<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q


                                   (MARK ONE)
   X          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 -----               THE SECURITIES AND EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 1998

                                       OR

              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 -----               THE SECURITIES AND EXCHANGE ACT OF 1934

                        Commission File Number 000-21629


                            THE KROLL-O'GARA COMPANY
             (Exact name of registrant as specified in its charter)



                        Ohio                               31-1470817
          (State or other jurisdiction of               (I.R.S. Employer
                   incorporation)                      Identification No.)


                               9113 LeSaint Drive
                              Fairfield, Ohio 45014
                                 (513) 874-2112

     (Address, including zip code, and telephone number, including area code
                  of registrant's principal executive offices)

   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
                                               -----    -----

   The number of shares of common stock outstanding on August 5, 1998 was 
17,306,717


================================================================================


<PAGE>   2



                                      INDEX

<TABLE>
<CAPTION>
                                                     PART I

                                            FINANCIAL INFORMATION

Item 1.       Financial Statements
<S>                                                                                                      <C>

              Consolidated Balance Sheets (unaudited) as of June 30, 1998
                  and December 31, 1997...................................................................1

              Consolidated Statements of Operations (unaudited) for the Three and Six Months
                  Ended June 30, 1998 and 1997............................................................3

              Consolidated Statement of Shareholders' Equity (unaudited) for the Six Months
                  Ended June 30, 1998.....................................................................4

              Consolidated Statements of Cash Flows (unaudited) for the Six Months
                  Ended June 30, 1998 and 1997............................................................5

              Notes to Consolidated Unaudited Financial Statements........................................6

Item 2.       Management's Discussion and Analysis of Financial Condition and
                  Results of Operations...................................................................12

Item 3.       Quantitative and Qualitative Disclosures About Market Risk..................................20

                                                      PART II

                                                 OTHER INFORMATION

Item 1.       Legal Proceedings...........................................................................21

Item 2.       Changes in Securities.......................................................................21

Item 6.       Exhibits and Reports on Form 8-K............................................................21

Signatures................................................................................................22
</TABLE>



<PAGE>   3


Item 1. Financial Statements

                            THE KROLL-O'GARA COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                                   (unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                       June 30,           December 31,
                                                                         1998                 1997
                                                                    ----------------      ------------

<S>                                                                    <C>                 <C>      
CURRENT ASSETS:
      Cash and equivalents                                             $  40,318           $   6,899
      Marketable securities                                                    -                  23
      Trade accounts receivable, net of allowance for
           doubtful accounts of $2,457 and $2,516 at June 30,
           1998 and December 31, 1997, respectively                       41,267              37,649
      Unbilled revenues                                                    5,991               3,082
      Other receivables
           Advances to shareholders                                          173                 526
           Affiliates                                                        606                 366
           Employees                                                         108                  48
      Costs and estimated earnings in excess of
           billings on uncompleted contracts                              19,802              12,078
      Inventories                                                         20,153              19,453
      Prepaid expenses and other                                           5,542               6,455
      Deferred tax asset                                                     412                 412
                                                                       ---------           ---------
               Total current assets                                      134,372              86,991

PROPERTY, PLANT, AND EQUIPMENT, at cost
      Land                                                                 1,637               1,637
      Buildings and improvements                                           6,444               6,223
      Leasehold improvements                                               5,277               5,243
      Furniture and fixtures                                               4,961               4,630
      Machinery and equipment                                             12,526              11,290
      Construction-in-progress                                             1,865               1,037
                                                                       ---------           ---------
                                                                          32,710              30,060
      Less:  accumulated depreciation                                    (16,239)            (15,448)
                                                                       ---------           ---------
                                                                          16,471              14,612
                                                                       ---------           ---------

DATABASES, net of accumulated amortization of $21,093
      and $19,506 at June 30, 1998 and December 31,
      1997, respectively                                                   8,467               8,336
COSTS IN EXCESS OF ASSETS ACQUIRED, net of
      accumulated amortization of $1,396 and $772 at
      June 30, 1998 and December 31, 1997, respectively                   28,515              17,852
OTHER ASSETS                                                               5,293               6,180
                                                                       ---------           ---------
                                                                          42,275              32,368
                                                                       =========           =========
                                                                       $ 193,118           $ 133,971
                                                                       =========           =========
</TABLE>


The accompanying notes are an integral part of these consolidated balance 
sheets.



                                       1
<PAGE>   4

                            THE KROLL-O'GARA COMPANY
                           CONSOLIDATED BALANCE SHEETS
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                   (unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                           June 30,             December 31,
                                                                             1998                   1997
                                                                        ---------------        ---------------

<S>                                                                       <C>                 <C>      
CURRENT LIABILITIES:
      Revolving lines of credit                                           $       -           $     559
      Current portion of long-term debt                                         973               3,201
      Shareholder payable                                                       294                 309
      Accounts payable-
           Trade                                                             26,973              31,586
           Affiliates                                                           131                 875
      Billings in excess of costs and estimated
           earnings on uncompleted contracts                                    361                 320
      Accrued liabilities                                                    13,128              13,929
      Income taxes currently payable                                          2,081                 845
      Customer deposits                                                       2,627               3,840
                                                                          ---------           ---------
               Total current liabilities                                     46,568              55,464

OTHER LONG-TERM LIABILITIES                                                   1,861               1,533
DEFERRED INCOME TAXES                                                         2,153               2,155
LONG-TERM DEBT, net of current portion                                       39,319              46,864
                                                                          ---------           ---------
               Total liabilities                                             89,901             106,016

SHAREHOLDERS' EQUITY:
      Preferred stock, $.01 par value, 1,000,000 shares
           authorized, none issued                                                -                   -
      Common stock, $.01 par value, 50,000,000
           shares authorized, 17,276,955, and 13,590,525 shares
           issued and outstanding in 1998 and 1997, respectively                173                 136
      Additional paid-in-capital                                            119,616              50,590
      Retained deficit                                                      (16,080)            (22,387)
      Accumulated other comprehensive income (loss)                            (492)               (384)
                                                                          ---------           ---------
               Total shareholders' equity                                   103,217              27,955
                                                                          ---------           ---------
                                                                          $ 193,118           $ 133,971
                                                                          =========           =========
</TABLE>



The accompanying notes are an integral part of these consolidated balance
sheets.


