<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                    FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                     TO 
                               -------------------    -------------------
COMMISSION FILE NUMBER  0-2901

                            KRUG INTERNATIONAL CORP.
                            ------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                                   <C>         
                    Ohio                                                  31-0621189  
                    ----                                                  ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION                          (I.R.S. EMPLOYER
                OR ORGANIZATION)                                      IDENTIFICATION NO.)
</TABLE>

            900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
            ---------------------------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   (ZIP CODE)

                                 (770) 933-7000
                                 --------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

               1290 Hercules Drive, Suite 120 Houston, Texas 77058
               ---------------------------------------------------
                 (FORMER ADDRESS OF 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
filings requirements for the past 90 days.

Yes X      No                              
   --        --


The number of Common Shares, without par value, outstanding as of February 3,
1999 was 4,977,530.

<PAGE>   2
                                   
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,         MARCH 31,
                                                                             1998                1998
                                                                          ------------         ---------
                                     ASSETS
                                   
<S>                                                                       <C>                  <C>    
Current Assets:
     Cash and cash equivalents                                              $10,454            $ 4,205
     Receivables - net                                                        8,285             10,314
     Inventories (Note C)                                                     4,608              5,000
     Prepaid expenses                                                           777                664
     Net current assets of discontinued operations (Note H)                      --              4,527
                                                                            -------            -------
         Total Current Assets                                                24,124             24,710

Property, Plant and Equipment, At Cost                                       11,596             10,461
     Less accumulated depreciation                                            5,802              4,863
                                                                            -------            -------
         Property, Plant and Equipment - Net                                  5,794              5,598

Pension Asset                                                                 1,560              1,557
Deferred Tax Assets                                                           1,982              2,529
Other Assets                                                                  1,578              5,185
                                                                            -------            -------
            Total Assets                                                    $35,038            $39,579
                                                                            =======            =======

                              LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                                       $10,024            $ 9,482
     Accrued expenses (Note F)                                                5,074              4,972
     Income taxes                                                               157                323
     Net current liabilities of discontinued operations (Note H)                450                 --
     Current maturities of long-term debt                                     1,568              1,238
                                                                            -------            -------
         Total Current Liabilities                                           17,273             16,015
Long-term Debt                                                                5,051              5,465
Net Non-Current Liabilities of Discontinued Operations (Note H)                 826                 --
                                                                            -------            -------
            Total Liabilities                                                23,150             21,480

Shareholders' Equity:
     Common shares, no par value:
         Issued and outstanding, 5,256,230 at December 31, 1998
            and 5,198,730 at March 31, 1998                                   2,628              2,599
     Additional paid-in capital                                               4,829              4,590
     Retained earnings                                                        5,314             10,222
     Treasury shares, at cost, 278,700 shares at December 31, 1998           (1,363)                --
     Accumulated other comprehensive income -
         Foreign currency translation adjustment                              1,097              1,305
         Minimum pension liability adjustment                                  (617)              (617)
                                                                            -------            -------
                Total Shareholders' Equity                                   11,888             18,099
                                                                            -------            -------

                    Total Liabilities and Shareholders' Equity              $35,038            $39,579
                                                                            =======            =======
</TABLE>


                     See notes to condensed consolidated financial statements

<PAGE>   3

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                           DECEMBER 31,
                                                    --------------------------
                                                     1998               1997
                                                     ----               ----
<S>                                                 <C>                <C>    
Revenues                                            $11,976            $27,220

Cost of Goods Sold                                   11,347             24,692
Selling and Administrative Expenses                   2,655              2,729
Restructuring Charges                                    --                547
                                                    -------            -------

Operating Loss                                       (2,026)              (748)

Other Income (Expense):
     Interest expense                                  (147)              (338)
     Interest income                                    134                 --
     Other income - net                                  --                802
                                                    -------            -------

Loss From Continuing Operations
     Before Income Taxes                             (2,039)              (284)

Income Tax Expense  (Note D)                             21                 39
                                                    -------            -------

Loss From Continuing Operations                      (2,060)              (323)

Loss From Discontinued Operations
         (Note H)                                        --                (73)
                                                    -------            -------

Net Loss                                            $(2,060)           $  (396)
                                                    =======            =======

Loss Per Share:
     Continuing Operations:
         Basic                                      $ (0.41)           $ (0.06)
                                                    =======            =======
         Diluted                                    $ (0.41)           $ (0.06)
                                                    =======            =======

     Net Loss:
         Basic                                      $ (0.41)           $ (0.08)
                                                    =======            =======
         Diluted                                    $ (0.41)           $ (0.08)
                                                    =======            =======

Average Common Shares Outstanding:
     Basic                                            4,978              5,170
                                                    =======            =======
     Diluted                                          4,980              5,208
                                                    =======            =======
</TABLE>

