<PAGE>   1
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
   
                                  FORM 10-K/A
    
   
                               (AMENDMENT NO. 2)
    
[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
       THE SECURITIES EXCHANGE ACT OF 1934
 
       For the fiscal year 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 000-21629
 
                            THE KROLL-O'GARA COMPANY
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                                      <C>
                          OHIO                                                  31-1470817
              (State or other jurisdiction                                   (I.R.S. Employer
                   of incorporation)                                       Identification No.)
</TABLE>
 
                               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)
 
Securities Registered Pursuant to Section 12(b) of the Act:     None
Securities Registered Pursuant to Section 12(g) of the Act:     Common Stock,
$.01 par value
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [ X ]      No [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K  [ ]
 
   
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $373,623,141 as of March 31,
1999. As of March 31, 1999, 20,870,079 shares of Common Stock were outstanding.
    
 
   
                  DOCUMENTS INCORPORATED BY REFERENCE -- NONE
    
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
   
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. Worldwide, governments, businesses and individuals
increasingly are recognizing the need for products and services that mitigate
the growing risks associated with fraud, electronic threats, physical threats
and uninformed decisions based upon incomplete or inaccurate information.
Through its network of 60 offices located in 19 countries, Kroll-O'Gara is
meeting these needs by providing information, analysis, training, advice and
products to its customers.
 
   
     Kroll-O'Gara's operations are divided among the following three business
segments:
    
 
INVESTIGATIONS AND INTELLIGENCE. Kroll-O'Gara's Investigations and Intelligence
Group provides:
 
   
     - financial services, including forensic accounting, asset tracing services
       and pre-acquisition due diligence;
    
 
   
     - business investigations and intelligence services, including litigation
       support, monitoring, and intellectual property infringement
       investigations;
    
 
   
     - corporate services, including pre-employment background checking, drug
       testing, surveillance and vendor integrity programs;
    
 
   
     - corporate security services, including security architecture and
       planning; and
    
 
   
     - computer forensics services, including data recovery and litigation
       support.
    
 
SECURITY PRODUCTS AND SERVICES. Kroll-O'Gara's Security Products and Services
Group provides:
 
   
     - armored products, including ballistic and blast protected armoring
       systems for commercial and military vehicles, aircraft and missile
       components; and
    
 
   
     - security services, including advanced driver training, force protection
       training and risk and crisis management.
    
 
   
INFORMATION SECURITY. Kroll-O'Gara's Information Security Group provides
objective information security services, including:
    
 
   
     - network and system security assessment;
    
 
   
     - product evaluation and assessment;
    
 
   
     - security policy creation and implementation;
    
 
   
     - security architecture and design; and
    
 
   
     - security training.
    
 
   
     Kroll-O'Gara has pursued a strategy of aggressive growth and has completed
numerous acquisitions, particularly during 1997 and 1998. Some of these
acquisitions have been accounted for as poolings of interest. Kroll-O'Gara's
consolidated financial statements and the other financial information presented
in this annual report have been restated to include these businesses as if they
always had been a part of Kroll-O'Gara. As a result, period-to-period
comparability is not affected by these acquisitions. Other acquisitions have
been accounted for as purchases. The financial results of these businesses are
included in Kroll-O'Gara's results from the effective date of each acquisition
forward. Therefore, period-to-period comparability is affected by these
acquisitions. Further information on the development of Kroll-O'Gara's business,
including a chart of acquisitions during 1997 and 1998, is provided in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
    
 
                                        1
<PAGE>   3
 
   
DISCONTINUED OPERATIONS
    
 
   
     On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of Kroll-O'Gara's Voice and Data Communications Group.
The Voice and Data Communications Group was engaged in reselling satellite
communication and navigation equipment, selling airtime for satellite telephones
and designing and installing integrated satellite communications systems in
vehicles. Kroll-O'Gara received an outside expression of interest for this
business in April 1999 and intends to make the assets of the segment available
for sale immediately and expects to complete the disposal of this segment within
the next twelve months. As a result of the plan to discontinue operations, the
historical financial statements of Kroll-O'Gara, as well as other affected
financial information contained in this annual report, have been restated for
all periods presented to reflect the discontinued operation's impact on those
periods.
    
 
   
PRODUCTS AND SERVICES
    
 
   
     The following table presents the net sales of Kroll-O'Gara's products and
services by Group for the periods indicated.
    
 
   
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1996       1997       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Security Products and Services Group........................  $ 79,156   $105,557   $136,844
Investigations and Intelligence Group.......................    77,992     83,108    110,232
Information Security Group..................................        --         --        116
                                                              --------   --------   --------
                                                              $157,148   $188,665   $247,192
                                                              ========   ========   ========
</TABLE>
    
 
     In addition to the information presented above, see the Notes to
Kroll-O'Gara's Consolidated Financial Statements, included elsewhere in this
annual report, for business segment data and for information concerning foreign
and domestic operations and export sales.
 
SECURITY PRODUCTS AND SERVICES GROUP
 
   
     The following table presents the aggregate net sales for each of the three
product categories in Kroll-O'Gara's Security Products and Services Group for
the periods indicated.
    
 
   
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1996       1997       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Commercial products.........................................  $ 18,304   $ 54,541   $ 67,594
Military products...........................................    54,596     43,719     59,839
Security services...........................................     6,256      7,297      9,411
                                                              --------   --------   --------
                                                              $ 79,156   $105,557   $136,844
                                                              ========   ========   ========
</TABLE>
    
 
Commercial Products
 
   
     Kroll-O'Gara armors a variety of vehicles, including limousines, sedans,
sport utility vehicles, commercial trucks and money transport vehicles, to
protect against varying degrees of ballistic and blast threats. The armoring
process begins with the disassembly of a new base vehicle. This disassembly
normally involves the removal of the interior trim, seats, doors and windows.
The passenger compartment then is armored with both opaque and transparent
armor. Other features, such as run flat tires and non-exploding gas tanks, also
may be added. Finally, the vehicle is reassembled as close to its original
appearance as possible. The types of commercial products produced by
Kroll-O'Gara are described below. During 1998, Kroll-O'Gara shipped
approximately 990 commercial armored vehicles.
    
 
                                        2
<PAGE>   4
 
   
     ARMORED VEHICLES. Kroll-O'Gara produces fully armored vehicles and light
armored vehicles. Fully armored vehicles, such as limousines, large sedans or
sport utility vehicles, typically are armored to protect against attacks from
military assault rifles such as AK-47s and M16s and from certain underbody
explosives. These vehicles also can be blast protected by enhancing the
ballistic and underbody protection with proprietary materials and installation
methods that protect the occupants against a defined blast threat. Blast-
protected vehicles defend against threats such as pipe bombs attached to the
exterior of the vehicle and nondirectional charges of 20 kg of TNT detonated
approximately five meters from the vehicle. Fully armored vehicles typically
sell for $70,000 to $200,000 exclusive of the cost of the base vehicle.
    
 
   
     Fully armored vehicles also include Parade Cars, which are formal
limousines used predominantly for official functions by a president or other
head of state. These vehicles are usually customized based upon a commercially
available chassis which Kroll-O'Gara essentially rebuilds from the ground up.
Because the threat of organized assassination attempts is greater for heads of
state, these vehicles normally incorporate more advanced armor and sophisticated
protection features. These features can include supplemental air and oxygen
systems, air purification systems to protect against chemical or biological
contamination, underbody fire suppressant systems, tear gas launchers,
anti-explosive self-sealing fuel tanks, electric deadbolt door locks, gun ports
and bomb scanners. Parade Cars normally sell for $300,000 to in excess of $1.0
million inclusive of the cost of the base vehicle.
    
 
   
     Light armored vehicles are similar in all respects to fully armored
vehicles except that substantially less total weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Cherokee. Light armored vehicles are designed to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of a
light armored vehicle ranges from $5,000 to $60,000 exclusive of the cost of the
base vehicle.
    
 
   
     OTHER VEHICLES. Kroll-O'Gara also produces specialty vehicles,
Cash-in-Transit money transport vehicles and commercial truck bodies. Specialty
vehicles are custom built for a specific mission. Examples of specialty vehicles
are Escort Cars, usually convertibles, and Chase Cars, usually closed-top
vehicles, in which security personnel ride while in a head of state motorcade.
Cash-in-Transit vehicles are used by banks or other businesses to transport
currency and other valuables. After starting with a van or small truck,
Kroll-O'Gara modifies the base vehicle to provide protection for the cargo and
passengers from ballistic and blast threats. Kroll-O'Gara believes that
conditions in many emerging growth countries will promote high demand for these
vehicles. Kroll-O'Gara also builds commercial truck bodies. The truck bodies are
manufactured primarily for 3.5 ton trucks and are installed on chassis produced
by a variety of manufacturers.
    
 
Military Products
 
   
     UP-ARMORED HMMWVS. Kroll-O'Gara is the prime contractor to the U.S.
Military for the supply of armoring and blast protection for High Mobility
Multi-Purpose Wheeled Vehicles, commonly known as HMMWVs. The HMMWV chassis are
produced by AM General Corporation and shipped directly to Kroll-O'Gara's
facility in Fairfield, Ohio where armor and blast protection components are
added. A number of these components are purchased from single source suppliers.
The Up-Armored HMMWVs provide exterior protection against various levels of
armor-piercing ammunition, overhead airburst protection and underbody blast
protection against anti-tank and anti-personnel mines. In addition, Kroll-O'Gara
installs other features designed to enhance crew safety, comfort and
performance, such as air conditioning, weapon turrets and mounts, door locks and
shock-absorbing seats. Kroll-O'Gara charges $70,000 to $110,000 for these
ballistic and blast protective systems, which is in addition to the cost of the
vehicle. During 1998, Kroll-O'Gara shipped 460 Up-Armored HMMWVs. Kroll-O'Gara
also supplies engineering design and prototype services in support of the
Up-Armored HMMWV Program, supplies spare parts and logistic support and produces
field-installable armoring kits.
    
 
   
     OTHER ARMOR SYSTEMS. Kroll-O'Gara markets armor sub-systems for other
tactical wheeled vehicles, such as 0.5 ton and 5.0 ton trucks. Kroll-O'Gara also
produces various armor systems as a subcontractor to larger defense contractors,
such as Lockheed Martin Corporation and The Boeing Company. These products
include
    
 
                                        3
<PAGE>   5
 
armor for containers for fuels and missile launchers and for pilot protection,
and typically involve the use of materials or methods which are unique to
Kroll-O'Gara.
 
Security Services
 
     Kroll-O'Gara provides a variety of services designed to protect and help
its clients manage risks and respond to crisis situations. These services
include training and risk and crisis management.
 
   
     TRAINING. Kroll-O'Gara offers comprehensive training programs in advanced
driving, ballistics, security and counterintelligence, and surveillance.
Kroll-O'Gara utilizes various facilities around the world, including its Force
Protection Institute in San Antonio, Texas and its newest facility in Mexico
City. Kroll-O'Gara offers ballistics training in a progressive and realistic
shooting house, encompassing 6,800 square feet of training space, at its
facility near Washington, DC. Ballistics training consists of a wide spectrum of
combat marksmanship skills which focuses on realistic situations, exposing
students to stress while under difficult firing situations. Kroll-O'Gara also
offers security and counterintelligence training courses for both U.S.
Government agencies and clients in the private sector. These courses provide a
history of U.S. counterintelligence efforts and current issues in the field. The
training includes instruction on methods of recognizing and deterring political
and business intelligence risks. Additionally, Kroll-O'Gara provides training in
the detection of, and responses to, surveillance. Students learn methodologies
utilized by terrorists, what information is needed by terrorists in order to
plan an attack and how to block or manipulate this flow of intelligence.
    
 
     RISK AND CRISIS MANAGEMENT. Kroll-O'Gara provides consulting services to
assist businesses in managing risks to their personnel and assets and in meeting
and managing unexpected crises. Kroll-O'Gara's crisis management services are
provided in a variety of contexts, including the crisis response to a kidnapping
of a company's executive, the safety of consumers, the contamination of a
consumer product or the environment and the potential damage to the reputation
of a corporate client as a result of disclosure of adverse events. Kroll-O'Gara
maintains a crisis management center in Vienna, Virginia where personnel are on
duty 24 hours a day, 365 days a year, to handle requests for information and
provide initial advice and immediate contact with members of Kroll-O'Gara's
professional staff specializing in the particular crisis presented.
 
     As part of its risk and crisis management service, Kroll-O'Gara furnishes
periodic information including: reports providing city-specific advisories to
business travelers on conditions and other relevant information with respect to
almost 300 cities around the world; a comprehensive country security risk
assessment service that includes daily intelligence briefings containing early
warnings of events and up-to-date information about political unrest, terrorist
activities, product contaminations, health emergencies and other similar events;
a monthly bulletin that reviews and analyzes safety and security issues relating
to air travel around the world; a monthly intelligence review that provides a
global survey of political risk development in countries around the world; and
special reports on topics, such as kidnappings or specific regions or countries,
that are relevant to business travelers.
 
                                        4
<PAGE>   6
 
INVESTIGATIONS AND INTELLIGENCE GROUP
 
   
     The following table presents the aggregate net sales for each of the
Investigations and Intelligence Group's five product categories for the periods
indicated.
    
 
   
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               1996      1997       1998
                                                              -------   -------   --------
                                                                     (IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
Financial services..........................................  $15,959   $20,955   $ 29,044
Business investigations and intelligence....................   44,077    40,295     46,442
Corporate services..........................................    8,774    14,251     24,215
Corporate security..........................................    9,182     7,607     10,531
Computer forensics..........................................       --        --         --
                                                              -------   -------   --------
                                                              $77,992   $83,108   $110,232
                                                              =======   =======   ========
</TABLE>
    
 
Financial Services
 
     Kroll-O'Gara's financial services include forensic accounting, asset
tracing services and pre-acquisition due diligence.
 
     FORENSIC ACCOUNTING. Kroll-O'Gara's forensic and investigative accountants
work with corporations, governments, law firms, financial institutions and
individuals to assist them in successfully resolving complex, high risk,
financial and investigative concerns on a worldwide basis. Forensic accounting,
by definition, is the application of financial knowledge and skills, in
conjunction with investigative strategies and techniques, to resolve matters
that are financial in nature in a legally defensible manner. Kroll-O'Gara's
services include: commercial litigation support, corporate investigations,
statutory and regulatory compliance, insurance claims, business valuations,
financial due diligence and visual strategies.
 
     ASSET TRACING AND ANALYSIS. Kroll-O'Gara's asset tracing services consist
of tracing and locating assets anywhere in the world and developing financial
profiles and life style assessments in connection with bankruptcy cases, loan
defaults, internal investigations and other due diligence requests by clients.
In many cases, Kroll-O'Gara has worked with trustees in bankruptcy and
insolvency, creditors' committees, bankers in workout and restructuring
departments, litigators and bankruptcy attorneys, conducting searches for
concealed or undisclosed assets. In other contexts, clients may be interested in
a financial profile or asset analysis of a person in connection with a potential
business relationship, lawsuit or internal investigation. Kroll-O'Gara believes
that its asset searching and analysis techniques are effective both in
uncovering assets and in bringing debtors to the negotiating table. In
identifying assets, Kroll-O'Gara relies both on a range of investigative
techniques and on the highly sophisticated use of electronic databases. Tactics
employed include searching publicly available, but sometimes obscure, local
records, reviewing financial documents and conducting discreet interviews with
people associated with the subject.
 
     PRE-ACQUISITION DUE DILIGENCE. The due diligence and background information
and analysis furnished by Kroll-O'Gara is intended to be useful for lenders,
underwriters, potential acquirers and other businesses concerned with assessing
and attempting to minimize the risks related to major financial and other
business decisions. These services include pre-transaction intelligence, due
diligence investigations, competitor intelligence and analysis, intelligence in
contests for corporate control, new market entry intelligence and intelligence
on business partners, customers and critical vendors.
 
   
Business Investigations and Intelligence Services
    
 
     Kroll-O'Gara's business investigations and intelligence services include
litigation support, monitoring and intellectual property infringement
investigations.
 
     LITIGATION SERVICES. Kroll-O'Gara provides litigation support services to a
client's outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and in designing settlement strategies.
 
                                        5
<PAGE>   7
 
These services include developing evidence to support a claim or a defense,
identifying and locating material witnesses, investigating adverse witnesses,
locating and evaluating recoverable or relevant assets of adverse parties,
assessing the strategic goals and financial commitment of the opposition and
helping to assess whether an adequate recovery can be obtained if a lawsuit is
successful. Kroll-O'Gara's wide-ranging information gathering can help
businesses and legal strategists decide whether to sue, go to trial or employ
alternative dispute resolution, and whether, and at what level, to negotiate a
settlement. In complex litigation, Kroll-O'Gara uses sophisticated link-analysis
software to track and process voluminous documentation, as well as extensive
database material, in order to identify elusive connections and produce
investigative leads.
 
     MONITORING SERVICES AND SPECIAL INQUIRIES. Kroll-O'Gara provides monitoring
services to, and conducts special inquiries for, clients that require an
independent fact finder to end fraud and install systems that monitor
compliance. Kroll-O'Gara's lawyers, forensic accountants, investigators,
analysts and industry experts seek to identify violations of federal or state
regulatory requirements or corporate policies and consult with clients with
respect to establishing systems to audit and ensure compliance with these
regulatory requirements or policies. Kroll-O'Gara serves as an objective fact
finder, whose work product might well be turned over to a questioning government
regulator or a skeptical and vocal segment of the public. Kroll-O'Gara's fact
finding efforts have been enlisted by management and by audit committees
concerned about problems that need to be resolved within an enterprise.
 
     INTELLECTUAL PROPERTY INFRINGEMENT. Kroll-O'Gara's investigators help to
investigate and devise a strategy to solve such problems as thefts of trade
secrets, threats and hostile acts, gray market and counterfeit products, and
patent and trademark infringements. Kroll-O'Gara attempts to determine the
source and extent of the problem, develop information about the parties
responsible, minimize damage to the client and propose effective measures to
prevent further losses.
 
Corporate Services
 
     Kroll-O'Gara's corporate services include pre-employment background checks,
drug testing, surveillance and vendor integrity programs.
 
   
     PRE-EMPLOYMENT BACKGROUND CHECKS. Kroll-O'Gara verifies job applicant
background information for employers. The background investigations are made
through the use of databases and independent contractors. The searches include
reviews of credit histories, reference checks, criminal records, workers'
compensation histories and driving records as well as education and credential
verification.
    
 
     DRUG TESTING. Kroll-O'Gara owns and operates a state-of-the-art laboratory
providing drug testing services to corporate and institutional clients seeking
to detect and deter the use of illegal drugs. The laboratory is certified by the
federal Substance Abuse and Mental Health Services Administration to conduct
drug testing using forensic procedures required for legal defensibility of test
results. Kroll-O'Gara's drug testing services also include assisting clients
with the development of drug testing programs, training client personnel,
managing specimen collections, arranging for transportation of specimens to
Kroll-O'Gara's laboratory, identifying trends in local and national drug use,
interpreting test results and providing expert testimony concerning test
results.
 
     SURVEILLANCE. Kroll-O'Gara provides video surveillance services to its
clients in connection with investigating exaggerated disability claims and other
frauds. In performing surveillance, Kroll-O'Gara utilizes its fleet of over 125
vans stationed throughout the United States, each containing state-of-the-art
equipment designed to obtain clear footage without detection. Agents with
extensive training and experience man the surveillance vans.
 
     VENDOR INTEGRITY PROGRAMS. Kroll-O'Gara provides profiles of a client's
vendors, using information provided by the vendors and obtained from independent
sources. A client utilizes these profiles to insure that its vendors adhere to
the client's standards for ethical business practices. The fees for this service
may be paid either through nominal fees charged to each participating vendor or
billed directly to the client.
 
                                        6
<PAGE>   8
 
   
Corporate Security Services
    
 
   
     Kroll-O'Gara's corporate security offerings include security architecture
and design as well as security planning.
    
 
     SECURITY ARCHITECTURE. Kroll-O'Gara offers comprehensive planning,
engineering and design services customized to meet the requirements of customers
for physical site protection. These services are primarily intended to protect
business facilities, embassies, VIPs' homes and public facilities against
unauthorized intrusions. Generally, a project begins with a security survey,
which identifies areas of vulnerability and recommends methods for protecting
the facility. Specific pieces of hardware are selected, processes and procedures
are outlined, engineering documentation is provided and control centers are
detailed.
 
     CORPORATE SECURITY PLANNING SERVICES. Kroll-O'Gara designs corporate
security programs that help to safeguard clients' operations and premises.
Security programs and systems are designed to protect the safety of key
executives, preserve assets and protect the integrity of computer and
telecommunications systems. Additionally, in several areas of the world,
Kroll-O'Gara provides special escort and general protective services to
executives and VIPs.
 
   
Computer Forensics Services
    
 
     Businesses face a variety of risks from both employees and outsiders who
infiltrate computer systems by various means including e-mail and internet
access points. For example, disgruntled employees or competitors may cause
unauthorized changes to a company's website, redirect message traffic to an
alternative website or create "hate sites" containing negative and often untrue
information about a business. Kroll-O'Gara's investigators usually are able to
track down the perpetrators of these activities and analyze how the incident
occurred. Kroll-O'Gara also can help a client locate information vital to a
lawsuit, and do so in a manner that assists in proving the admissability of the
evidence. The information is located by the use of forensic software that allows
Kroll-O'Gara to recover previously deleted computer files, obtain access to
password protected files, and search a hard drive for up to 256 words or phrases
simultaneously.
 
INFORMATION SECURITY GROUP
 
   
     The Information Security Group has five service categories:
    
 
   
     NETWORK AND SYSTEM SECURITY ASSESSMENT. Kroll-O'Gara can determine
categories of threats and risks to the critical systems, services (including
e-commerce) and information resources of clients and recommend cost-effective
countermeasures. Kroll-O'Gara has leading industry experts on-staff who analyze
design strengths and weaknesses in secure protocols and cryptographic
algorithms.
    
 
     PRODUCT EVALUATION AND ASSESSMENT. Kroll-O'Gara understands that no
information system can be made completely secure for practical use in the real
world. Therefore, Kroll-O'Gara works to determine the residual risks that are
acceptable to specific clients based on the needs of the client and the
product's function, security features and interaction with other security
products. Once the analysis is made, the recommendations can include product
enhancements, rules for deploying and configuring the product, and internal
technical guidance.
 
   
     SECURITY POLICY CREATION AND IMPLEMENTATION. Kroll-O'Gara has specialists
who focus on the development of corporate policies that pertain to computer
security. A comprehensive security policy is as unique as the organization that
owns it because every organization has different requirements. A security policy
not only addresses specific systems, but also describes the organization
structure, guidelines and procedures necessary to support the policy.
    
 
     SECURITY ARCHITECTURE AND DESIGN. The Information Security Group
specializes in the architecture, design and implementation of e-commerce
systems. Its staff includes some of the inventors of the technology that
provides the security to these systems. Kroll-O'Gara assists its customers in
all phases of e-commerce applications, including evaluations of products and
vendors, application design and implementation, and
                                        7
<PAGE>   9
 
continuing assistance in monitoring, administering and responding to problems in
the operation of e-commerce sites.
 
     SECURITY TRAINING. The weakest link in most security systems is usually the
human aspect. To defend against accidental "social compromises" within an
organization, Kroll-O'Gara provides corporate user awareness training, combined
with an implementation service in order to ensure the smooth operation of new
procedures or technology. Kroll-O'Gara offers different training to various
groups within a client's organization, including training solely directed at
specific groups, such as system administrators, development engineers and
security directors, and training directed to the total employee population.
 
   
CUSTOMERS
    
 
SECURITY PRODUCTS AND SERVICES GROUP
 
   
     COMMERCIAL PRODUCTS. Kroll-O'Gara's armored commercial vehicle customers
include governmental and private buyers. U.S. and foreign governmental buyers
purchase both fully and light-armored vehicles. Governmental buyers also
comprise the market for Parade Cars. Typically, governmental buyers consist of
ministries of foreign affairs, defense and internal affairs and offices of
presidential security. These customers are not constrained in their purchasing
decisions by considerations such as import duties and taxes and are free to
search globally for the best product available. The procurement cycles of
governmental buyers can range from relatively rapid, when the vehicles are for
the use of the head of state or in response to a particular crisis, to prolonged
bureaucratic bids and evaluations for normally budgeted items. Kroll-O'Gara's
private customers for armored commercial vehicles include corporations and
individuals. Private buyers are much more sensitive to cost, of which import
duties and taxes may be a substantial part, and, therefore, often will buy a
locally produced product, if one exists that meets their needs. Local servicing
of the vehicle is also a critical concern to private buyers. Kroll-O'Gara's
customers for Cash-in-Transit vehicles are generally financial institutions.
Purchasing decisions for Cash-in-Transit vehicles depend on many criteria
including whether the financial institution is private or governmental,
insurance requirements and cost. The geographic distribution of 1998 sales of
Kroll-O'Gara's commercial armored vehicles, as a percentage of total 1998 sales
for those products, was as follows:
    
 
             PERCENTAGE OF 1998 COMMERCIAL SALES BY GEOGRAPHIC AREA
 
<TABLE>
<S>                                                      <C>
Europe.................................................             43%
Central and South America..............................             29%
North America..........................................             11%
Middle East............................................              6%
Far East...............................................              2%
Other..................................................              9%
</TABLE>
 
     MILITARY PRODUCTS. Kroll-O'Gara's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces.
Kroll-O'Gara's major contracts for delivery of Up-Armored HMMWVs are with the
U.S. Military. Additionally, Kroll-O'Gara provides protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
Military under a subcontract with Lockheed Martin. Kroll-O'Gara has sold
Up-Armored HMMWVs to Qatar and Luxembourg, either directly or through the U.S.
Foreign Military Sales Program, and is seeking to expand its sales of these
vehicles to foreign defense forces.
 
   
     TRAINING. Kroll-O'Gara offers advanced driver training, firearms training
and surveillance detection training courses. Many private sector clients are
drawn to Kroll-O'Gara's training courses due to Kroll-O'Gara's reputation of
providing these services to various governmental agencies. Kroll-O'Gara markets
its various courses to its armored commercial vehicle customers and vice versa.
    
 
   
     RISK AND CRISIS MANAGEMENT. A significant portion of Kroll-O'Gara's
customers for investigating and negotiating ransom demands in connection with
kidnappings and for investigating incidents of product tampering or
disparagement arise from a contract with American International Group, Inc., an
international multi-risk insurance company, under which Kroll-O'Gara
investigates claims by AIG's insureds. Although
    
                                        8
<PAGE>   10
 
Kroll-O'Gara is paid by AIG after claims are made, Kroll-O'Gara's customer is
the affected person or entity. Kroll-O'Gara's customers for its information
services relating to travel safety are multinational corporations and
individuals. Kroll-O'Gara markets its information services to many of its
customers for other products and services.
 
INVESTIGATIONS AND INTELLIGENCE GROUP
 
     Kroll-O'Gara's clients for investigative and intelligence services include
multinational corporations, leading law firms, financial institutions,
government agencies and individuals in a wide range of business sectors. The
financial institutions to which Kroll-O'Gara provides services include many of
the largest international investment banks, numerous commercial banks, insurance
companies and other significant credit institutions.
 
     Kroll-O'Gara classifies its investigative and intelligence sales by where
the services are delivered; international sales are services delivered outside
the United States. For the years ended December 31, 1996, 1997 and 1998, 77%,
73%, and 69%, respectively, of this Group's net sales were attributable to
services delivered in the United States; the balance were attributable to
services delivered outside the United States.
 
     Although many of Kroll-O'Gara's clients utilize these services on a
periodic basis, comparatively few clients utilize Kroll-O'Gara's services on a
continuing basis and the clients that account for a material percentage of net
sales in any year may vary widely.
 
     In the United States, Kroll-O'Gara generally charges for its investigative
and intelligence services on an hourly basis at varying rates, depending upon
the type of service being provided and the competition that exists in providing
the service. Kroll-O'Gara also provides these services, particularly outside the
United States, on a negotiated project, or fixed fee, basis. Providing services
on a fixed fee basis enhances the potential for higher profit margins. However,
these arrangements also can result in unexpected losses on a particular project.
Kroll-O'Gara believes that this risk is reduced by being spread over a large
number of fixed fee arrangements.
 
INFORMATION SECURITY GROUP
 
   
     Kroll-O'Gara markets its information security services to its corporate and
governmental customers. These clients either are concerned about potential
infiltration of their proprietary databases or have had their databases
infiltrated by employees or third parties. Emerging customers are those
interested in the development of e-commerce and the security associated with
these transactions. Generally, Kroll-O'Gara charges on an hourly basis for these
services.
    
 
   
MARKETING AND SALES
    
 
     COMMERCIAL. Kroll-O'Gara believes that it enjoys excellent name recognition
and a strong reputation in the security industry. The central element of
Kroll-O'Gara's commercial marketing strategy is to utilize the name recognition
and reputation of its products and services to position Kroll-O'Gara as a global
provider of one-stop risk mitigation services and products. In this manner,
Kroll-O'Gara believes it can capitalize on its existing customer base, maximize
the benefits of its long history of supplying security-related products and
services around the world and enhance its leadership niche in the risk
mitigation market. Kroll-O'Gara tailors its marketing strategy to each
geographic area of the world and often will tailor its product and services
offerings by country. Kroll-O'Gara actively cross markets its products and
services and believes this strengthens the image of each product group.
 
     On a worldwide basis, Kroll-O'Gara employs 48 full-time sales professionals
in its Security Products and Services Group. These employees operate out of
Washington, D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo, Brazil; Lamballe,
France; Paris, France; Mexico City, Mexico; Subic Bay, the Philippines; Manila,
the Philippines; Moscow, Russia; Bogota, Colombia; and Geneva, Switzerland. All
personnel have a geographic and/or product- specific responsibility. In most
cases, the sales personnel also recruit and maintain sales agents or
distributors. The agents or distributors have geographic and product-specific
agreements, and
 
                                        9
<PAGE>   11
 
compensation in most cases is based upon a commission arrangement. The sales
personnel use a consultative approach when offering solutions to customers'
security problems. Sales cycles for commercial physical security products can
range from several months to a matter of days, depending upon the product and
the urgency associated with the security problem being addressed. Physical
security products which are readily available, such as the fully armored
Standard Suburban, allow Kroll-O'Gara to assist customers who have, or believe
they have, developed an immediate threat.
 
     In its Investigations and Intelligence Group and its Information Security
Group, Kroll-O'Gara relies on its professionals not only to provide services to
existing clients, but also for new business development and marketing.
Kroll-O'Gara obtains engagements from a client's board of directors, chief
executive, chief financial and chief information officers, general counsel and a
variety of other corporate officials, including business development officers,
security managers, risk managers and human resource personnel. Kroll-O'Gara's
senior professionals act as relationship managers for Kroll-O'Gara's major
clients, and a significant amount of Kroll-O'Gara's marketing consists of
maintaining and developing these personal relationships. In addition, in its
Investigations and Intelligence Group, Kroll-O'Gara has a professional staff in
New York City and in each of its regional headquarters that includes marketing,
sales and public relations professionals who support and coordinate
Kroll-O'Gara's marketing efforts on a worldwide basis. These marketing efforts
include seminars, briefings, receptions, breakfast and lunch meetings, direct
mail and selected advertising in trade and other journals. Kroll-O'Gara's
services and marketing events are promoted through its Internet website and a
publication mailed periodically to approximately 20,000 clients and prospective
clients.
 
     Kroll-O'Gara's marketing efforts attempt to increase business with existing
clients by expanding clients' awareness of the range of services offered by
Kroll-O'Gara and by broadening the decision makers within a client's
organization that are aware of the range of services offered by Kroll-O'Gara.
Kroll-O'Gara's business development staff periodically conducts surveys of
clients to assess their perception of the range and quality of its services and,
after the completion of an assignment, clients are often asked to complete a
quality control questionnaire.
 
   
     MILITARY. Kroll-O'Gara has positioned itself in the marketplace as a
commercial company with a military production capability. As such, Kroll-O'Gara
emphasizes its ability to develop new products, or product adaptations, quickly
and more cost-effectively than traditional defense contractors. In marketing its
products to the military, Kroll-O'Gara also places strong emphasis on its
superior antitank and antipersonnel mine protection for the occupants of
tactical wheeled vehicles. Kroll-O'Gara markets its military products through a
combination of trade show exhibitions, print advertising in military-related
periodicals and direct customer visits. Kroll-O'Gara emphasizes the
cross-marketing of military and commercial products, which it believes
strengthens the image of each product group. Kroll-O'Gara also has entered into
exclusive teaming and joint marketing agreements with AM General, the
manufacturer of the basic HMMWV, for sales in the military and commercial
arenas. These agreements designate Kroll-O'Gara as the exclusive armorer to AM
General for HMMWVs and allow Kroll-O'Gara to benefit from the AM General
distribution network and save on certain costs, such as exhibitions where AM
General and Kroll-O'Gara otherwise would both show products. Additionally,
Kroll-O'Gara currently is working with other military vehicle manufacturers
whose products are more popular in other areas of the world to develop armored
configurations for their vehicles.
    
 
     Kroll-O'Gara's military sales activities are directed toward identifying
contract bid opportunities with various U.S. Government agencies, private
enterprises acting as prime contractors on government contracts, sales through
the Foreign Military Sales Program, and military sales directly to foreign
military organizations. Kroll-O'Gara has two full-time business development
managers who are responsible for this activity and also has contractual
arrangements with several outside consultants who assist the business
development managers in their activities. Proposal preparation and presentation
for government projects is done by a team which normally consists of program
managers, a contracting officer, a cost accountant and various manufacturing and
engineering personnel.
 
                                       10
<PAGE>   12
 
ENGINEERING AND DEVELOPMENT
 
     Kroll-O'Gara's engineering and development activities are centered on
products offered by its Security Products and Services Group. Kroll-O'Gara
emphasizes engineering excellence and has an extensive engineering staff. Design
engineers use state-of-the-art two-dimensional and three-dimensional computer
aided design and engineering (CAD/CAE) systems in conjunction with coordinate
measuring machines to develop electronic models which generally are converted to
solid models or prototypes. Manufacturing engineers concentrate on improvements
in the production process and on overall cost reductions from better methods,
fewer components and less expensive materials with equal or superior quality.
Applying these techniques, in the last several years Kroll-O'Gara has been able
to produce savings in both the time and cost necessary to produce its armored
vehicles.
 
     Quality engineering is responsible for assuring that manufacturing and
design plans are consistent with a reliable, quality product that meets the
specifications of the customer. Quality engineers also are responsible for
identifying in-process quality inspection points in the work orders.
Kroll-O'Gara's ballistic engineer, in conjunction with its design and
manufacturing engineers, develops new ballistic and blast protection systems
that meet ever-changing threats. The ballistic engineer also is responsible for
the ballistic testing required by customers, the assignment of ballistic
specifications to final products and the issuance of ballistic specifications
for internal quality control. Advanced engineering is responsible for new
product development in conjunction with design engineering, manufacturing
engineering and ballistic engineering. Kroll-O'Gara estimates that it expended
approximately $2.8 million, $2.9 million and $3.7 million in 1996, 1997 and
1998, respectively, on its engineering and development efforts. The amounts for
1997 and 1998 include expensed amounts reimbursed under a Systems Technical
Support Contract described under "U.S. Government Contracts."
 
U.S. GOVERNMENT CONTRACTS
 
     Kroll-O'Gara serves as the U.S. Military's sole source contractor for
armoring the HMMWV fleet. Since its initial contract in August 1993 to armor 59
HMMWVs, Kroll-O'Gara has been awarded contracts to armor a total of 1,993
HMMWVs. Of these, 1,498 Up-Armored HMMWVs have been shipped, as follows:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                        YEAR SHIPPED                           HMMWVS
                        ------------                          ---------
<S>                                                           <C>
1993........................................................        0
1994........................................................      139
1995........................................................       26
1996........................................................      507
1997........................................................      366
1998........................................................      460
                                                                -----
          Total.............................................    1,498
                                                                =====
</TABLE>
 
   
     Kroll-O'Gara's most recent contract with the U.S. Military covers 738
Up-Armored HMMWVs for the U.S. Army and the U.S. Air Force, to be delivered from
August 1998 through December 1999. The contract for 378 of those vehicles for
the U.S. Air Force was signed in March 1998, with the remaining amount
contracted for in April 1998. The award includes an option for an additional 216
vehicles, which was exercised on April 30, 1999. As the Up-Armored HMMWV fleet
grows, Kroll-O'Gara is experiencing continued growth in sales of spare parts and
related fleet management activity, including a $2.0 million annual contract to
support field requirements. This contract was most recently renewed in March
1998.
    
 
   
     In January 1997, Kroll-O'Gara signed a Systems Technical Support contract
with the U.S. Military to support continued research and development on the
Up-Armored HMMWV program. The four year contract, three of which are option
years, was budgeted for $2.5 million in 1997, with $2.5 million options in each
of 1998 and 1999 and a $2.0 million option in 2000. In September 1997, the U.S.
Military exercised its options for 1998 and 1999. The contract, in part, allows
Kroll-O'Gara to make design improvements, to conduct additional testing of
materials, components and vehicles and to explore alternate and more advanced
armor
    
 
                                       11
<PAGE>   13
 
   
configurations. The contract requires Kroll-O'Gara to provide 25,000 hours per
year of engineering and development time to the U.S. Military. Kroll-O'Gara
believes that the knowledge gained from work on the contract also has been of
value to its commercial manufacturing programs.
    
 
     As a subcontractor to Lockheed Martin Corporation, Kroll-O'Gara has
provided armoring for certain missile weapons systems. Kroll-O'Gara was first
engaged in September 1993 by Lockheed Martin to armor launch systems of
missiles. Kroll-O'Gara was most recently engaged by Lockheed Martin in February
1999 to provide this armoring and believes that it is well positioned for future
engagements.
 
COMPETITION
 
     The markets for Kroll-O'Gara's products and services are highly
competitive. Kroll-O'Gara competes in a variety of fields, with competitors
ranging from small businesses to multinational corporations.
 
SECURITY PRODUCTS AND SERVICES GROUP
 
     Kroll-O'Gara believes that its design, engineering and production expertise
in providing fully integrated ballistic and blast protected vehicles gives it a
competitive advantage over those competitors who provide protection against only
selected ballistic threats. The largest competitor on a worldwide basis in the
production of armored commercial vehicles is DaimlerChrysler AG, which sells its
armored Mercedes Benz products on a special order basis, and BMW AG, which sells
its products through its worldwide dealer distribution system. In addition,
there are a number of other vehicle armorers in Europe, the Middle East and
Latin America which armor primarily locally manufactured automobiles. U.S. based
protected passenger automobile armorers include the Pittston Company (owner of
Brinks armored vehicles), Moloney Coachbuilders, Inc., Armor Holdings, Inc., and
Armet Armored Vehicles, Inc. The principal competitive factors are price,
quality of engineering and design, production capability and capacity, ability
to meet delivery schedules and reputation in the industry. There are a large
number of companies, such as Simula, Inc., that provide specific armoring
packages for tactical wheeled vehicles, helicopters and selected other military
applications. Kroll-O'Gara believes that, as the size of the Up-Armored HMMWV
requirement continues to grow, competition from major defense contractors may
increase.
 
   
     With regard to the security services provided by this Group, Kroll-O'Gara
competes with numerous local integrators and small consultant-type businesses,
such as Control Risks Group Ltd., and also with large suppliers of
security-related equipment such as Western Resources, Inc., Securitas AB, The
Wackenhut Corporation, Borg-Warner Security Corporation, Pittway Corporation,
Armor Holdings, Inc., ICTS International, N.V. and Tyco International Ltd. The
principal competitive factors are the best approach to solving the problems,
expertise, price, trust, availability and the company or individual reputation.
    
 
INVESTIGATIONS AND INTELLIGENCE GROUP
 
     In this area, Kroll-O'Gara competes with local, regional, national and
international firms, including investigative and security firms, guard companies
and specialized consultants in areas such as kidnapping. Kroll-O'Gara believes
that it is one of the largest companies in the world providing a broad array of
corporate investigation, risk and crisis management and business intelligence
services on a global basis and that it enjoys strong name recognition in its
industry. Nevertheless, Kroll-O'Gara faces significant, and increasing,
competition in the United States and elsewhere in the world from a variety of
companies that provide some of the services offered by Kroll-O'Gara. In most
service areas in which Kroll-O'Gara operates, there is at least one competitor
that is significantly larger or more established than Kroll-O'Gara. Many of the
national and international accounting firms, along with other companies such as
Decision Strategies/Fairfax International, LLC and Investigations Group, Inc.,
provide consulting services similar to some of the services provided by
Kroll-O'Gara. Some of these firms have indicated an interest in providing
corporate investigation and business intelligence services on a broader scale.
The accounting firms have significantly larger financial and other resources
than Kroll-O'Gara and have long-established relationships with their clients,
which also are likely to be clients or prospective clients of Kroll-O'Gara. In
addition, large multinational security product
 
                                       12
<PAGE>   14
 
and service providers have indicated an interest in expanding their services to
include value-added services such as some of the investigation and consulting
services provided by Kroll-O'Gara.
 
INFORMATION SECURITY GROUP
 
     This Group provides services in an area which is subject to rapid change
and is highly competitive. Primary competitors include participants from a
variety of market segments, including national and international accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, outsourcing firms, systems
integration companies and general management consulting firms. Many of these
competitors have significantly greater financial, technical and marketing
resources and greater name recognition in the field than Kroll-O'Gara.
 
   
SEASONALITY, BACKLOG AND RELATED MATTERS
    
 
   
     Approximately 25% of Kroll-O'Gara's net sales during 1998 were derived from
U.S. Military contracts and an additional 5% were derived from commercial
contracts with U.S. governmental agencies or foreign governments. For 1997,
these percentages were 23% and 5%, respectively. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. Kroll-O'Gara
frequently receives substantial orders in one quarter, the revenues from which
are not recognized until one or more subsequent quarters. As a result,
Kroll-O'Gara has significant fluctuations from time to time in its business.
Historically, these fluctuations have not been seasonal. Kroll-O'Gara does not
believe that its business is seasonal overall, although historically the first
quarter has been weaker than the other three. 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.
    
 
   
     Kroll-O'Gara's backlog at December 31, 1997 and 1998 was approximately
$50.0 million and $29.3 million, respectively. Backlog consists of net sales
value for firm orders not previously included in net sales on the basis of
percentage-of-completion accounting. Because many timing and cost factors affect
the production and delivery of Kroll-O'Gara's products, there is no certainty as
to when net sales will be recognized from Kroll-O'Gara's backlog. However,
Kroll-O'Gara expects to ship all of its 1998 backlog in 1999. Year-to-year
comparisons of backlog are not necessarily indicative of future operating
results.
    
 
     Kroll-O'Gara's net sales from government contracts and most commercial
contracts for its armoring products are recognized using the
percentage-of-completion method. Under this method, contract revenues are
reported based on the percentage that costs to date bear to total estimated
costs. Estimated contract losses are recognized in full in the period in which
it becomes likely that a loss will occur. Accordingly, contract revenues and
total cost estimates are reviewed and revised periodically as the work
progresses and as change orders are approved, and adjustments based upon the
percentage-of-completion are reflected in contract revenues in the period when
such estimates are revised. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
   
EMPLOYEES
    
   
    
 
   
     As of February 28, 1999, Kroll-O'Gara had 2,446 employees, comprised of 110
in marketing and sales, 1,192 in operations, 506 in professional services, 65 in
engineering and 573 in general and administrative. Kroll-O'Gara's U.S. employees
are not represented by any union and are not covered by any collective
bargaining agreements. Approximately 134 employees of Kroll-O'Gara's French
subsidiary Labbe are employed under agreements with the Confederation Francaise
Democratique du Travail. Wage increase parameters are set twice a year by
Kroll-O'Gara's local management in consultation with the union. Kroll-O'Gara has
not experienced any work stoppages or employee related slowdowns and believes
that its relationship with its employees is good.
    
 
   
GOVERNMENT REGULATION
    
 
     Kroll-O'Gara's services are subject to various federal, state, local and
foreign laws, including laws designed to protect the privacy of persons.
Subsidiaries of Kroll-O'Gara hold private investigative licenses
                                       13
<PAGE>   15
 
from, and their investigative activities are subject to regulation by, the state
and local licensing authorities in the locations where such subsidiaries do
business. Kroll-O'Gara also utilizes data from outside sources, including data
from third party vendors and various government and public record services, in
performing its services. Use of this data is subject to compliance with
applicable law.
 
     Additionally, Kroll-O'Gara's drug testing laboratory is certified on the
federal level and licensed in a number of states. If the laboratory's
certification were suspended or lost, it would have a material adverse effect on
this aspect of Kroll-O'Gara's business.
 
     As a contractor with agencies of the U.S. Government, Kroll-O'Gara is
obligated to comply with a variety of regulations governing its operations and
the workplace. Additionally, Kroll-O'Gara's contracts give the contracting
agency the right to conduct audits of Kroll-O'Gara's facilities and operations,
and these audits occur routinely. An audit involves a governmental agency's
review of Kroll-O'Gara's compliance with the prescribed procedures established
in connection with the government contract.
 
     Regulations promulgated by the U.S. Commerce Department require
Kroll-O'Gara to obtain a general destination license in connection with the sale
of certain commercial products in foreign countries, and U.S. State Department
regulations require Kroll-O'Gara to file an export license in connection with
sales of military equipment in foreign countries. Furthermore, the U.S. State
Department prohibits all sales of military equipment to certain countries, and
the U.S. complies with United Nations trade embargos. Additionally, foreign
countries in which Kroll-O'Gara does business or into which it expects to expand
have laws and regulations which may restrict Kroll-O'Gara's business.
 
   
ENVIRONMENTAL MATTERS
    
 
     Kroll-O'Gara and its operations are subject to a number of environmental
laws, regulations and ordinances, both in the U.S. and various foreign
countries, governing activities that may have adverse environmental effects,
such as discharges to air and water, as well as handling, storage and disposal
practices for solid and hazardous materials. These laws also impose liability
for the cost of remediating, and damages resulting from, sites of past releases
of hazardous materials. Environmental laws continue to change rapidly, and it is
likely that Kroll-O'Gara will be subject to increasingly stringent environmental
standards in the future. Kroll-O'Gara believes that it currently conducts its
activities and operations in substantial compliance with applicable
environmental laws.
 
   
PATENTS, TRADEMARKS AND COPYRIGHTS
    
 
     Kroll-O'Gara currently has six issued U.S. patents relating to its armoring
business. Kroll-O'Gara also currently has three federally registered trademarks
and pending applications for several others and has registered its trademarks in
numerous foreign countries. Kroll-O'Gara has no federally registered copyrights.
Although Kroll-O'Gara does not believe that its ability to compete in any of its
product markets is dependent on its intellectual property, Kroll-O'Gara does
believe that the protection afforded by its "Armoring Assembly" and "Vehicle
Mine Protection Structure" patents, both of which relate to vehicle underbody
blast protection, provides Kroll-O'Gara with important technological advantages
over its competitors. Although Kroll-O'Gara has protected its technologies to
the extent that it believes appropriate, there can be no assurance that
Kroll-O'Gara's measures to protect its proprietary rights will deter or prevent
unauthorized use of Kroll-O'Gara's technologies. In other countries,
Kroll-O'Gara's proprietary rights may not be protected to the same extent as in
the United States.
 
   
RISK FACTORS
    
 
   
KROLL-O'GARA MAY NOT BE ABLE TO MANAGE THE GROWTH THAT RESULTS FROM ITS
AGGRESSIVE GROWTH STRATEGY.
    
 
   
     Kroll-O'Gara has made multiple acquisitions since January 1, 1997 and
currently intends to continue an aggressive acquisition and internal growth
strategy. When companies are acquired, Kroll-O'Gara may not be able to integrate
or manage these businesses so as to produce returns that justify the investment.
Additionally, issues relating to new acquisitions may divert the attention of
Kroll-O'Gara's management from existing
    
 
                                       14
<PAGE>   16
 
   
operations. Kroll-O'Gara also will need to enhance the capabilities of its
operational and financial systems and will require additional employees,
management and operational and financial resources to support its growth
strategy. If Kroll-O'Gara cannot manage its growth for any of these reasons, its
operations and earnings could be adversely affected.
    
 
   
THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, KROLL-O'GARA'S U.S. MILITARY
BUSINESS WOULD HAVE A MATERIAL ADVERSE EFFECT ON KROLL-O'GARA'S RESULTS OF
OPERATIONS.
    
 
   
     U.S. Military contracts account for a significant portion of Kroll-O'Gara's
business, representing 33%, 23% and 25% of net sales for 1996, 1997 and 1998,
respectively. The U.S. Military funds these contracts in annual increments, and
the contracts require subsequent authorization and appropriation which may not
occur or which may provide less than the total amount of the contract.
Fluctuations in spending by the U.S. Government for national defense could
adversely affect Kroll-O'Gara's ability to receive future contracts. Also, the
U.S. Government generally may cancel its contracts unilaterally, at its
convenience.
    
 
   
KROLL-O'GARA IS DEPENDENT ON SINGLE SOURCE SUPPLIERS OF COMPONENTS FOR ITS
UP-ARMORED HMMWVS, WHICH ACCOUNT FOR ALMOST 25% OF ITS NET SALES.
    
 
   
     HMMWVs armored by Kroll-O'Gara are manufactured by AM General Corporation
under separate U.S. Military contracts. Should deliveries of HMMWVs to
Kroll-O'Gara be significantly interrupted, or should other single source
suppliers significantly interrupt deliveries of components for the Up-Armored
HMMWV, Kroll-O'Gara probably would not be able to deliver Up-Armored HMMWVs to
the U.S. Military on schedule, which could have a material adverse effect on
Kroll-O'Gara.
    
 
   
KROLL-O'GARA'S SIGNIFICANT BUSINESS OUTSIDE THE UNITED STATES EXPOSES IT TO
NUMEROUS RISKS WHICH, SINGLY OR TOGETHER, COULD MATERIALLY AND ADVERSELY AFFECT
ITS BUSINESS.
    
 
   
     In addition to its U.S. facilities, Kroll-O'Gara has operations and assets
in Argentina, Australia, Brazil, Canada, China, Colombia, France, Germany,
India, Italy, Japan, Mexico, the Philippines, Russia, Saudi Arabia, Singapore,
Switzerland and the United Kingdom. Kroll-O'Gara also sells its products and
services in other foreign countries and is seeking to increase its level of
international business activity. Kroll-O'Gara's international business exposes
it to various risks. Currently, the most significant risks relate to regional
economic downturns in Central and South America and in Asia. Although the impact
of these downturns has been offset to date with growth in other areas of
Kroll-O'Gara's business, these results may not continue. Other risks of foreign
business include exchange rate fluctuations, foreign currency restrictions,
expropriation of assets, war, civil uprisings and riots, government instability,
the vagaries of foreign legal systems, and unanticipated taxes, duties or other
governmental assessments. Any of these risks could result in a loss of business,
significant unexpected write-offs of assets or other unexpected costs which
could have a material adverse effect on Kroll-O'Gara.
    
 
   
KROLL-O'GARA'S INABILITY OR FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS AND
LICENSING REQUIREMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS.
    
 
   
     The services provided by Kroll-O'Gara's Investigations and Intelligence
Group are subject to various federal, state, local and foreign laws, including
privacy laws. Subsidiaries of Kroll-O'Gara hold private investigative licenses
from, and their investigative activities are regulated by, government agencies
in various jurisdictions. Kroll-O'Gara also utilizes certain data from outside
sources, including data from third party vendors and various government and
public record services, in performing its services. To date, applicable laws and
regulations have not interfered materially with the manner in which Kroll-O'Gara
obtains information and conducts its operations, including Kroll-O'Gara's access
to data used in its business. However, changes in these laws and regulations,
particularly those relating to privacy, could interfere with Kroll-O'Gara's
method of operations and access to data and, as a result, have a material
adverse effect on Kroll-O'Gara.
    
 
                                       15
<PAGE>   17
 
   
     Additionally, the laboratory of Kroll-O'Gara's drug testing subsidiary is
certified on the federal level and licensed in a number of states. If the
subsidiary fails to continue to meet all applicable requirements, its
certification could be suspended or lost, which would result in Kroll-O'Gara not
being eligible to perform testing for various clients and would have a material
adverse effect on this aspect of Kroll-O'Gara's business.
    
 
   
     Moreover, as a government contractor, Kroll-O'Gara's operations are subject
to routine audit to assure compliance with a variety of regulations. Adverse
findings in an audit or other investigation, including violations of
environmental or labor laws, could result in fines or other penalties up to and
including disqualification as a U.S. Government contractor.
    
 
   
KROLL-O'GARA DEPENDS ON THE SERVICES OF MANY OF ITS PROFESSIONAL AND TECHNICAL
EMPLOYEES. COMPETITION FOR THESE EMPLOYEES IS INTENSE.
    
 
   
     Kroll-O'Gara is highly dependent on the quality and efforts of the senior
managers and professional and technical staff in its Investigations and
Intelligence Group and its Information Security Group. Kroll-O'Gara relies
heavily on these employees for continued business development. Also, personnel
in Kroll-O'Gara's new Information Security Group must be fully up-to-date,
and -- indeed -- "ahead of the curve," in the rapidly evolving areas of
e-commerce and computer security. Competition for these employees is intense.
Kroll-O'Gara's business could be materially and adversely affected if a number
of its senior managers and professional and technical employees were to leave
and if Kroll-O'Gara were unable to attract and retain qualified replacements.
    
 
   
DUE TO THE NATURE OF ITS BUSINESS, KROLL-O'GARA IS SUSCEPTIBLE TO POTENTIALLY
SIGNIFICANT LIABILITY CLAIMS.
    
 
   
     The very nature of Kroll-O'Gara's business exposes it to potential
liability claims in instances in which its clients suffer losses in spite of
Kroll-O'Gara's efforts to mitigate their risks. Kroll-O'Gara maintains product
liability insurance with a maximum per occurrence and annual aggregate limit of
$25 million and professional liability insurance with a maximum per occurrence
and annual aggregate limit of $15 million. If one or more successful claims
substantially exceeded coverage limits, it would have a material adverse effect
on Kroll-O'Gara. Also, in the ordinary course of its business, Kroll-O'Gara is
subject to claims of third parties other than clients alleging trespass,
invasion of privacy and other tortious conduct by its investigators and other
personnel, which are not covered by insurance. Although Kroll-O'Gara endeavors
to minimize the risk of these claims, a substantial successful claim could have
a material adverse effect on Kroll-O'Gara.
    
 
   
THE FAILURE OF THIRD PARTIES TO RESOLVE THEIR YEAR 2000 ISSUES COULD HAVE A
MATERIAL ADVERSE EFFECT ON KROLL-O'GARA.
    
 
   
     Although Kroll-O'Gara currently expects to complete its own Year 2000
conversions on a timely basis and without costs that are material to its
financial condition or results of operations, many of Kroll-O'Gara's operations,
especially in the Investigations and Intelligence Group, rely on third party
computer systems and databases. The failure of third parties to address
adequately their Year 2000 issues could deprive Kroll-O'Gara of access to
information necessary to its business and thereby have a material adverse effect
on Kroll-O'Gara's operations and results.
    
 
   
ITEM 2.  PROPERTIES
    
 
     Kroll-O'Gara maintains executive offices and regional headquarters in New
York, New York, and Fairfield, Ohio, and other regional headquarters in London,
England; Hong Kong; Miami, Florida; Lamballe, France; and Sao Paulo, Brazil. In
addition, Kroll-O'Gara maintains 28 domestic offices or facilities in 14
 
                                       16
<PAGE>   18
 
states and 32 foreign offices or facilities in 18 foreign countries around the
world. Kroll-O'Gara's principal properties and facilities as of December 31,
1998 were as follows:
 
<TABLE>
<CAPTION>
                                                     BUILDING
                    LOCATION                      SQUARE FOOTAGE   STATUS
                    --------                      --------------   ------
<S>                                               <C>              <C>
Fairfield, Ohio.................................     130,000       owned
Lamballe, France................................     125,000       leased
Sao Paulo, Brazil...............................      50,000       leased
New York, New York..............................      39,000       leased
Gretna, Louisiana...............................      20,000       owned
Mexico City, Mexico.............................      20,000       owned
Washington, D.C. area...........................         n/a       leased
San Antonio, Texas..............................         n/a       owned
</TABLE>
 
     FAIRFIELD, OHIO. In addition to executive offices, this facility contains
full production and assembly facilities for Kroll-O'Gara's armored commercial
vehicles and the manufacturing and distribution of Up Armored HMMWVs. The
facility is financed through tax-exempt debt and is pledged to secure the
repayment of the debt. The facility includes a complete fabrication and machine
shop equipped with a computer controlled plasma cutter, a computer controlled
press break, mills, automated grinders, a robotic welder and two coordinate
measuring machines, paint booths and ancillary equipment for both military and
commercial painting.
 
     LAMBALLE, FRANCE. The site contains facilities for production of armored
commercial and cash-in-transit vehicles, design studios for development of
prototypes, integrated computer systems, and areas for parts, fabrication,
painting and quality control. This facility also contains a ballistics range. It
currently is leased for a term expiring in September 2000. For accounting
purposes, this is treated as an operating lease.
 
     SAO PAULO, BRAZIL. This facility, which was expanded to include a second
facility on an adjacent location in December 1996, is used for manufacturing and
sales of a full product line of armored commercial vehicles. It currently is
leased for a term expiring in March 2000. For accounting purposes, this lease is
treated as an operating lease.
 
     NEW YORK, NEW YORK. This facility contains executive offices and serves as
the headquarters for Kroll-O'Gara's Investigations and Intelligence Group. The
space is leased for a term expiring in December 2007. For accounting purposes,
this lease is treated as an operating lease.
 
     GRETNA, LOUISIANA. This facility houses Kroll-O'Gara's drug testing
laboratory as well as serving as offices for Kroll-O'Gara's drug testing
subsidiary.
 
     MEXICO CITY, MEXICO. This facility is used for manufacturing and sales of a
full product line of armored commercial vehicles. This facility was purchased in
1996.
 
     WASHINGTON D.C. AREA. This facility is used for advanced security training
and includes a portion of an abandoned airport runway that is used for advanced
driver training. The facility is leased for a term expiring in May 2009. For
accounting purposes, this lease is treated as an operating lease.
 
     SAN ANTONIO, TEXAS. This facility, which was acquired in 1997, consists of
165 acres of land used for advanced driver and force protection training.
 
     Kroll-O'Gara's manufacturing capabilities include fully integrated
manufacturing programs which link production control, materials control, quality
control and accounting. Kroll-O'Gara's non-executive offices range from
approximately 320 square feet to approximately 8,800 square feet and are subject
to leases expiring through May 2002. Kroll-O'Gara believes that its facilities
are adequate for its current needs and that its properties, including machinery
and equipment, are generally in good condition, well maintained and suitable for
intended current and foreseeable uses.
 
                                       17
<PAGE>   19
 
ITEM 3.  LEGAL PROCEEDINGS
 
     Kroll-O'Gara is involved in litigation from time to time in the ordinary
course of its business; however, Kroll-O'Gara does not believe that there is any
currently pending or threatened litigation, individually or in the aggregate,
that is likely to have a material adverse effect on its business or financial
condition.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
   
                                    PART II
    
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
   
     Kroll-O'Gara's common stock trades on the Nasdaq National Market under the
symbol "KROG." On March 31, 1999, there were approximately 197 record owners of
Kroll-O'Gara common stock.
    
 
     The table below sets forth the high and low sale prices for Kroll-O'Gara
common stock as reported by The Nasdaq Stock Market for the periods indicated.
 
<TABLE>
<CAPTION>
                                                               HIGH        LOW
                                                              ------      ------
<S>                                                           <C>         <C>
1997
First Quarter...............................................  $13.25      $ 9.00
Second Quarter..............................................   13.00        9.00
Third Quarter...............................................   15.00       10.25
Fourth Quarter..............................................   20.00       16.00
1998
First Quarter...............................................   19.25       16.50
Second Quarter..............................................   22.00       17.00
Third Quarter...............................................   26.00       18.50
Fourth Quarter..............................................   40.50       20.00
</TABLE>
 
DIVIDENDS
 
     Kroll-O'Gara expects that any future earnings will be retained to finance
its operations and for the growth and development of its business. Accordingly,
Kroll-O'Gara currently does not expect to pay cash dividends on its common stock
in the foreseeable future. Additionally, the terms of Kroll-O'Gara's Senior
Notes and the credit agreement with its bank require maintenance of certain
financial ratios which may limit the funds available for cash dividends. The
payment of any future dividends will be subject to the discretion of the Board
of Directors of Kroll-O'Gara and will depend on Kroll-O'Gara's results of
operations, financial position and capital requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal
restrictions on the payment of dividends and other factors its Board of
Directors deems relevant.
 
SALE OF UNREGISTERED SECURITIES
 
   
     During the fourth quarter of 1998, Kroll-O'Gara issued shares of common
stock to the former owners or shareholders of the following companies in
connection with the acquisition of each entity:
    
 
<TABLE>
<CAPTION>
                     COMPANY                              DATE        NUMBER OF SHARES
                     -------                              ----        ----------------
<S>                                                   <C>             <C>
Holder Associates, S.A. (1 person)................    October 1             46,287
Schiff & Associates (6 persons)...................    December 31          169,521
Securify Inc. (18 persons)........................    December 31        1,430,936
</TABLE>
 
     In each case the issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
 
                                       18
<PAGE>   20
 
   
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
    
 
   
     The following selected financial data reflects mergers during 1997 and 1998
which were accounted for as poolings of interest. The prior period consolidated
financial information has been restated as though the entities had always been
part of Kroll-O'Gara. The selected financial data also includes the completion
of other acquisitions in 1997 and 1998 that utilized the purchase method of
accounting, which requires including the reported results of each acquired
business from the effective date of its acquisition. The selected historical
financial data presented as of December 31, 1997 and 1998 and for each of the
three years ended December 31, 1998, have been derived from the audited
Consolidated Financial Statements of Kroll-O'Gara presented elsewhere in this
annual report. The consolidated financial data as of December 31, 1994, 1995 and
1996 and for the years ended December 31, 1994 and 1995 are derived from
Kroll-O'Gara's unaudited consolidated financial statements not included in this
annual report. The selected financial data should be read
    
 
                                       19
<PAGE>   21
 
   
in conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
    
 
   
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                --------------------------------------------------
                                                 1994      1995       1996       1997       1998
                                                -------   -------   --------   --------   --------
<S>                                             <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net sales.....................................  $91,338   $92,955   $157,148   $188,665   $247,192
Cost of sales.................................   57,990    65,106    111,640    125,453    159,187
                                                -------   -------   --------   --------   --------
     Gross profit.............................   33,348    27,849     45,508     63,212     88,005
Selling, general and administrative expenses,
  including amortization......................   32,227    30,836     36,138     44,589     57,901
Asset impairment..............................       --        --        125         --         --
Merger related expenses.......................       --        --         --      7,205      5,339
                                                -------   -------   --------   --------   --------
  Operating income (loss).....................    1,121    (2,987)     9,245     11,418     24,765
Interest expense..............................   (2,599)   (2,827)    (3,002)    (4,726)    (4,194)
Other income (expense), net...................      533        36        332       (325)     1,310
                                                -------   -------   --------   --------   --------
     Income (loss) from continuing operations
       before minority interest, provision
       (benefit) for income taxes,
       extraordinary item and cumulative
       effect of change in accounting
       principle..............................     (945)   (5,778)     6,575      6,367     21,881
Minority interest.............................       --        --         --       (156)        --
                                                -------   -------   --------   --------   --------
     Income (loss) from continuing operations
       before provision (benefit) for income
       taxes, extraordinary item and
       cumulative effect of change in
       accounting principle...................     (945)   (5,778)     6,575      6,211     21,881
Provision (benefit) for income taxes..........   (1,540)     (824)       365      3,305      7,466
                                                -------   -------   --------   --------   --------
     Income (loss) from continuing operations
       before extraordinary item and
       cumulative effect of change in
       accounting principle...................      595    (4,954)     6,210      2,906     14,415
Income (loss) from operations of discontinued
  Voice and Data Communications Group, net....      (44)     (676)       332       (305)    (1,326)
Loss from operations and disposal of
  discontinued clinical business, net of
  tax.........................................       --        --     (1,274)        --         --
                                                -------   -------   --------   --------   --------
     Income (loss) before extraordinary item
       and cumulative effect of change in
       accounting principle...................      551    (5,630)     5,268      2,601     13,089
Extraordinary item, net of tax benefit........       --        --         --       (194)        --
                                                -------   -------   --------   --------   --------
     Income (loss) before cumulative effect of
       change in accounting principle.........      551    (5,630)     5,268      2,407     13,089
Cumulative effect of change in accounting
  principle, net of tax benefit...............       --        --         --       (360)        --
                                                -------   -------   --------   --------   --------
Net income (loss).............................  $   551   $(5,630)  $  5,268   $  2,047   $ 13,089
                                                =======   =======   ========   ========   ========
Basic earnings (loss) per share from
  continuing operations.......................  $  0.07   $ (0.46)  $   0.54   $   0.21   $   0.78
                                                =======   =======   ========   ========   ========
Basic weighted average shares outstanding.....    8,926    10,884     11,607     14,007     18,439
                                                =======   =======   ========   ========   ========
Diluted earnings (loss) per share from
  continuing operations.......................  $  0.02   $ (0.46)  $   0.50   $   0.20   $   0.76
                                                =======   =======   ========   ========   ========
Diluted weighted average shares outstanding...    9,384    10,884     12,161     14,799     18,965
                                                =======   =======   ========   ========   ========
</TABLE>
    
 
                                       20
<PAGE>   22
 
   
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                    ----------------------------------------------
                                                     1994      1995     1996      1997      1998
                                                    -------   ------   -------   -------   -------
<S>                                                 <C>       <C>      <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital...................................  $17,261   $5,130   $11,991   $35,278   $83,370
Net property, plant, and equipment................    7,752    8,305    10,763    17,435    23,825
Total assets......................................   70,772   71,871    89,998   143,869   243,722
Long-term debt, including current portion.........   28,010   29,072    27,939    54,239    41,223
Shareholders' equity..............................   16,926   11,471    23,117    38,468   141,095
</TABLE>
    
 
   
ITEM 7. 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 Kroll-O'Gara's Consolidated
Financial Statements and Notes. As a result of the acquisitions made by
Kroll-O'Gara in 1997 and 1998 (see below), financial results from
period-to-period may lack comparability. