Letter to the Shareholders

Armor Holdings, Inc. (AHI) had an outstanding year in 1997. The Company achieved record sales and profits, expanded its Manufactured Products Division and entered a new market segment: security services. The Company established its Integrated Security Services Division with the acquisition of DSL Group Limited in April 1997, and then strengthened it by acquiring complementary security service businesses. The business of security risk management was attractive because it offered the Company the opportunity to diversify its revenue base into the growing market for security services and because it opened up new markets for the Company's products. Now our goal of becoming the global leader in the manufacture of products for law enforcement and the provision of overall security solutions is well on its way to becoming a reality. With three acquisitions completed and more pending already this year, and with continued strong internal growth expected for our existing businesses, 1998 is shaping up to be another great year.

Revenues for 1997 were $78.3 million, an increase of 153%, and net income for the year grew to $3.2 million, up more than 358% over 1996. Earnings per share, before merger-related charges, rose to $0.33 per share. In addition to achieving these exceptional operating results, we have maintained a strong balance sheet, ending 1997 with cash balances just short of $20 million and no debt. Both are signs that we have stayed on the right track and that we are in a position to capitalize on business opportunities and management strengths.

Innovation was key to our continued leadership in the manufacture of ballistic-resistant garments and equipment. The sales in our original business unit -- American Body Armor & Equipment -- remain strong, increasing to approximately $15 million in 1997. In early 1998, we also developed and introduced our Xtreme™ Armor series of bullet resistant vests, incorporating a revolutionary, new technology which results in a lighter and more flexible garment. Furthermore, the acquisition of Pro-Tech Armored Products has significantly enhanced our hard armor manufacturing capabilities and will bring yet more growth to our already successful armor product line.

Integrating the products of Defense Technology Corporation of America, NIK® Public Safety and Supercraft (Europe) Limited into our overall marketing and product offering strategy was another major accomplishment of 1997. These companies are not only strong profit centers on their own, they also add value to our relationships with existing distributors and customers who utilize AHI as a single-source provider for multiple product lines. This aggressive integration gives our distributors increased access to various sectors of the market, and we continue to wholeheartedly support their efforts.

In the less-lethal products market, the increase in Defense Technology's profit margin was impressive. These products continue to make market gains and provide some of our best examples of potential growth as international agencies coping with political and social uprising are increasingly employing our less-lethal solutions. Additionally, our pending acquisition of Federal Laboratories**, a division of Mace™ Security International, Inc., and the licensing of the Mace™ trademark for the law enforcement market will strengthen our global position.

AHI's year-round calendar of training programs generates additional revenue, reduces potential liability claims and solidifies our Company's strong relationships with law enforcement, security and correctional agencies. These training programs, together with regular field exposure, ensure the continued use of our products. Furthermore, by maintaining brand identification and by building rapport with a diverse base of endusers, we gain helpful product feedback and development ideas.

As the base for our Integrated Security Services Division, DSL Group Limited is a global leader in security risk management in high-risk and emerging environments. Established in 1981 and now operating in over twenty countries, DSL Group Limited manages key security contracts with multinational corporations and supra-governmental agencies. These contracts provide revenue in excess of $48 million annually and add significant credibility to our overall business portfolio. Humanitarian demining efforts in the Balkans on behalf of the World Bank, European Union and United Nations reinforce our goal of contributing toward world stability and international development.

The acquisitions of Low Voltage Systems Technology, Asmara Limited and the pending acquisition of CDR International* in early 1998 add systems engineering, business intelligence and investigative strength to our Integrated Security Services Division. Ultimately, utilizing our existing global infrastructure and maximizing cross-selling opportunities between our products and services divisions will enhance our growth strategy throughout the coming years.

In April 1997, we moved our corporate headquarters to a new facility in Jacksonville, Florida, and attracted staff and executive management with the knowledge and experience to identify, capture and maximize opportunities within our industry. This centralization of accounting and administrative functions has proven to be extremely cost-efficient.

