathan M. Spiller
----------------------------------
Jonathan M. Spiller
President, Chief Executive Officer
and Director
Dated: November 14, 2002

/s/ Robert R. Schiller
----------------------------------
Robert R. Schiller
Executive Vice President and Chief Financial Officer
Dated: November 14, 2002

39

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

CERTIFICATIONS

I, Jonathan M. Spiller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Armor
Holdings, Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

40

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

Date: November 14, 2002

/s/ Jonathan M. Spiller
President, Chief Executive Officer and Director

41

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

I, Robert R. Schiller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Armor
Holdings, Inc.;

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

42

ARMOR HOLDINGS, INC. AND SUBSIDIARIES

/s/ Robert R. Schiller
Executive Vice President and Chief Financial Officer

43