                                       2
<PAGE>   5

                            THE KROLL-O'GARA COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                    (dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                        Three Months Ended                 Six Months Ended
                                                                             June 30,                          June 30,
                                                                    ----------------------------      ----------------------------
                                                                        1998           1997               1998           1997
                                                                    -------------  -------------      -------------  -------------

<S>                                                                     <C>            <C>                <C>            <C>     
NET SALES                 Security Products & Services                  $ 33,910       $ 23,998           $ 64,128       $ 46,441
                          Investigations & Intelligence                   19,734         18,218             37,148         34,282
                          Voice & Data Communications                      5,714          5,144             10,540          7,877
                                                                    -------------  -------------      -------------  -------------
                                                                          59,358         47,360            111,816         88,600

COST OF SALES             Security Products & Services                    23,997         16,754             45,854         32,779
                          Investigations & Intelligence                   11,248         10,796             21,172         20,432
                          Voice & Data Communications                      4,707          4,224              8,606          6,397
                                                                    -------------  -------------      -------------  -------------
                                                                          39,952         31,774             75,632         59,608

GROSS PROFIT              Security Products & Services                     9,913          7,244             18,274         13,662
                          Investigations & Intelligence                    8,486          7,422             15,976         13,850
                          Voice & Data Communications                      1,007            920              1,934          1,480
                                                                    -------------  -------------      -------------  -------------
                                                                          19,406         15,586             36,184         28,992
OPERATING EXPENSES
                          Selling and marketing                            4,033          3,378              7,734          6,540
                          General and administrative                       7,829          6,993             15,019         13,113
                          Amortization of costs
                               in excess of assets acquired                  383            142                624            306
                                                                    -------------  -------------      -------------  -------------
      Operating income                                                     7,161          5,073             12,807          9,033

OTHER INCOME (EXPENSE):
                          Interest expense                                (1,102)        (1,255)            (2,369)        (2,115)
                          Interest income                                    284             51                364            161
                          Other, net                                        (157)           334               (355)           (41)
                                                                    -------------  -------------      -------------  -------------
     Income before minority interest, provision for income
          taxes, and extraordinary item                                    6,186          4,203             10,447          7,038
Minority interest                                                              -            (71)                 -            (74)
                                                                    -------------  -------------      -------------  -------------
     Income before provision for income taxes and
          extraordinary item                                               6,186          4,132             10,447          6,964
Provision for income taxes                                                 2,406          1,646              4,140          2,949
                                                                    -------------  -------------      -------------  -------------
     Income before extraordinary item, net                                 3,780          2,486              6,307          4,015
Extraordinary item, net                                                        -           (194)                 -           (194)
                                                                    -------------  -------------      -------------  -------------
     Net income                                                          $ 3,780        $ 2,292            $ 6,307        $ 3,821
                                                                    =============  =============      =============  =============
Basic earnings per share                                                 $  0.24        $  0.17            $  0.43        $  0.29
                                                                    =============  =============      =============  =============
Basic weighted average shares outstanding                                 15,651         13,198             14,632         13,060
                                                                    =============  =============      =============  =============
Diluted  earnings per share                                              $  0.24        $  0.15            $  0.42        $  0.26
                                                                    =============  =============      =============  =============
Diluted weighted average shares outstanding                               16,052         13,942             15,015         13,830
                                                                    =============  =============      =============  =============
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.



                                       3
<PAGE>   6

                            THE KROLL-O'GARA COMPANY
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                     For the Six Months Ended June 30, 1998
                                   (unaudited)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                              ACCUMULATED
                                                                                     ADDITIONAL                 OTHER
                                                            COMPREHENSIVE  COMMON     PAID-IN      RETAINED  COMPREHENSIVE
                                                    SHARES     INCOME      STOCK      CAPITAL      DEFICIT   INCOME (LOSS)   TOTAL
                                                  --------- ------------- --------  -----------  ----------- ------------  ---------
<S>                                                 <C>        <C>         <C>       <C>         <C>           <C>         <C>     
BALANCE, December 31, 1997                          13,590                 $ 136     $ 50,590    $ (22,387)    $ (384)     $ 27,955
Issuance of stock in conjunction with the
     acquisition of businesses                         308                     3        6,511            -          -         6,514
Public offering of common stock, net of
     issuance costs of approximately $1,325          3,200                    32       60,403            -          -        60,435
Issuance of stock bonus to certain
     employees                                           2                     -           48            -          -            48
Exercise of stock options, and related
     income tax benefit                                177                     2        2,064            -          -         2,066
Comprehensive income:
     Net income                                                $ 6,307         -            -        6,307          -         6,307
                                                             ----------
    Other comprehensive income, net of tax:
       Foreign currency translation
       adjustments, net of $39 tax benefit               -         (98)        -            -            -          -             -
     Reclassification adjustment for gain on
       securities included in net income, net of
       $4 tax expense                                    -         (10)        -            -            -          -             -
                                                             ----------
     Other comprehensive income                          -        (108)        -            -            -       (108)         (108)
                                                             ==========
Comprehensive income                                           $ 6,199         -            -            -          -             -
                                                             ==========

                                                  ---------              --------  -----------  -----------  ---------    ----------
BALANCE, June 30, 1998                              17,277                 $ 173     $119,616    $ (16,080)    $ (492)     $103,217
                                                  =========              ========  ===========  ===========  =========    ==========

The accompanying notes are an integral part of these consolidated financial 
statements
</TABLE>



                                       4
<PAGE>   7

                            THE KROLL O'GARA COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 June 30,           June 30,
                                                                                   1998               1997
                                                                                -----------------------------
<S>                                                                              <C>                <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                                 $  6,307           $  3,821
      Adjustments to reconcile net income to net cash
            provided by (used in) operating activities-
           Depreciation and amortization                                              913              1,025
           Amortization of databases                                                1,587                788
           Amortization of costs in excess of assets acquired                         624                306
           Bad debt expense                                                         1,056                637
           (Gain) loss on sale of marketable securities                                (7)                 6
           Share in net (income)  loss of joint ventures                                -                 43
      Change in assets and liabilities, net of effects of acquisitions-
           Receivables                                                             (4,578)            (5,318)
           Advances to shareholders                                                   353                  -
           Affiliate receivables                                                      168                 15
           Employee receivables                                                       (60)                20
           Unbilled revenues                                                       (2,502)                43
           Costs in excess of billings on uncompleted contracts                    (7,724)             3,443
           Inventories                                                               (700)            (2,290)
           Prepaid expenses and other assets                                        1,793             (1,879)
           Accounts payable and income taxes currently payable                     (4,522)              (447)
           Affiliate payable                                                         (744)                 -
           Notes payable - shareholders                                               (27)                 -
           Billings in excess of costs and estimated earnings on
               uncompleted contracts                                                   41               (598)
           Customer deposits                                                       (1,213)              (509)
           Deferred income taxes payable                                             (108)                 -
           Accrued liabilities                                                       (759)              (195)
           Long term liabilities                                                      328                 71
                                                                                -----------------------------
               Net cash used in operating activities                               (9,774)            (1,018)
                                                                                -----------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property, plant and equipment, net                              (2,017)            (2,062)
      Additions to databases                                                       (1,719)            (1,081)
      Acquisitions, net of cash acquired                                           (4,454)            (7,606)
      Sale (purchase) of marketable securities                                         30             (3,011)
      Other                                                                             -                (77)
                                                                                -----------------------------
               Net cash used in investing activities                               (8,160)           (13,689)
                                                                                -----------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net borrowings (repayments) under revolving lines of credit                  (1,096)            (9,936)
      Proceeds from long-term debt                                                      -             34,875
      Payments of long-term debt                                                   (9,944)                 -
      Purchase and retirement of common stock                                           -             (2,553)
      Repayment of shareholder notes                                                    -               (577)
      Net proceeds from public offering of common stock                             60,435                  -
      Proceeds from exercise of stock options including related tax benefits        2,066                  -
      Foreign currency translation                                                    (34)              (465)
                                                                                -----------------------------
                Net cash provided by financing activities                          51,427             21,344
                                                                                -----------------------------
 NET INCREASE IN CASH AND EQUIVALENTS                                              33,493              6,637
Effects of foreign currency exchange rates on cash                                    (74)               (46)
                                                                                -----------------------------
CASH AND EQUIVALENTS, beginning of period                                           6,899              4,761
                                                                                -----------------------------
CASH AND EQUIVALENTS, end of period                                              $ 40,318           $ 11,398
                                                                                =============================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Cash paid for interest                                                     $  2,328           $  1,675
                                                                                =============================

