While it has been argued that application-layer overlay protocols can enhance services in mobile ad-hoc networks, hardly any empirical data is available on the throughput and delay performance achievable in this fashion. This paper presents an application-layer overlay approach to ensure integrity and confidentiality of application data in an ad-hoc environment. A key management and encryption scheme, called neighborhood key method, is presented where each node shares secrets only with authenticated neighbors in the ad-hoc network, thus avoiding global re-keying operations. All proposed solutions have been implemented and empirically evaluated in an existing software system for application-layer overlay networking. Results from indoor and outdoor measurement experiments with mobile handheld devices provide insight into the performance and overhead of overlay networking and application layer security services in ad-hoc networks.