             See notes to condensed consolidated financial statements


<PAGE>   4

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED
                                                                DECEMBER 31,
                                                        ---------------------------
                                                          1998               1997
                                                        --------            -------
<S>                                                      <C>                <C>    
Revenues                                                 $37,088            $69,571

Cost of Goods Sold                                        35,269             63,153
Selling and Administrative Expenses                        7,078              5,518
Restructuring Charges                                         --                547
                                                         -------            -------

Operating Profit (Loss)                                   (5,259)               353

Other Income (Expense):
     Interest expense                                       (455)              (840)
     Interest income                                         433                 --
     Equity in loss of Wyle Laboratories, Inc.              (123)                --
     Other income - net (Note E)                             176                854
                                                         -------            -------

Earnings (Loss) From Continuing Operations
     Before Income Taxes                                  (5,228)               367

Income Tax Expense (Note D)                                   28                276
                                                         -------            -------

Earnings (Loss) From Continuing Operations                (5,256)                91

Earnings From Discontinued Operations  (Note H)              348              1,369
                                                         -------            -------

Net Earnings (Loss)                                      $(4,908)           $ 1,460
                                                         =======            =======

Earnings (Loss) Per Share:
     Continuing Operations:
         Basic                                           $ (1.04)           $  0.02
                                                         =======            =======
         Diluted                                         $ (1.04)           $  0.02
                                                         =======            =======

     Net Earnings (Loss):
         Basic                                           $ (0.97)           $  0.28
                                                         =======            =======
         Diluted                                         $ (0.97)           $  0.28
                                                         =======            =======

Average Common Shares Outstanding:
     Basic                                                 5,067              5,160
                                                         =======            =======
     Diluted                                               5,075              5,195
                                                         =======            =======
</TABLE>

             See notes to condensed consolidated financial statements


<PAGE>   5

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                             NINE MONTHS ENDED
                                                                                DECEMBER 31,
                                                                         -------------------------
                                                                          1998              1997
                                                                         -------           -------
<S>                                                                      <C>               <C>    
Net Cash Provided by Operating Activities                                $   195           $ 2,517

Cash Flows From Investing Activities:
     Purchase of U.K. subsidiary                                              --            (3,878)
     Expenditures for property, plant and equipment                         (352)             (828)
     Proceeds from sale of Sowester Limited - net                          8,380                --
     Proceeds from sale of property, plant and equipment                     188             1,493
     Purchases of treasury shares                                         (1,363)               --
     Other investments                                                      (132)               --
                                                                         -------           -------

         Net Cash Provided by (Used in) Investing Activities               6,916            (3,213)

Cash Flows From Financing Activities:
     Payments on long-term debt                                             (920)           (2,441)
     New long-term debt                                                                      6,143
     Proceeds from exercise of stock options                                 268               141
     Bank borrowings - net                                                    --            (1,161)
                                                                         -------           -------

            Net Cash Provided by (Used in) Financing Activities             (652)            2,682

     Effect of Exchange Rate Changes on Cash                                 (15)               10
                                                                         -------           -------

Net Increase in Cash                                                       6,249             1,996

Cash at Beginning of Period                                                4,205               105
                                                                         -------           -------

Cash at End of Period                                                    $10,454           $ 2,101
                                                                         =======           =======


Cash Paid For:
     Income Taxes                                                        $   325           $   439
                                                                         =======           =======
     Interest                                                            $   471           $   926
                                                                         =======           =======


Non-Cash Investing and Financing Activities:
     Capital leases                                                      $   884           $   591
                                                                         =======           =======
</TABLE>


          See notes to condensed consolidated financial statements


<PAGE>   6


                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                      THREE MONTHS ENDED DECEMBER 31, 1998
                             (DOLLARS IN THOUSANDS)

NOTE A -- BASIS OF PRESENTATION

         The unaudited Condensed Consolidated Financial Statements for the three
and nine months ended December 31, 1998 have been prepared in accordance with
Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and, as
such, do not include all information required by generally accepted accounting
principles. These Condensed Consolidated Financial Statements should be read in
conjunction with the consolidated financial statements included in the
Corporation's Annual Report on Form 10-K filed on June 16, 1998. In the opinion
of management, the Condensed Consolidated Financial Statements, which are
unaudited, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for the periods indicated. The results of operations for the three
and nine months ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.

NOTE B -- ACQUISITION OF KLIPPAN LIMITED

         On October 2, 1997, the Corporation's U.K. Housewares and Child Safety
Products subsidiary purchased all the issued capital shares of Klippan Limited,
a manufacturer of children's automobile safety seats and accessories in the
United Kingdom and Scandinavia, for a purchase price of approximately $3,900.
The acquisition was financed under the Corporation's U.K. bank credit facility.
The acquisition was accounted for using the purchase method of accounting.
Pro-forma financial information of Klippan Limited is included in the
Corporation's Form 10-K for the fiscal year ended March 31, 1998.