      Cash paid for taxes                                                        $  1,147           $  2,065
                                                                                =============================
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.




                                       5
<PAGE>   8


                        THE KROLL-O'GARA COMPANY

              NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

         The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles to businesses,
individuals and governments. It also offers security services such as training,
risk and crisis management services, and site security systems. The
Investigations and Intelligence Group offers business intelligence and
investigation services to clients worldwide. The Voice and Data Security Group
offers secure satellite communication equipment, satellite navigation systems
and computer hardware and software security.

         In December 1997, a wholly owned subsidiary of The O'Gara Company
("O'Gara") was merged (the "Merger") into Kroll Holdings, Inc. ("Kroll"). At the
time of the Merger, the Company's name was changed from The O'Gara Company to
The Kroll-O'Gara Company.

         Effective upon the consummation of the Merger, each then issued and
outstanding share of Kroll common stock (including those issued under the Kroll
restricted stock plan) was converted into 62.52 shares of Common Stock of the
Company or 6,098,561 shares of Company Common Stock in total. Outstanding
employee stock options were converted at the same exchange factor into options
to purchase 551,492 shares of Company Common Stock.

         The Merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Kroll as though it
had always been a part of the Company.

         On May 5, 1998, the Company completed a public offering of 3,200,000
shares of its Common Stock at $20.50 per share (the "Offering"), resulting in
net proceeds to the Company of $60.4 million. A portion of the net proceeds were
used to pay off $14.8 million of indebtedness of the Company, with the balance
invested in short-term instruments and available for potential acquisitions,
working capital and other general corporate purposes. In addition to the shares
sold by the Company, certain shareholders sold 1,860,000 shares of Common Stock
in conjunction with the Offering. The Offering followed the Company's initial
public offering, which was completed on November 15, 1996 and resulted in the
issuance of 2,048,000 shares of Common Stock.

         The consolidated financial statements include the accounts of O'Gara
and Kroll and all their majority-owned subsidiaries. All material intercompany
accounts and transactions are eliminated. Investments in 20% to 50% owned
entities are accounted for on the cost method. Affiliated entities are not
included in the accompanying consolidated financial statements.

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. The accompanying financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.


                                       6
<PAGE>   9


(2) REVENUE RECOGNITION
    -------------------

         Revenue related to contracts for security products (both government and
commercial) results principally from long-term, fixed price contracts and is
recognized using the percentage-of-completion method calculated utilizing the
cost-to-cost approach. The percent deemed to be complete is determined by
comparing the costs incurred to date with estimated total costs for each
contract. This method is used because management considers costs incurred to be
the best available measure of progress on these contracts. However, adjustments
to this measurement are made when management believes that costs incurred
materially exceed effort expended. Contract costs include all direct material
and labor costs, along with certain direct overhead costs related to contract
production.

         Provisions for any estimated total contract losses on uncompleted
contracts are recorded in the period in which it becomes known that such losses
will occur. Changes in estimated total contract costs will result in revisions
to contract revenue. These revisions are recognized when determined.

         Revenue from investigations, intelligence and security services is
recognized as the services are performed. The Company records either billed or
unbilled accounts receivable based on a case-by-case invoice determination.

         Revenue related to voice and data security equipment are recognized as
equipment is shipped. Revenue and related direct costs of brokered satellite
time are recorded when payments are received from customers.

(3)      ACQUISITIONS
         ------------

         The Company completed the following acquisitions during the first six
months of 1998, both of which were accounted for as purchases. The allocation of
purchase price was based on estimates and may be revised at a later date pending
the completion of certain appraisals and other analyses.

         (a)          On March 16, 1998, the Company acquired all of the shares 
                  of Corplex, Inc. ("Corplex"), a provider of investigative and
                  executive protection services based in New York, New York. The
                  purchase price consisted of 29,207 shares of Common Stock
                  (valued at approximately $0.5 million or $17.98 per share).
                  For accounting purposes, the acquisition was effective March
                  1, 1998, and the results of operations of Corplex are included
                  in the consolidated results of the Company from that date
                  forward. The former shareholder of Corplex, who was employed
                  by Corplex prior to the acquisition, will continue in his
                  formerly held capacity. Cost in excess of assets acquired is
                  expected to be $0.4 million and will be amortized over 15
                  years.

         (b)          On June 15, 1998 the Company completed the acquisition of
                  Lindquist Avey MacDonald Baskerville Inc. ("Lindquist Avey"),
                  a provider of forensic and investigative accounting services
                  headquartered in Toronto, Canada. The purchase price for the
                  acquisition was $10.7 million consisting of $4.7 million in
                  cash and 278,340 shares of Company common stock (valued at
                  approximately $6.0 million or $21.52 per share). For
                  accounting purposes, the acquisition was effective June 1,
                  1998, and the results of operations of Lindquist Avey are
                  included in the consolidated results of the Company from that
                  date forward. Cost in excess of assets acquired is expected to
                  be $10.7 million and will be amortized over 25 years.



                                       7
<PAGE>   10


                  In connection with the acquisition of Corplex and Lindquist
         Avey, assets were acquired and liabilities were assumed as follows
         (dollars in thousands):

<TABLE>
<CAPTION>
                                             Lindquist
                                                Avey          Corplex
                                           ---------------- -------------
<S>                                              <C>                 <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
    Cash                                           $257              $16
    Accounts receivable                               -               96
    Unbilled revenue                                339               69
    Other current assets                            577                -
    Property, plant and equipment                   628                4
    Other non-current assets                        116               15
    Goodwill                                     10,716              384
                                           ---------------- -------------
                                                 12,633             $584
    Less:  Cash paid for net assets              (4,727)               -
               Fair value of debt issued              -                -
               Fair value of stock issued        (5,989)            (525)
                                           ================ =============
                                                 $1,917              $59
                                           ================ =============
LIABILITIES ASSUMED INCLUDING:
    Liabilities assumed and 
    acquisition costs                            $1,917              $46
    
    Debt                                              -               13
                                           ================ =============
                                                 $1,917              $59
                                           ================ =============
</TABLE>

(4) EARNINGS PER SHARE
    ------------------

         In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS No. 128"). In accordance with SFAS
No. 128, basic earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share are computed by dividing net income by the weighted
average number of shares of common stock and equivalents outstanding during the
year. Dilutive common stock equivalents represent shares issuable upon assumed
exercise of stock options and upon assumed issuance of restricted stock. The
following is a reconciliation of the numerator and denominator for basic and
diluted earnings per share for the three and six months ended June 30, 1998 and
1997 (in thousands except per share data):

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30, 1998
                                                 --------------------------------------------------------------------
                                                                                                 Per Share
                                                 Income (Numerator)            Shares              Amount
                                                                            (Denominator)
                                                 --------------------    --------------------    -----------
<S>                                                     <C>                    <C>                 <C>  
      Basic EPS                                         $3,780                 15,651              $0.24
                                                                                                 ===========
      Effect of dilutive securities:
           Options                                           -                    401
                                                 --------------------    --------------------
      Diluted EPS                                       $3,780                 16,052              $0.24
                                                 ====================    ====================    ===========
</TABLE>


                                       8
<PAGE>   11





<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JUNE 30, 1997
                                                 --------------------------------------------------------------------
                                                                              Shares             Per Share
                                                 Income (Numerator)         (Denominator)          Amount
                                                 --------------------    --------------------    -----------
<S>                                                     <C>                    <C>                 <C>  
      Basic EPS                                         $2,292                 13,198              $0.17
                                                                                                 ===========
      Effect of dilutive securities:
           Options                                           -                    155
           Restricted stock                              (207)                    589
                                                 --------------------    --------------------
      Diluted EPS                                       $2,085                 13,942              $0.15
                                                 ====================    ====================    ===========

                                                                   SIX MONTHS ENDED JUNE 30, 1998
                                                 --------------------------------------------------------------------
                                                        Income                 Shares            Per Share
                                                      (Numerator)          (Denominator)           Amount 
                                                 --------------------    --------------------    -----------
      Basic EPS                                         $6,307                 14,632              $0.43
                                                                                                 ===========
      Effect of dilutive securities:
           Options                                           -                    383
                                                 --------------------    --------------------
      Diluted EPS                                       $6,307                 15,015              $0.42
                                                 ====================    ====================    ===========

                                                                   SIX MONTHS ENDED JUNE 30, 1997
                                                 --------------------------------------------------------------------
                                                        Income                Shares             Per Share
                                                      (Numerator)          (Denominator)           Amount  
                                                 --------------------    --------------------    -----------
      Basic EPS                                         $3,821                 13,060              $0.29
                                                                                                 ===========
      Effect of dilutive securities:
           Options                                           -                    177
           Restricted stock                              (227)                    593
                                                 --------------------    --------------------
      Diluted EPS                                       $3,594                 13,830              $0.26
                                                 ====================    ====================    ===========
</TABLE>


The diluted earnings per share calculations for the first and second quarter of
fiscal 1997 cannot be added together to arrive at the diluted earnings per share
amount for the six months ended June 30, 1997 due to the effects of rounding and
the dilutive impact of the restricted stock on net income.

(5) NEW PRONOUNCEMENTS 
    ------------------

         In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
established standards for reporting and displaying 



                                       9
<PAGE>   12


comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has chosen to disclose comprehensive income, which encompasses net income and
foreign currency translation adjustments and unrealized holding gains of
marketable securities, in the Consolidated Statement of Shareholder's Equity.
Prior years have been restated to conform to the SFAS No. 130 requirements. The
Accumulated Other Comprehensive Income balance of $(492) at June 30, 1998
consists entirely of foreign currency translation adjustments.

         Total comprehensive income for the six-month period ended June 30, 1997
is as follows (in thousands):

<TABLE>
<S>                                                               <C>   
Net income                                                        $3,821
                                                            -------------
Other comprehensive income, net of tax:
         Foreign currency translation adjustments,  
              net of $204 tax benefit                              (511)
                                                            -------------
Other comprehensive income                                         (511)
                                                            -------------
                  Comprehensive income                            $3,310
                                                            =============
</TABLE>

         In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), effective for fiscal years beginning after
December 15, 1997. This statement requires disclosure for each segment into
which a company is organized by the chief operating decision maker for the
purposes of making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure and any manner in which management disaggregates a company.
The Company intends to adopt SFAS No. 131 during fiscal 1998. This statement,
which requires expansion or modification to existing disclosures, will have no
impact on the Company's reported financial position, results of operations or
cash flows.

         In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
preoperating costs, organization costs and other start-up costs, to be expensed
as incurred. The Company's current practice is to capitalize these expenses and
amortize them over periods ranging from one to five years. The Company is
required to adopt the provisions of this statement no later than the first
quarter of fiscal 1999. Included in the accompanying June 30, 1998 Consolidated
Balance Sheet are approximately $0.7 million of preoperating, organization and
start-up costs which would have been expensed had this statement already been
implemented.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
The Company currently has several forward contracts in place in association with
demand notes from certain subsidiaries. These instruments qualify for hedge
accounting. The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements and has not determined the timing of or method
of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.


                                       10
<PAGE>   13

(6) SUPPLEMENTAL CASH FLOW DISCLOSURE
    ---------------------------------

         Cash and equivalents consist of all operating cash accounts and
investments with an original maturity of three months or less. Marketable
securities consist of available-for-sale commercial paper obligations which
mature in 1998. These securities are valued at current market value, which
approximates cost. Non-cash activity for the six months ended June 30, 1998 and
1997 is as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                         1998         1997
                                                                                         ----         ----
<S>                                                                                    <C>            <C> 
                  Fair value of stock issued in connection with
                    acquisition of ITI   ............................................         -         $800
                  Notes issued in connection with acquisition
                    of ITI...........................................................         -       $1,232
                  Fair value of stock issued in connection
                    with acquisition of Next Destination.............................         -       $1,851
                  Notes issued in connection with acquisition
                    of Next Destination..............................................         -       $1,575
                  Fair value of stock issued in connection with
                    acquisition of Labbe.............................................         -       $3,431
                  Fair value of stock issued in connection with
                    acquisition of Corplex...........................................      $525            -
                  Fair value of stock issued in connection with
                    acquisition of Lindquist Avey........................................$5,989            -
</TABLE>


(7) INVENTORIES
    -----------

     Inventories are stated at the lower of cost or market using the first-in,
     first-out (FIFO) method and include the following (dollars in thousands):

<TABLE>
<CAPTION>
                                  June 30,           December 31,
                                    1998                 1997
                              -----------------    -----------------
                                           (Unaudited)
<S>                                    <C>                   <C>   
Raw materials                          $10,823               $9,441
Vehicle costs and                        
work-in-process                          9,330               10,012    
                              =================    =================
                                       $20,153              $19,453
                              =================    =================
</TABLE>

(8) DERIVATIVE FINANCIAL INSTRUMENTS
    --------------------------------

         Financial instruments in the form of foreign currency exchange
contracts are utilized by the Company to hedge its exposure to movements in
foreign currency exchange rates. The Company does not hold or issue derivative
financial instruments for trading purposes. Gains and losses on foreign exchange
contracts are deferred and amortized as an adjustment to the cumulative foreign
currency translation adjustment component of equity over the terms of the
agreements in accordance with hedge accounting standards. The fair value of
foreign currency exchange contracts is not recognized in the consolidated
financial statements since they are accounted for as hedges.

         The Company has entered into five foreign currency exchange contracts
to effectively hedge its exposure to certain foreign currency rate fluctuations
on demand loans to subsidiaries which are denominated in the foreign currency.
By virtue of these contracts, the Company has fixed the total dollar amount
which it will receive under the aforementioned subsidiary loans through the
maturity dates of the contracts regardless of the fluctuations in the exchange
rate. The total notional amount of the contracts, which mature between September
1998 and July 2000, is $20.9 million. The Company's foreign currency translation
adjustment component of accumulated other comprehensive income (loss) was
increased by $0.1 million in the first half of 1998 as a result of these
agreements.


                                       11
<PAGE>   14

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

         The following discussion of results of operations and financial
condition is based upon and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes. As a result of the acquisitions
made by the Company in 1997 and 1998, financial results from period-to-period
may lack comparability. Additionally, prior to December 1, 1997, the Company
reported revenue under the categories Security Hardware Products, Security
Systems Integration and Security Services. Effective December 1, 1997, the
Company recategorized its groups as Security, Products and Services,
Investigations and Intelligence and Voice and Data Security. Historical revenue
amounts have been reclassified to conform to the current categories.

GENERAL

         The Kroll-O'Gara Company is a leading global provider of a broad range
of specialized products and services that are designed to provide solutions to a
variety of security needs. The Company reports its revenue through three groups.
The Security Products and Services Group markets ballistic and blast protected
vehicles to businesses, individuals, and governments. It also offers security
services such as training, risk and crisis management services, and site
security systems. The Investigations and Intelligence Group offers business
intelligence and investigation services to clients worldwide. The Voice and Data
Security Group offers secure satellite communication equipment, satellite
navigation systems, and computer hardware and software security.

         On May 5, 1998, the Company completed a public offering of 3,200,000
shares of its Common Stock at $20.50 per share (the "Offering"), resulting in
net proceeds to the Company of $60.4 million. A portion of the net proceeds was
used to pay off $14.8 million of the indebtedness of the Company, with the
balance available for potential acquisitions, working capital and other general
corporate purposes. In addition to the shares sold by the Company, certain
shareholders sold 1,860,000 shares of Common Stock in conjunction with the
Offering. The Offering followed the Company's initial public offering, which was
completed on November 15, 1996 and resulted in the issuance of 2,048,000 shares
of Common Stock.

         Merger. On December 1, 1997, a wholly owned subsidiary of the Company
merged (the "Merger") into Kroll Holdings, Inc ("KHI"). In the Merger, the
Company issued 6,098,561 shares of Common Stock and repaid an aggregate of $14.5
million in outstanding indebtedness of KHI. Approximately 550,000 additional
shares of Common Stock may be issued upon the exercise of options held by KHI
employees, which were assumed by the Company. Revenues of KHI comprise all of
those reported by the Company's Investigations and Intelligence Group as well as
certain revenues in its other two Groups.

         Acquisitions-1997. On February 5, 1997, the Company completed the
acquisition of all of the shares of Next Destination, Ltd ("Next Destination")
of Salisbury, the United Kingdom, a distributor of high technology products for
the global positioning satellite and satellite communication markets. The
purchase price consisted of 170,234 shares of Common Stock (valued at
approximately $1.9 million or $10.88 per share) and $1.6 million in
seller-provided financing, in the form of secured, three-year 6% notes. Next
Destination, which had been selling the portable satellite terminal offered by
the Company, reports revenue through the Company's Voice and Data Security
Group. For accounting purposes, the acquisition was effective February 1, 1997,
and the results of operations of Next Destination are included in the
consolidated results of operations of the Company from that date forward.

         On February 12, 1997, the Company completed the acquisition of all of
the shares of Labbe, S.A. ("Labbe") a leading armorer of commercial and private
vehicles headquartered in Lamballe, France. The purchase price consisted of
$10.7 million in cash and 376,597 shares of Common Stock (valued at
approximately $3.5 million or $9.29 per share). The acquisition of Labbe has
increased substantially the level of commercial revenue generated by the
Security Products and Services Group and enhanced the Company's competitive
position due to an expanded product line, which includes cash-in-transit
vehicles, 



                                       12
<PAGE>   15


and penetration into new markets, such as Europe and Africa. For accounting
purposes, the acquisition was effective January 1, 1997, and the results of
operations of Labbe are included in the consolidated results of operations of
the Company from that date forward.

          On March 24, 1997, the Company completed the acquisition of all the
shares of International Training, Inc. ("ITI"), a provider of advanced security
training headquartered near Washington, D.C. The purchase price consisted of
$0.5 million in cash, 68,086 shares of Common Stock (valued at approximately
$0.8 million or $11.89 per share) and $1.2 million in seller-provided financing
in the form of unsecured, two-year 10% notes. ITI, which reports revenue through
the Company's Security Products and Services Group, added a number of new
services, such as evasive and defensive driver training, terrorist surveillance
training, force protection consulting and advanced weapons training, not
previously available from the Company. For accounting purposes, the acquisition
was effective March 1, 1997, and the results of operations of ITI are included
in the consolidated results of operations of the Company from that date forward.

         Effective December 2, 1997, the Company acquired all of the shares of
ZAO IMEA ("IMEA"), as well as certain work in process of, and an agreement not
to compete in Russia by, Acorn Communications Group, Inc. ("Acorn"). IMEA and
Acorn had substantially common ownership prior to the acquisition. The purchase
price of $3.0 million consisted of $0.5 million in cash, 138,889 shares of
Common Stock (valued at approximately $2.4 million or $18.00 per share) and $0.1
million in cash payable over the six months commencing January 1, 1998. IMEA is
engaged in the business of selling cash-in-transit vehicles and other commercial
bank equipment, such as safes, money counters and counterfeit detectors,
throughout Russia; it reports revenue through the Company's Security Products
and Services Group. For accounting purposes, the acquisition was effective
December 1, 1997, and the results of operations of IMEA are included in the
consolidated results of operations of the Company from that date forward.

         Acquisitions-1998. On March 16, 1998, the Company acquired all of the
shares of Corplex, Inc. ("Corplex"), a provider of investigative and executive
protection services based in New York, New York. The purchase price consisted of
29,207 shares of Common Stock (valued at approximately $0.5 million or $17.98
per share). Corplex, which reports revenue through the Company's Investigations
and Intelligence Group, allows the Company to streamline its use of subcontract
investigators in the New York metropolitan area and to offer certain new
products, such as executive protection and electronic counter measure expertise,
that are natural extensions of existing service areas. For accounting purposes,
the acquisition was effective March 1, 1998, and the results of operations of
Corplex are included in the consolidated results of operations of the Company
from that date forward.