I'm proud of our accomplishments in 1997. But more important, I am confident that our drive to offer complete and integrated security solutions, coupled with domestic and international trends, will equal future prosperity. We've found that by bringing security services and products together under one roof, we are in a strong position to benefit from the continuing growth in the globalization of business, law enforcement and the attendant security concerns. We will pursue our goals by continuing to remain mindful of individual market and regional demands and by ensuring that we understand our clients and their needs while maintaining a highly motivated and qualified management team.

With our international focus, talent and teamwork, we will build upon our 1997 accomplishments and secure our positions in 1998. Particularly strong opportunities exist in Latin America, Asia, Europe, Russia and the CIS. Our ability to successfully penetrate these growing markets is key to our overall strategy. To assure consistent performance, we will focus on three key objectives in 1998: striving for organizational excellence, unifying our corporate image, and building value through acquisition and internal growth.

With a number of programs and initiatives already in place, the momentum of 1998 is well under way. As always, thank you for your commitment to our future and to another landmark year.

Jonathan M. Spiller
President and Chief Executive Officer


Manufactured Products Division

Due largely to the successful acquisition and integration of Defense Technology Corporation, NIK Public Safety and Supercraft (Europe) Limited, the Manufactured Products Division of AHI enjoyed an increase in net revenues during fiscal 1997 of 66% to approximately $30 million.

We are pleased with these results and are only beginning to realize the benefits of our strategic position. American Body Armor continues to dominate the U.S. law enforcement market as the leading domestic manufacturer of a variety of body armor products. Defense Technology and NIK Public Safety also have stronger domestic market status than ever before. With the 1998 addition of Pro-Tech Armored Products and Federal Laboratories**, AHI boasts one of the most diverse product offerings in the industry and widest distribution among the U.S. law enforcement and correction agencies.

On this foundation, we have adjusted our organization to focus on new markets for growth. Overseas, our new international sales team is set to achieve the same level of success we have traditionally enjoyed in the U.S. markets. Domestically, we are positioned to increase our business in the corrections and federal government sectors. We are also maximizing opportunities with our Integrated Security Services Division for the provision of equipment, when needed, for contract services.

We have begun to take advantage of our position as a multi-line manufacturer, both in distributor relationships and in cross-brand marketing. Encouraged by our broad range of products and confident in our growth-through-acquisition strategy, distributors are placing more and more importance on their relationships with AHI.

This is very gratifying to us and in return we will continue to live up to our reputation as a stable provider of high-quality products and exceptional customer service.

Supporting our distribution network has long been an AHI strong point. In 1998, we have planned well-designed product launches with merchandising tools, including advertising reprints and point-of-sale materials, to help retailers and agents meet their sales goals. Additionally, we offer centralized support for bulk mailouts, lead-distribution and literature fulfillment.

Cross-brand promotions are designed to introduce existing customers to other products within our offering. For example, a recent initiative rewarded large orders for Defense Technology products with a sample of our new Xtreme™ Armor. This approach not only stimulates Defense Technology sales, it also delivers an exciting new product into the hands of key, influential or decision-making buyers.

Xtreme™ Armor, developed in 1997 for an early 1998 launch, is a product which we believe will significantly impact the body armor industry. Designed to be the thinnest, coolest and most wearable body armor yet, the Xtreme™ was developed using patented construction and fibers exclusively available to American Body Armor & Equipment. In addition to being lightweight, the technical performance and hybrid engineering of the Xtreme™ offers a level of protection that exceeds industry standards. We hope this design innovation will encourage more police and security officers to wear their body armor and protect their lives.

Since joining the AHI family, Defense Technology has increased its product development funding. As a result, our less-lethal product line, already one of the best in the industry, will launch products in 1998 which will even further enhance our market leadership by increasing accuracy, reliability and range on many of our products.

With the addition of Pro-Tech's Body Bunkertm™ AHI instantly became the leading provider of ballistic shields to the domestic law enforcement market. We are confident that we can substantially enhance distribution of this already well-recognized brand name and look forward to including Pro-Tech's riot control vehicles in our less-lethal product line.

Supercraft's expertise in the manufacture of high quality products at competitive prices with good margins has also been a valuable addition to AHI. In addition to our facility in the United Kingdom, Supercraft enjoys excellent relationships with contract manufacturers in Romania, Russia and the former Yugoslavia. All ISO 9000 certified, these operations provide us with low-cost capacity and valuable assistance when the demand for Supercraft products exceeds our in-house production capabilities. In 1998 we believe our new international sales team will help Supercraft continue its growth, especially in the higher-margin body armor business.

The dramatic growth and positive change for each of our business units in 1997 will open new doors of opportunity in a broader range of market categories as we move ahead. We now have the people, the capabilities and the desire to add more products and more businesses in the future, realizing our dream -- to be the world's preeminent manufacturer of top-rated professional security products.


Integrated Security Services Division

During the second quarter of 1997, DSL Group Limited and its many subsidiaries became the foundation of Armor Holdings' Integrated Security Services Division. This combination brought a major corporate opportunity to AHI, at once increasing our global coverage and setting us well on the path toward the formation of a truly global infrastructure. In 1997, DSL Group Limited generated over $48 million of revenue, continuing its pattern of strong internal growth, with a 30% increase over 1996. The key factor in this success was a focus on newly industrialized countries, where corporate security officers trust DSL Group Limited and its reputation for providing personal, professional and responsive service. As a simple measure of customer loyalty, the majority of our service contracts stem from repeat customers or, personal referrals.

Providing for fixed asset and personnel protection has long been a part of our portfolio of services. In 1997 we significantly developed our expertise in aviation security, pipeline protection, humanitarian mine clearance and security of lines of communication. As we move forward, we are listening to our clients and using their input to further develop our service offerings.

Specifically, the acquisitions of Asmara Limited and CDR International* have expanded our worldwide capabilities to include substantive investigative and forensic audit capabilities and intellectual property protection services.

AHI's acquisition of Low Voltage Systems Technology (LST) enhances the Company's technical system design group. LST specializes in the assessment, design, procurement, installation, training and maintenance of life safety, fire and security systems. These electronic security service operations are expected to benefit particularly from access to the strong international presence of DSL Group Limited. Moreover, LST's significant experience in the design of institutional security systems will be beneficial in developing our domestic alliances with correctional facilities.

As part of our comprehensive strategy, we have broadened our client base by adding an increasing number of international banking and distribution companies and we have expanded geographically by commencing business operations in Mali, Ghana, Nigeria, Eritrea, Venezuela, Brazil, Ukraine and

Indonesia. We continually evaluate our businesses and make every effort to decrease dependence on certain markets while emphasizing growth in others.

People are the single biggest resource in our services division. Our relationships continue to be of prime importance to us and we remain committed to our clients, to the communities in which we operate and to our personnel. Dedicated expatriates and local staff in our worldwide offices provide the expertise and skill necessary for our operations to successfully serve our clients, whether they be governments, multinational corporations or VIPs.

Careful planning and follow-through, combined with attention to social, cultural and political events, help us retain the market-leading position we enjoy. We're intent on continuing to offer premier security and investigative solutions and know that by bringing together a group of companies with extraordinary credentials and superior capabilities, 1998 is certain to be another dynamic and productive year.


Achieving Positive Results

In 1996 we articulated a strategy for growth that would result in direct benefits to our investors. Specifically, we planned to become the preeminent global provider of security products and services through a targeted acquisition program. Our goals were to add companies that complemented our existing capabilities and to build sound financial and management structures. Just two years on this path, we have acquired eight new business units, have three pending transactions and are realizing measurable gains from those investments. Today, AHI represents a unique balance of security products and services within an otherwise fragmented industry.

Indeed, we are creating value by bringing together the right companies and buying them at the right price. Perhaps more important, we are integrating them in the right way.

Market results speak for themselves. For the second year in a row we have produced record earnings, and our market capitalization exhibits a 42.4% rise. Also, year-end share price demonstrates that we are passing on material value to our shareholders.

Still, the full return of our plan is yet to be realized. Although each business under the AHI umbrella holds a market-leading position, significant opportunities remain for expanding global reach, improving operational efficiencies and leveraging customer relationships. Staying focused and building cohesiveness should continue to provide shareholders the long-term value they deserve.


Directing Growth

AHI acquires companies that complement its existing businesses, provide additional capabilities or serve as a focused, independent investment in the security market. Acquisition candidates in both the security services and manufactured product divisions include companies with industry brand recognition, steady cash flow, low volatility and high gross margins.

As we continue to identify and acquire prospects, we expect to see continued expansion of our product line, increased geographic diversity, an overall rise in our blended gross margin, and realized efficiencies from consolidating administrative overhead and improving access to capital.

NIK Public Safety - July 1996
Based on existing law enforcement distribution, the addition of the NIK drug testing, evidence collection, and Flex-cuf line was a natural fit. Highlights of the NIK acquisition included its strong brand recognition, the potential for growth in a variety of new markets, and the fact that it added little or no incremental overhead to AHI.

Defense Technology Corporation - September 1996
Continuing to leverage our core distribution strength, Defense Technologyís anti-riot and less-lethal product line broadened our offering, opened new domestic and international markets, and expanded our overall manufacturing base.

Supercraft (Europe) Limited - April 1997
As a maker of outerwear, uniforms and bullet-proof clothing for military, public works, transportation and security markets, Supercraft gave AHI its first European manufacturing and distribution arm. In addition to fulfilling orders in its own facility, Supercraft coordinates production with Eastern European manufacturers when necessary and works closely with American Body Armor on international tenders for ballistic protection.

Defence Systems Limited - April 1997
Realizing the need to offer both manufactured products and security services to our customers, the merger with DSL set the foundation for continuing investments in the Integrated Security Services Division. This diversified our market to include the corporate sector, immediately increased access to a number of countries and established AHI as the leading global source for security solutions.

Gorandel Trading Limited - June 1997
This investment demonstrated our global commitment to US multinationals in Russia and Central Asia. With offices and key management in Moscow and Almaty, GTL is the centerpiece for security services in this region. GTL also serves as a valuable platform for product distribution.

Low Voltage Systems Technology - January 1998
The LST acquisition brought previously outsourced technical expertise to the Integrated Security Services Division. LST specializes in the engineering, design, procurement and installation of commercial security and life safety systems. While LST will maintain its domestic business, the demand for system design and engineering in our foreign markets will be a key growth area.

Pro-Tech Armored Products - April 1998
Building on traditional manufacturing strengths, Pro-Tech added engineering talent to our hard armor production. The Pro-Tech brand is well-regarded in the law enforcement sector. When coupled with our developed distribution network, AHI represents a significant force in the ballistic protection and hard armor marketplace.

Asmara Limited - April 1998
The strength of AHIís acquisition strategy is realized by leveraging new, but complementary capabilities. Through Asmara, AHI and its companies can now offer commercial due diligence and intelligence, asset tracing, litigation support, and other investigative work to clients worldwide.

CDR International Limited** - June 1998
For many of our clients, intangible assets are their most valuable resource. With the addition of CDR, AHIís asset protection services are now expanding to include intellectual property management and protection worldwide. We believe CDR will change the way large corporations police their patents, trademarks and licensing arrangements.

Federal Laboratories** - June 1998
Federal Labs has long been a major player in the international tear gas and anti-riot products industry. In addition, defense sprays sold under MACE® trademark are considered the most widely known brand in the industry. This is an important addition to our Manufactured Products Division and solidifies our position as a leading provider of anti-riot and less-lethal solutions to global law enforcement.

* On May 7, 1998, Armor Holdings, Inc. entered into a Letter of Intent to purchase the ordinary shares of CDR International Limited. There can be no assurance that a definitive agreement relating to this acquisition will be executed and that such transaction will be consummated.

**On April 2, 1998, Armor Holdings, Inc. entered into an agreement providing for the acquisition of the law enforcement division of Mace Security International, Inc., including the Federal Laboratories Division and the right to use the MACE® trademark in the law enforcement market. The closing of such transaction is subject to a number of conditions, not all of which are within the control of Armor Holdings. There can be no assurance that such conditions will be satisfied or that the transaction will close.