NOTE C -- INVENTORIES

<TABLE>
<CAPTION>
                                           December 31,     March 31,
                                               1998            1998
                                           ------------     ---------
         <S>                               <C>              <C>   
         Finished goods                      $1,076          $1,599
         Work-in-process                      1,077           1,194
         Raw materials and supplies           2,455           2,207
                                             ------          ------
                                             $4,608          $5,000
                                             ======          ======
</TABLE>

NOTE D -- INCOME TAXES

         The provision for income taxes is composed of the following:

<TABLE>
<CAPTION>
                          Three Months Ended December 31,
                          -------------------------------
                              1998              1997
                              ----             -----
         <S>                  <C>              <C>  
         Domestic              $--             $ 268
         Foreign                21              (229)
                               ---             -----
                               $21             $  39
                               ===             =====
</TABLE>


<PAGE>   7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- INCOME TAXES (CONTINUED)


<TABLE>
<CAPTION>
                              Nine Months Ended December 31,
                              ------------------------------
                                  1998           1997
                                  ----          -----
         <S>                      <C>           <C>  
         Domestic                 $ --          $ 357
         Foreign                    28            (81)
                                  ----          -----
                                  $ 28          $ 276
                                  ====          =====
</TABLE>

NOTE E -- OTHER INCOME -- NET

         During the nine months ended December 31, 1998, the Corporation sold
land in Dayton, Ohio for a pre-tax gain of $176. This property was excess to the
Corporation's needs and had been listed for sale. The net proceeds of the sale
were used for working capital. During the quarter ended December 31, 1997, the
Corporation sold a building and land in Dayton, Ohio for a pre-tax gain of $803.

NOTE F -- RESTRUCTURING CHARGES AND ACCRUED EXPENSES

         In January 1998, the Corporation announced the restructuring of its
Housewares and Child Safety Products Segment, including the consolidation of two
U.K. manufacturing facilities and the relocation of its German sales offices. At
December 31, 1998, accrued expenses included restructuring charges of $727 which
related primarily to rent and lease exit costs payable through June 1999 for a
leased manufacturing facility in England which is no longer in use, and $102 of
restructuring charges which relate primarily to rent (net of expected sublease
rental income) and other expenses payable through June 1999, on the Dayton,
Ohio, offices vacated by the Corporation in 1996.

NOTE G -- MERGER OF SUBSIDIARIES

         In March 1998, the Corporation merged its Life Sciences and Engineering
subsidiaries, KRUG Life Sciences Inc. and Technology/Scientific Services, Inc.,
with Wyle Laboratories, Inc. ("Wyle"). The Corporation received convertible
preferred shares equal to thirty-eight percent of the combined entity plus cash
and the assumption of the subsidiaries' working capital debt. The transaction
has been accounted for as a "tax-free" merger, and the Corporation reports its
investment in Wyle on the equity method of accounting. During the nine months
ended December 31, 1998, the Corporation reported a loss of $123 relating to its
equity in Wyle. The Corporation currently has no investment in Wyle recorded on
its books and, accordingly, will report future profits or losses of Wyle only
when its investment account exceeds zero. At September 30, 1998, Wyle reported
aggregate equity of $4,355 on its balance sheet.

NOTE H -- DISCONTINUED OPERATIONS

         On April 16, 1998, the Corporation sold its Leisure Marine Subsidiary
to a company formed by the management of the Segment. The purchase price
consisted of approximately $15,000 comprised of approximately $8,400 in cash,
deferred payments of $400 due within one year and the assumption of
approximately $6,200 of debt. As a result of the disposal, the Corporation
reported a gain of $348 under discontinued operations for the nine months ended
December 31, 1998.

         In prior years, the Corporation discontinued the operations and
disposed of substantially all of the net assets of its Industrial Segment.
Remaining obligations related to this segment include final costs under leases
of property in Knoxville, Tennessee (which expired


<PAGE>   8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H -- DISCONTINUED OPERATIONS (CONTINUED)

December 31, 1998) and Toronto, Canada (which expired March 31, 1998), and
product liability claims related to products sold before the disposal of the
Industrial Segment.

Income tax expense from discontinued operations was as follows:

<TABLE>
<CAPTION>
  Three months ended December 31,     Nine months ended December 31,
          1998        1997                 1998         1997
         -----        ----                 ----         ----
         <S>         <C>                   <C>          <C>  
           $0        $(41)                  $55         $740
           ==        ====                   ===         ====
</TABLE>


         In connection with settling the final obligations under the leases in
Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit concerning
the maintenance obligations of the Corporation and one of its subsidiaries and
requesting relief from payment of a $200,000 promissory note due the Corporation
by the landlord. In January 1999, the Corporation filed suit against the
landlord requesting payment of the promissory note, other damages due to breach
of contract and unjust enrichment and a declaration regarding a payment from a
former sub-tenant of the Corporation at the Knoxville location. Based upon an
evaluation of information currently available and consultation with legal
counsel, the Corporation is unable to determine what effect, if any, the outcome
of these claims under litigation would have on the financial position of the
Corporation.