         On June 15, 1998, the Company acquired all of the capital stock of
Lindquist Avey MacDonald Baskerville, Inc. ("Lindquist Avey"), a provider of
forensic and investigative accounting services headquartered in Toronto, Canada.
The purchase price consisted of $4.7 million in cash and 278,340 shares of
Company common stock (valued at approximately $6.0 million or $21.52 per share).
The acquisition of Lindquist Avey expands the Company's forensic and
investigative accounting service product line and establishes the Company in a
new geographic market. For accounting purposes, the acquisition was effective
June 1, 1998, and the results of operations of Lindquist Avey are included in
the consolidated results of operations of the Company from that date forward.

         Potential Acquisitions/Mergers. On March 31, 1998, the Company
announced it had reached an agreement in principle to acquire all of the capital
stock of Kizorek, Inc. ("Kizorek") of Naperville, Illinois. Kizorek, which does
business as InPhoto Surveillance, is a leading claims investigation agency to
insurance companies, corporations, and government agencies in connection with
investigating disability claims. The transaction is conditioned on the
satisfactory completion of due diligence, execution of definitive agreements and
other closing conditions.


                                       13
<PAGE>   16



         On May 14, 1998, the Company announced it had reached an agreement in
principle to acquire all of the capital stock of Protec S.A. ("Protec") of
Bogota, Colombia. Protec is engaged in the business of armoring cars in
Colombia, South America. It also operates a facility for the manufacture of
bullet and smash resistant glass for its own use and for sale to third parties.
The transaction is conditioned on the satisfactory completion of due diligence,
execution of definitive agreements and other closing conditions.

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the items
noted as a percentage of net sales:

<TABLE>
<CAPTION>
                                            For the Three Months Ended          For the Six Months Ended
                                                     June 30,                           June 30,
                                           -----------------------------      -----------------------------
                                              1998             1997              1998             1997
                                              ----             ----              ----             ----
<S>                                            <C>              <C>               <C>              <C>  
Security Products and Services:
   Military                                     25.5%            20.9%             23.7%            21.8%
   Commercial                                   31.7             29.8              33.7             30.6
Intelligence and Investigations                 33.2             38.4              33.2             38.7
Voice and Data Communications                    9.6             10.9               9.4              8.9
                                           ------------     ------------      ------------     ------------
    Total net sales                            100.0%           100.0%            100.0%           100.0%
Cost of sales                                   67.3             67.1              67.6             67.3
                                           ------------     ------------      ------------     ------------
    Gross profit                                32.7             32.9              32.4             32.7
Operating expenses:
    Selling and marketing                        6.8              7.1               6.9              7.4
    General and administrative                  13.2             14.8              13.4             14.8
   Amortization of costs in excess of
       assets acquired                           0.6              0.3               0.6              0.3
                                           ------------     ------------      ------------     ------------
Operating income                                12.1             10.7              11.5             10.2
Other income (expense):
    Interest expense                            (1.9)            (2.6)             (2.1)            (2.4)
    Interest income                              0.5              0.1               0.3              0.2
    Other, net                                  (0.3)             0.7              (0.3)            (0.0)
                                           ------------     ------------      ------------     ------------
Income before minority interest,
     provision for income taxes
     and extraordinary item                     10.4              8.9               9.3              7.9
Minority interest                                -               (0.2)              -               (0.1)
                                           ------------     ------------      ------------     ------------
Income before provision for
     income taxes and 
     extraordinary item                         10.4              8.7               9.3              7.8
    Provision for income taxes                   4.0              3.5               3.7              3.3
                                           ------------     ------------      ------------     ------------
Income before extraordinary 
     item                                        6.4              5.2               5.6              4.5
Extraordinary item, net                          -               (0.4)              -               (0.2)
                                           ============     ============      ============     ============
Net income                                       6.4%             4.8%              5.6%             4.3%
                                           ============     ============      ============     ============
</TABLE>

Three and Six Months Ended June 30, 1998 Compared to Three and Six Months Ended
June 30, 1997

         NET SALES. Net sales for the three months ended June 30, 1998 were
$59.4 million, an increase of $12.0 million, or 25%, from $47.4 million in the
same period in 1997. For the six months ended June 30, 1998, net sales increased
$23.2 million, or 26%, to $111.8 million from $88.6 million in the same period
in 1997.


                                       14
<PAGE>   17



         Security Products and Services Group. Net sales for the Security
Products and Services Group for the three months ended June 30, 1998 increased
$9.9 million, or 41%, to $33.9 million from $24.0 million for the same period in
1997. For the six months ended June 30, net sales for the Security Products and
Services Group increased $17.7 million, or 38%, from $46.4 million in 1997 to
$64.1 million in 1998. Both increases include net sales of commercial armoring
products, which increased $4.7 million, or 33%, from $14.1 million in 1997 to
$18.8 million for the three months ended June 30, 1998. For the six months
ended, net sales of commercial armoring products increased $10.6 million, or
39%, from $27.1 million in 1997 to $37.7 million in 1998. The increase in
commercial net sales was primarily due to continued growth in the Company's
international armoring divisions. During 1996 and 1997, the Company initiated
start-up armoring operations in Mexico, Brazil and the Philippines, and acquired
Labbe and IMEA. The Company will continue in its efforts to expand the
operations of its existing foreign subsidiaries along with evaluating new
acquisition opportunities and additional new markets.

         Also included in net sales for the Security Products and Services Group
are sales of military products and services, which increased $5.2 million, or
53%, to $15.1 million in 1998 from $9.9 million for the same three month period
in 1997. For the six months ended June 30, net sales of military products
increased $7.2 million, or 37%, from $19.3 million in 1997 to $26.5 million in
1998. In April 1998, the Company began work on a new contract with the U.S.
Military to supply 738 armored High Mobility Multi-Purpose Wheeled Vehicles
("HMMWVs") to the U.S. Army and the U.S. Air Force (the "738 Contract").
Production on the Company's previous contract with the U.S. Military for 360
Up-Armored HMMWV's (the "360 Contract") continued through July of 1998. The
combination of production on the two contracts resulted in an increase in net
sales. The convergence of the two contracts will have a favorable effect on the
level of military net sales in the third quarter. In subsequent periods,
production levels will be reduced as the 360 Contract ends and HMMWV production
will be solely based on the 738 Contract.

         Based on certain internal requirements, the U.S. Air Force has dictated
an aggressive delivery schedule for the 738 Contract. This delivery schedule
will require the Company to maintain an increased level of production for the
Up-Armored HMMWV in comparison with production levels in previous periods. This
increase in production will be reflected in an increase in net sales of military
products over levels experienced in 1997 and the first quarter of 1998. This
increase in net sales should continue through the balance of the 738 Contract,
which is expected to last through 1999.

         Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $1.5 million, or 8%, from $18.2 million in the
second quarter of 1997 to $19.7 million in the same period in 1998. For the six
months ended June 30, net sales for the Investigations and Intelligence Group
increased $2.9 million, or 8%, from $34.3 million in 1997 to $37.2 million in
1998. The increases in 1998 are primarily due to the inclusion of net sales from
the acquisition of Lindquist Avey and Corplex in the first half of the year.
Without acquisitions, net sales for the Investigations and Intelligence Group
would have been $18.3 million and $35.7 million for the three and six months
ended June 30, 1998, in comparison with $18.2 million and $34.3 million for the
three and six months ended June 30, 1997.

         Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group increased $0.6 million, or 11%, from $5.1 million in 1997
to $5.7 million in 1998 for the three months ended June 30. For the six months
ended June 30, net sales increased $2.7 million, or 34%, from $7.9 million in
1997 to $10.5 million in 1998. The level of sales was positively impacted by the
inclusion, since the first quarter of 1997, of the Mini-M telephone for mobile,
marine and vehicle applications in the product line offered by Next Destination.
Additionally, the Company has initiated relationships with certain mobile
telephone and navigation equipment suppliers that have made product more readily
available, making it possible for a faster turnover of inventory and increased
net sales.

         COST OF SALES. Cost of sales for the three months ended June 30, 1998
increased $8.2 million, or 26%, to $40.0 million from $31.8 million in the same
period in 1997. For the six months ended June 30, 



                                       15
<PAGE>   18


cost of sales increased $16.0 million, or 27%, from $59.6 million in 1997 to
$75.6 million in 1998. The increase in cost of sales was due to the increased   
level of business activity experienced in 1998. Gross profit as a percentage of
net sales for the three months ended June 30, 1998 was 32.7%, as compared with
32.9% for the same period in 1997. For the six months ended June 30, gross
profit as a percent of net sales was 32.4% and 32.7% for 1998 and 1997,
respectively.

         The Company has historically experienced higher levels of gross profit
as a percent of net sales in the Investigations and Intelligence Group as
opposed to the Security Products and Services Group and the Voice and Data
Communications Group. In the three and six months ended June 30, 1998, net sales
for the Security Products and Services and Voice and Data Communications Groups
increased as a percent of total net sales in comparison with the same periods in
1997. This change in product mix was the primary reason for the small decreases
in gross profit as a percent of net sales.

         Gross profit as a percentage of net sales increased approximately 3%
(from approximately 40% in 1997 to 43% in 1998) for the Investigations and
Intelligence Group for the three and six months ended June 30. This increase was
primarily due to the effect of certain cost-saving synergies attributable to the
Merger and to a more efficient use of subcontract services.

         Management expects the level of gross profit as a percent of net sales
to remain relatively consistent within each Group. However, if revenue from the
Investigations and Intelligence Group increases as a percentage of total sales
as management expects, consolidated gross profit as a percent of net sales may
increase as well.

         Operating expenses. Operating expenses for the three months ended June
30, 1998 increased $1.7 million, or 16%, to $12.2 million, compared to $10.5
million for the same period in 1997. For the six months ended June 30, 1997 and
1998, respectively, operating expenses increased $3.4 million, or 17%, from
$20.0 million to $23.4 million. The increase is primarily attributable to an
increase in the level of personnel and professional services required to
administer the growth experienced by the Company in 1998 and 1997.

         As a percent of net sales, operating expenses for the three months
ended June 30 decreased from 22% in 1997 to 21% in 1998. For the six months
ended June 30, operating expenses decreased from 23% in 1997 to 21% in 1998. As
a result of investments made by the Company in facilities and personnel in
previous periods, the Company did not require an additional commitment of fixed
cost to achieve growth in net sales in 1998. As sales increase further, the
Company will be required to commit additional amounts of fixed cost to secure
increased incremental net sales.

         Interest expense. Interest expense for the three months ended June 30,
1998 decreased $0.2 million, or 12%, to $1.1 million, compared to $1.3 million
in the same period in 1997. For the six months ended June 30, interest expense
increased from $2.1 million in 1997 to $2.4 million in 1998, a decrease of 12%.
With the completion of the Offering, a significant portion of the Company's
indebtedness was paid off (approximately $14.8 million). As a result, the
Company experienced lower interest expense in the second quarter of 1998 and
expects interest expense to be lower in comparison with 1997 for the remainder
of 1998.

         On May 30, 1997, the Company entered into an agreement with certain
institutional investors to issue and sell $35.0 million worth of Senior Notes.
This agreement contained a provision for a step down of the interest rate if
certain criteria were met. The Company complied with the specified criteria and
the step down of rates commenced in the second quarter of 1998. The step down,
which changed the interest rate from 9.56% to 8.56%, contributed to the decrease
in interest expense in the second quarter of 1998.

         Interest income. Interest income for the three months ended June 30,
1998 increased $0.2 million, or 457%, to $0.3 million, compared to $0.1 million
in the same period in 1997. For the six months ended June 30, interest income
increased from $0.2 million in 1997 to $0.4 million in 1998, an increase of
126%. 



                                       16
<PAGE>   19



Funds from the proceeds of the Offering that were not used to pay down debt or
expenses were invested in short-term instruments with maturities of three months
or less. The return on these investments is responsible for the increase in
interest income in 1998. Management anticipates that it will continue to have
funds available for investment in the foreseeable future. As a result, the
Company anticipates it will continue to experience higher levels of interest
income in 1998 in comparison with 1997.

Provision for income taxes. The provision for income taxes was $2.4 million for
the three months ended June 30, 1998 in comparison with $1.6 million for the
same period in 1998. For the six months ended June 30, the provision for taxes
was $4.1 million and $2.9 million in 1998 and 1997, respectively. The effective
tax rate for the first half of 1998 was 40% compared to 42% in the same period
of 1997. The effective rate in the first half of 1997 was higher due to the fact
that KHI did not benefit certain foreign losses in the period.



                                       17
<PAGE>   20


LIQUIDITY AND CAPITAL RESOURCES

         General. The Company historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by operations, excluding non-cash charges such as depreciation and amortization.

Public Offering. A portion of the net proceeds of the Offering (approximately
$60.4 million) was used to pay off certain indebtedness of the Company ($14.8
million). The remaining amounts were invested in short-term instruments and are
available for potential acquisitions, working capital and other general
corporate purposes.

         Credit Facility. The Company will maintain its revolving credit
facility agreed to with KeyBank National Association in May 1997 and amended in
December 1997. This agreement provides for a revolving line of credit of $7.0
million and a letter of credit facility of approximately $7.7 million. The
revolving credit facility bears interest at the prime rate less 0.5%, or, at the
Company's option, the LIBOR rate plus 2%.

         On August 3, 1998, there were no borrowings under the revolving credit
agreement. The remaining proceeds from the Offering along with the unused
capacity on the revolving line of credit will be sufficient to fund the working
capital needs of the Company for the foreseeable future.

         The Company will continue to pursue its strategy of acquiring security
related companies in an effort to consolidate its position in the risk
mitigation industry. To that end, the Company will continue to review additional
sources of working capital as they become necessary.

         Cash flows from operating activities. Net cash used in operating
activities was $9.8 million and $1.0 million for the six months ended June 30,
1998 and 1997, respectively. During the time that the Company has contracted
with the U.S. Government to armor the HMMWV, the Company was designated a Small
Business according to U.S. Government procurement regulations. As result of the
Merger and the acquisitions completed in 1998, the Company's designation was
changed to Large Business for government procurement purposes.

         The change in designation affects progress payments made by the
government to the Company over the course of a contract, and the Company's cash
flow, in two ways. First, the progress payments will be determined using a
smaller percentage of total cost committed than they have in the past. Second,
the Company will only be reimbursed for vendor invoices paid instead of expenses
incurred. Although these changes will not affect the total amount ultimately
collected, they will defer certain amounts previously included as part of a
progress payment until the vehicles are delivered. The majority of these
adjustments to the way the Company is reimbursed for its military business were
applied to the HMMWV contracts on a cumulative basis in the second quarter. This
resulted in a significant increase in the balance of Cost and Estimated Earnings
in Excess of Billings on Uncompleted Contracts and its related effect on cash
flows from operating activities.

         Once the cumulative effect of the change in designation is recovered,
the progress payments made by the government to the Company will resume on a
regular schedule. These progress payments should be smaller than previously
experienced due to the change in the Company's cost recovery procedures. In
August 1998, the Company initiated discussions with its contracting officers
seeking some relief from the cash flow constraints placed on it due to the
changes in its payment process. As result of these discussions, it appears
likely that the Company will be reimbursed for a portion of the progress
payments withheld in the second quarter. This reimbursement should occur in the
third quarter of 1998.

         Cash flows from investing activities. Historically, the Company has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $2.0 million for the six months ended 


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June 30, 1998, and $2.1 million for the same period in 1997. Additions to
databases totaled $1.7 million and $1.1 million for the six months ended June
30, 1998 and 1997, respectively.

In addition to capital expenditures, 1997 investing activities included the
acquisitions of Labbe and ITI, which required a total cash outlay of $7.6
million, net of cash acquired. In 1998, the acquisition of Lindquist Avey
required cash of approximately $4.5 million, net of cash acquired. Management
anticipates that, as the Company continues to pursue strategic acquisitions,
cash outlays will be required in connection with acquisitions for the remainder
of 1998.

Cash flows from financing activities. Net cash provided by financing activities
was $51.4 million and $21.3 million for the six months ended June 30, 1998 and
1997, respectively. Cash from financing activities in 1998 includes the net
proceeds from the Offering ($60.4 million) completed in the second quarter. The
amount in 1997 reflects the borrowings under the Senior Notes and the execution
of a term loan that were used to finance certain acquisitions and working
capital requirements.

         Foreign operations. The Company attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, maintaining reserves for credit losses, maintaining insurance on
equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge the Company's risk from translation
gains and losses.

         The Company utilizes derivative financial instruments, in the form of
forward contracts, to hedge its exposure to foreign currency rate fluctuations.
At June 30, 1998 five such contracts were outstanding in connection with
intercompany demand notes with Labbe and Lindquist Avey. These contracts are
intended to hedge the Company's exposure to deterioration in the amount
outstanding due to changes in currency translation rates. The notional amount
(together with amortized premium) and the fair market value associated with
these forward contracts were $20.9 million and $0.3 million, respectively. These
contracts mature between September 1998 and July 2000. Gains or losses on
existing forward instruments are offset against the translation effects
reflected in shareholders' equity. The fair value of forward contracts is not
recognized in the consolidated financial statements since they are accounted for
as hedges. The Company does not hold or issue derivative financial instruments
for trading purposes.

         Year 2000 Issues. The Company has implemented a Year 2000 program to
insure that its computer systems and applications will function properly beyond
1999. The Company believes that it has allocated adequate resources for this
purpose and expects its Year 2000 date conversion program to be completed
successfully. In addition, the Company is selecting and implementing several new
software applications, all of which are believed to be Year 2000 compliant.
Although the ability of vendors and customers to adequately address their Year
2000 issues is outside the Company's control, the Company is discussing the
possibility of any interface difficulties which may affect the Company. The
Company currently does not expect the costs necessary to address this matter to
be material to its financial condition or results of operations.

Quarterly fluctuations. The Company's operations may fluctuate on a quarterly
basis as a result of the timing of contract costs and revenues of its Security
Products and Services Group, particularly from its military and governmental
contracts which are generally awarded in a periodic and/or sporadic basis. The
Company generally does not have long-term contracts with its clients in its
Investigations and Intelligence Group and its ability to generate net sales is
dependant upon obtaining many new projects each year, most of which are of a
relatively short duration. Period-to-period comparisons within a given year or
between years may not be meaningful or indicative of operating results over a
full fiscal year.

         Forward-Looking Statements. Forward-looking statements, within the
meaning of Section 21E of the Securities and Exchange Act of 1934, are made
throughout this Management's Discussion and Analysis of Financial Conditions and
Results of Operations. The Company's results may differ materially from those in
the forward-looking statements. Forward-looking statements are based on
management's 



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current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by external factors such as actions of competitors, changes in laws and
regulations, customer demand, effectiveness of programs, strategic relations,
fluctuations in the cost and availability of resources, and foreign economic
conditions, including currency rate fluctuations.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.



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PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is involved in litigation from time to time in the ordinary
course of business; however, the Company does not believe that there is any
pending litigation, individually or in aggregate, that is likely to have a
material adverse affect on its business or financial condition.

ITEM 2.  CHANGES IN SECURITIES

         These issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

                  (a)      On June 1, 1998, the Company issued 2,249 shares of 
                           common stock to certain officers of the Company in 
                           connection with its annual bonus program.

                  (b)      On June 15, 1998, the Company issued 278,340 shares
                           of common stock to the principals of Lindquist Avey
                           in connection with the acquisition of that Company.
                           The issuances were exempt from registration pursuant
                           to Section 4(a) of the Securities Act of 1933.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

                  (a)      Exhibits

                           10.1     Stock Purchase Agreement among The
                                    Kroll-O'Gara Company, The Kroll-O'Gara
                                    Canada Company, Kroll Associates, Inc. and
                                    the shareholders of Lindquist Avey MacDonald
                                    Baskerville Inc. and U.S. Holdings, Inc.
                                    dated June 1, 1998.

                           27       Financial Data Schedule (Edgar version only)

                  (b)      Reports on Form 8-K.

                                    No reports on Form 8-K were filed in the
                                    three months ended June 30, 1998.


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                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 14th day of August, 1998.

                                             THE KROLL-O'GARA COMPANY



                                             By    /s/ Nicholas P. Carpinello
                                                   -----------------------------
                                                   Nicholas P. Carpinello
                                                   Controller and Treasurer



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