NOTE I -- COMPREHENSIVE INCOME

         Effective April 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. Other comprehensive earnings for the
Corporation includes foreign currency translation adjustments. Total
comprehensive loss for the following periods were as follows:

<TABLE>
<CAPTION>
                                             Three Months Ended
                                         ----------------------------
                                         December 31,    December 31,
                                             1998            1997
                                         ------------    ------------
         <S>                             <C>             <C>   
         Net earnings (loss):             $(2,060)          $(396)
         Other comprehensive
         earnings net of tax:
         Change in equity due to
         foreign currency
         translation adjustments             (238)            335
                                          -------           -----

         Comprehensive loss               $(2,298)          $ (61)
                                          =======           =====
</TABLE>


<PAGE>   9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I -- COMPREHENSIVE INCOME (CONTINUED)

<TABLE>
<CAPTION>
                                             Nine Months Ended
                                        ------------------------------
                                        December 31,      December 31,
                                             1998             1997
                                        ------------      ------------
         <S>                            <C>               <C>   
         Net earnings (loss):             $(4,908)          $1,460
         Other comprehensive
         earnings net of tax:
         Change in equity due to
         foreign currency
         translation adjustments             (208)              71
                                          -------           ------

         Comprehensive earnings (loss)    $(5,116)          $1,531
                                          =======           ======
</TABLE>


<PAGE>   10


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

FINANCIAL SUMMARY

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED                NINE MONTHS ENDED
                                                December 31,                     December 31,
                                    -------------------------------   ------------------------------
                                            1998            1997              1998           1997
                                    -------------------------------   ------------------------------
<S>                                        <C>             <C>               <C>            <C>    
REVENUES:
Housewares and Child Safety                $11,976         $13,464           $37,088        $33,584
Life Sciences and Engineering                               13,756                           35,987
                                    -------------------------------   ------------------------------
                                           $11,976         $27,220           $37,088        $69,571
                                    ===============================   ==============================
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES:
Housewares and Child Safety               $(1,580)          $(543)          $(3,971)         $(348)
Life Sciences and Engineering                                 689                            2,302
Restructuring charge                                         (547)                            (547)
                                    -------------------------------   ------------------------------
                                           (1,580)           (401)           (3,971)          1,407
Corporate expense                            (446)           (347)           (1,288)        (1,054)
                                    -------------------------------   ------------------------------
Operating Profit (Loss)                    (2,026)           (748)           (5,259)            353
Other income - net                                            802               176             854
Interest income (expense) - net               (13)           (338)              (22)          (840)
Equity in loss of
 Wyle Laboratories, Inc.                                                       (123)
                                    -------------------------------   ------------------------------      
Earnings (Loss) before Income Taxes
                                          $(2,039)          $(284)          $(5,228)           $367
                                    ===============================   ==============================

CAPITAL ADDITIONS:
Housewares and Child Safety               $   133           $ 281           $   336            $764
Life Sciences and Engineering                                  28                                44
Other                                                                            17
                                    -------------------------------   ------------------------------
                                          $   133           $ 309           $   353           $808
                                    ===============================   ==============================
</TABLE>

GENERAL

         During March 1998, the Corporation merged KRUG Life Sciences Inc. and
Technology/Scientific Services, Inc., its two subsidiaries which comprised the
Life Sciences and Engineering Segment, with Wyle Laboratories, Inc. in exchange
for a 38% equity interest in Wyle plus cash and the assumption of debt. The
Corporation is reporting for the nine months ended December 31, 1998 its equity
in Wyle's losses as a single line item in its condensed consolidated statements
of earnings pursuant to APB No. 18. For the three and nine months ended December
31, 1997, the Life Sciences and Engineering Segment is reported as continuing
operations in the condensed consolidated statements of earnings.

         In April 1998, the Corporation sold its Leisure Marine subsidiary and
the results of operations of the Segment are included in discontinued operations
for the three and nine months ended December 31, 1998 and 1997, respectively.


<PAGE>   11


RESULTS OF OPERATIONS 

         Revenues of the U.K. Housewares and Child Safety Products Segment (the
Corporation's continuing operations segment) for the third quarter of fiscal
1999 decreased by $1,488 or 11% to $11,976 from $13,464 for the same quarter in
fiscal 1998. The decreased sales were due to lower housewares product sales by
the Beldray Limited subsidiary and discontinuance of the industrial and office
products lines of Hago Products Limited in March 1998 when Hago's manufacturing
operations were consolidated into Beldray's manufacturing facility. The
favorable effect of currency translation contributed $167 of revenue to the
Segment for the third quarter of fiscal 1999. Sales at Beldray decreased $2,395
in the quarter, primarily the Corporation believes, because of significant
operating inefficiencies which lead to missed customer delivery schedules at the
manufacturing plant near Birmingham, England. Revenues of Klippan Limited, which
manufactures children's automobile safety seats, increased $908 in the third
quarter of fiscal 1999. During fiscal 1999, Klippan redesigned its children's
automobile safety seats and began shipping the redesigned seats to customers in
October 1998. The new models received a favorable response from customers and
resulted in increased revenues compared to the prior year's third quarter.
Revenues of the Housewares and Child Safety Products Segment increased $3,504 or
10% to $37,088 for the nine months ended December 31, 1998 from the same period
last year. Klippan sales were $11,288 for the current period, an increase of
$8,153 while sales at Beldray Limited decreased $4,779 for this nine-month
period due to the previously mentioned difficulties at its manufacturing plant.

         The operating loss of $1,580 incurred by the Housewares and Child
Safety Segment for the quarter ended December 31, 1998, resulted primarily from
continued operating inefficiencies and missed customer delivery schedules in
connection with the consolidation of the Hago manufacturing operations into the
Beldray facility. Since this consolidation was completed in April 1998, the
facility has experienced increased cost of goods sold and lower than anticipated
sales. The Corporation made significant operational and organizational changes
at the facility to address the operating difficulties during the quarter and in
connection therewith recorded a pre-tax charge of $153 for severance and other
expenses relating to the organizational changes. Beldray has implemented a cost
reduction program to bring the facility's costs in line with its current and
anticipated revenue levels. The Corporation believes its actions will result in
improved performance at the facility but is uncertain if its Beldray
manufacturing operations will return to profitability in the fourth quarter of
fiscal 1999. During fiscal 1999, Klippan undertook a comprehensive product
redevelopment program for its children's automobile safety seats and six new
models of the seats were introduced in late August 1998. The Corporation
commenced shipments of five new models in October 1998 and one in January 1999.
While the new products increased sales during the third quarter of fiscal 1999,
Klippan was not profitable for the quarter as sales have not yet increased to a
level which cover Klippan's costs. Corporate expense for the current year's
third quarter increased from the prior year due to increased legal and other
professional fees.

         The operating loss of $5,259 for the nine months ended December 31,
1998 resulted from losses incurred by both of the Housewares and Child Safety
Segment subsidiaries. The losses at Beldray resulted from the significant
operating inefficiencies and missed customer delivery schedules described above.
The losses at Klippan resulted from low sales volume, product development costs
related to the new children's automobile safety seats and higher marketing costs
as a result of the reorganization of the German and French sales operations
during the current fiscal year.


<PAGE>   12


         During the first nine months of fiscal 1999, the Corporation recognized
its portion of Wyle's loss, which resulted primarily from certain of Wyle's
fixed-priced hardware contracts. Also included in the first nine months results
is a pre-tax gain of $176 from the sale of excess land in Dayton, Ohio. The
third quarter of fiscal 1998 included a pre-tax gain of $802 from the sale of
land and a building in Dayton, Ohio.

         Interest expense decreased $191 for the third quarter and $385 for the
nine months ended December 31, 1998 compared to the comparable periods of the
previous fiscal year. These decreases are due to decreased debt levels in the
current year because of the April 1998 sale of the Leisure Marine Segment and
the debt assumed by Wyle in the Wyle merger. The Corporation has earned interest
income of $134 for the third quarter and $433 for the nine months ending
December 31, 1998 on cash received from the Wyle merger and the sale of the
Leisure Marine Segment.

         The Corporation recorded income tax expense of $21 and $28 in the
fiscal 1999 third quarter and nine months, respectively. The tax expense is due
to income taxes payable on profits of certain European subsidiaries of Klippan.
No tax benefit has been recorded for the U.K. or German tax losses from the
Housewares and Child Safety Products Segment nor the U.S. tax losses from the
U.S. corporate headquarters. Such losses resulted in tax loss carryforwards in
the United Kingdom ($1,921), Germany ($331) and the United States ($1,185),
which may be available to offset a portion of future income, if any.

         The net loss was $2,060 ($0.41 per share) in the third quarter of
fiscal 1999 compared to a net loss of $396 ($0.08 per share) in the third
quarter of fiscal 1998. The loss in the third quarter of fiscal 1999 was due
primarily to operating losses in the Housewares and Child Safety Products
Segment. Fiscal 1998 third quarter results includes a $547 restructuring charge
for the then anticipated consolidation of the Hago operations into the Beldray
facility. The net loss for the nine months ending December 31, 1998 was $4,908
($0.97 per share) compared to net earnings of $1,460 ($0.28 per share) for the
same period last year. The gain of $348 from the sale of the Corporation's
Leisure Marine Segment is presented as "Earnings From Discontinued Operations"
in the current year's results.

         The Corporation has approximately $900 of prepaid U.K. taxes,
classified as a long-term tax asset, which arose due to advance corporation
taxes paid on prior years' inter-company dividends. These prepaid taxes are
available to offset U.K. income taxes payable, subject to certain yearly limits,
and currently have no expiration date. Recent changes in the U.K. tax law may
make the use of these tax prepayments more difficult in future years, but does
not affect the ultimate use of the prepaid taxes and, accordingly, no valuation
allowance against this component of the long-term income tax asset is considered
necessary.

         On March 31, 1998, the Corporation approved an amendment to its
domestic defined benefit retirement plan to terminate the plan. Management
expects that, subject to required regulatory approvals, final payment of the
plan termination benefits will be made by the end of July 1999. The Corporation
has reflected an additional minimum liability of $617, net of related tax
benefits, as a reduction of shareholders' equity because such amount exceeds the
amount of unrecognized prior service costs. This additional minimum liability
will be charged against earnings upon settlement of the domestic plan. An
additional contribution to the domestic retirement plan of approximately $1,100
will likely be required to be made by the Corporation at the time of the final
distribution of the plan assets, based on current interest rates applicable to 
the calculation of the termination liability.


<PAGE>   13


DISCONTINUED OPERATIONS

         On April 16, 1998, the Corporation sold its Leisure Marine Subsidiary 
to a company formed by the management of the Segment. The purchase price 
consisted of approximately $15,000 comprised of approximately $8,400 in cash, 
deferred payments of $400 due within one year and the assumption of 
approximately $6,200 of debt. As a result of the disposal, the Corporation 
reported a gain of $348 under discontinued operations for the nine months ended 
December 31, 1998.

         In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment and subsequently disposed of substantially all related net
assets. However, obligations remain relating to final costs under leases in
Knoxville, Tennessee (lease expired December 31, 1998) and Toronto, Canada
(lease expired March 31, 1998), and product liability claims for products
manufactured and sold before the disposal of the Segment. The Corporation
reviewed the provision for losses from such discontinued operations during the
quarter and no changes were deemed necessary.

         In connection with settling the final obligations under the leases in
Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit concerning
the maintenance obligations of the Corporation and one of its subsidiaries and
requesting relief from payment of a $200,000 promissory note due the Corporation
by the landlord. In January 1999, the Corporation filed suit against the
landlord requesting payment of the promissory note, other damages due to breach
of contract and unjust enrichment and a declaration regarding a payment from a
former sub-tenant of the Corporation at the Knoxville location. See Part II,
Item 1. Legal Proceedings of this Form 10-Q for more information regarding these
lawsuits. Based upon an evaluation of information currently available and
consultation with legal counsel, the Corporation is unable to determine what
effect, if any, the outcome of these claims under litigation would have on the
financial position of the Corporation.

LIQUIDITY AND CAPITAL RESOURCES

         The Corporation generated $195 of cash from operating activities during
the first nine months of fiscal 1999. Cash was generated from the sale of
certain tax credits to the Corporation's former Leisure Marine Segment
subsidiary for which the Corporation received $560. The increase in the cash
balance from March 31, 1998 to December 31, 1998 is due primarily to the cash
proceeds of the sale of Sowester Limited in April 1998, net of debt paid off in
connection with the sale.

         In April 1998, the Corporation announced that it would repurchase for
cash in the open market up to 200,000 of its common shares, and in August 1998,
the Corporation's Board of Directors authorized the purchase of an additional
100,000 shares. As of February 3, 1999, the Corporation had repurchased a total
of 278,700 shares.

         At December 31, 1998, the Corporation had outstanding debt of $5,209
under a variable rate loan and a term loan with an U.K. bank. The debt is
payable in quarterly installments and matures in fiscal 2005. In addition, the
Corporation has a $3,300 line of credit for its U.K. subsidiaries with an U.K.
bank, all of which was unused at December 31, 1998. The U.K. loan agreements are
collateralized by substantially all of the Corporation's U.K. assets, including
approximately $8,300 of cash proceeds of the sale of the Leisure Marine Segment.
A portion of such cash is restricted pending the renegotiation of the U.K. bank
debt. The agreements contain affirmative and negative covenants (including
financial covenants relating to cash flow and tangible net worth requirements)
and are cross-guaranteed by the U.K. subsidiaries. The Corporation is currently
in violation of certain of the financial covenants, but has received a waiver of
the covenant violations from its bank. The Corporation expects to renegotiate
its U.K. bank debt agreements in calendar 1999 and reduce the outstanding
amount. At December 31, 1998, the Corporation had no outstanding U.S. debt. The
Corporation believes it has adequate financing in both the U.S. and U.K. to
support its current level of operations.


<PAGE>   14


IMPACT OF THE YEAR 2000 ISSUE

         Some older computer programs and systems were written using two digits
rather than four to define the applicable year (for example, 98 to denote 1998).
As a result, those computer programs have software which may recognize a date
using "00" as the year 1900 rather than the year 2000. This may result in a
computer system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, engage in manufacturing processes, or continue similar normal
business activities.

         State of Readiness - The Corporation recognizes the importance of the
Year 2000 issues and has given it high priority. The Corporation has underway a
Year 2000 project to identify the programs and infrastructure that could be
affected by the Year 2000 issues and is implementing a plan to resolve the
problems identified on a timely basis. The Corporation's Year 2000 plan may be
broken into five interrelated phases: (i) evaluating existing information
technology (IT) and non-IT systems of the Corporation, (ii) implementing
corrective actions to such systems (including testing), (iii) evaluating the
Corporation's exposure to third parties' failures to adequately address Year
2000 issues, (iv) developing contingency plans with respect to such exposure,
and (v) on-going vigilance with respect to Year 2000 developments. As mentioned,
the scope of the Year 2000 project includes (i) IT systems such as software and
hardware; (ii) non-IT systems or embedded technology such as micro-controllers
contained in various manufacturing systems; and (iii) the readiness of key third
parties, including suppliers and customers, and electronic data interchange with
those key third parties. The evaluation phase of the Year 2000 project includes
identifying products and IT and non-IT systems or components that might
malfunction or fail at the end of the millennium.

         The Corporation currently has three primary operating locations
(Birmingham England, Carlisle England and Vantaa Finland) and at each location a
person is responsible for coordinating Year 2000 issues for that location. At
the largest location, the IT system is less than two years old and the
information technology for this system when purchased was reviewed for Year 2000
compliance. The other two locations are smaller and will require new IT systems
(local area networks) for approximately 25 users at each location. Such new IT
systems will be installed by the end of 1999. The non-IT systems identified are
primarily manufacturing and assembly systems which will require testing for Year
2000 compliance. Key third parties will be contacted to minimize the disruptions
in the relationship between the Corporation and these important third parties
because of the Year 2000 issue. While the Corporation cannot guarantee
compliance of third parties, the Corporation will consider alternate sources of
supply in the event a key supplier cannot demonstrate its systems or products
are Year 2000 compliant.

         The Year 2000 project will require the Corporation to devote
considerable internal resources and hire consultants to assist with the
implementation and monitoring of the plan, and will require the replacement of
certain equipment and replacement or modification of certain software. The
Corporation will also be working with its customers and suppliers to ensure
business continuity during the potential problem period.

         Costs to Address the Year 2000 Issue - The Corporation currently
estimates that the total cost of its Year 2000 project will be approximately
$150 which has been or will be expensed as incurred and approximately $350 of
capital expenditures. These costs include approximately $200 of normal system
software and equipment upgrades and replacements, which the Corporation
anticipated incurring in the ordinary course regardless of the Year 2000 issue.
These costs will be incurred during the fourth quarter of fiscal 1999 and during
fiscal 2000.

         Risks to the Corporation of the Year 2000 Issue - If the Corporation's
plan to address the Year 2000 issue is not successful or not timely implemented,
the Corporation may need to devote more resources to the process and additional
costs may be incurred, which could have a 



<PAGE>   15


material adverse effect on the Corporation's financial condition and results of
operations. Problems encountered by the Corporation's vendors and customers with
the Year 2000 issue may also have a material adverse effect of an uncertain
magnitude on the Corporation's financial condition and results of operations.

         The Corporation's Contingency Plans - At present, the Corporation is
not able to describe its most reasonably likely worst case Year 2000 scenarios
because it does not presently have adequate information from its suppliers and
customers and has not completed evaluating its non-IT systems. The Corporation
has devoted resources to the analysis of this uncertainty and will continue to
devote resources to addressing this uncertainty. As a component of its Year 2000
project, the Corporation is developing contingency plans to mitigate the effects
of problems experienced by it, key vendors or service providers and customers in
the timely implementation of solutions to Year 2000 problems. At present,
however, the Corporation has not completed contingency plans, but plans to do so
by March 31, 1999.

         The estimated costs of the Corporation's Year 2000 project and the date
on which the Corporation plans to complete the Year 2000 compliance program are
based on management's best estimates and reflect assumptions regarding the
availability and cost of personnel trained in this area, the compliance plans of
third parties, and similar uncertainties. However, due to the complexity and
pervasiveness of the Year 2000 issues and in particular the uncertainty
regarding the compliance programs of third parties, no assurance can be given
that these estimates can be achieved, and actual results could differ materially
from those anticipated.

THE EURO CONVERSION

         On January 1, 1999, eleven of the fifteen member countries of the
European Union (EU) established fixed conversion rates through the European
Central Bank (ECB) between their existing local currencies and the Euro, the
EU's future single currency. The participating countries adopted the Euro as
their common legal currency on that date. The Euro currently trades on currency
exchanges and is available for non-cash transactions.

         The Corporation currently operates in three countries which adopted the
Euro (Finland, France and Germany) and sells from the United Kingdom to certain
countries which adopted the Euro. The British pound appears to have strengthened
in anticipation of the Euro adoption and has continued strong compared to other
currencies and the Corporation believes the strength of the pound has adversely
affected sales from the U.K. to certain European countries. The Corporation is
not able at this time to anticipate what effect the adoption of the Euro will
have on its businesses.

CERTAIN CAUTIONARY STATEMENTS

         In addition to historical information, Items 1 and 2 of this document
as well as certain information disseminated by the Corporation in the form of
press releases, presentations, investor relations material and otherwise,
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which may include, without limitation,
statements regarding management's outlook for each of its businesses and the
sufficiency of the Corporation's liquidity and sources of capital. These
forward-looking statements are subject to certain risks, uncertainties and other
factors which could cause actual results to differ materially from those
anticipated, including, without limitation, restrictions imposed by debt
agreements, competition in the Housewares and Child Safety Products business and
for government and commercial services provided by Wyle, the regulatory
environment for the Corporation's businesses, consolidation trends in the
Corporation's businesses, competition 


<PAGE>   16


in the acquisition market, changes in exchange rates, Euro conversion, increases
in raw material prices and labor rates, the purchasing practices of significant
customers, the availability of qualified management and staff personnel in each
business segment, claims for product liability from continuing and discontinued
operations and Year 2000 software related malfunctions.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.



<PAGE>   17



PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         On December 31, 1998, Springdale Partners Ltd., an Ohio Limited
         Liability Company, and Mada Corporation (Mada) filed a Compliant in the
         Chancery Court of Knox County, Tennessee naming KRUG International
         Corp. and KRUG Properties, Inc. (KRUG Properties) as defendants. The
         suit relates to a piece of industrial property in Knoxville, Tennessee
         that the Corporation sold to Springdale Partners, an Ohio General
         Partnership, in December 1983. As part of the transaction, KRUG
         Properties leased a portion of the property back from Springdale
         Partners and the Corporation and KRUG Properties guaranteed the
         obligations of Mada, the lessee of the other portion of the property.
         In order to minimize the Corporation's and KRUG Properties' obligations
         under the guarantee, Mada was required to use all reasonable efforts to
         sublease its portion of the property on terms and conditions approved
         by the Corporation. As part of the purchase price, Springdale Partners
         executed a $200,000 promissory note payable to the Corporation on
         December 31, 1998, which Springdale has failed to pay. As part of its
         obligations, the Corporation was required to maintain the portion of
         the property that it leased and return said portion on December 31,
         1998 in as good condition as it was in at the beginning of the lease,
         excluding ordinary wear and tear and obsolescence. The plaintiffs have
         requested a declaration from the Court concerning the maintenance
         obligations of the Corporation and KRUG Properties and the status of
         the $200,000 promissory note. The Corporation and KRUG Properties have
         filed a Motion to Dismiss this action.

         Related to this action, on January 25, 1999, the Corporation and KRUG
         Properties filed a Complaint in the Common Pleas Court of Montgomery
         County, Ohio, naming Springdale Partners, its general partners and Mada
         as defendants. This case involves substantially the same factual
         situation as the Knox County, Tennessee case. The Corporation requested
         the following relief:
         Payment of the (1) $200,000 promissory note; (2) damages due to breach
         of contract and unjust enrichment and (3) a declaration that the final
         payment of $98,545 from Carolina Steel Corp. relating to its sublease
         from KRUG Properties belongs to the Corporation and KRUG Properties.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (A)      Exhibit 10.1 - Employment Agreement between KRUG International
                  Corp. and Robert M. Thornton, Jr. dated November 9, 1998 is
                  filed as an exhibit to this report.

         (B)      Exhibit 27 - Financial Data Schedule (for SEC use only).

         (C)      Reports on Form 8-K - None.


<PAGE>   18


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, KRUG
International Corp. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

                                    KRUG International Corp.

                                    By:  /s/ Mark J. Stockslager
                                       -----------------------------------------
                                         Mark J. Stockslager
                                         Principal Accounting Officer





Dated:   February 9, 1999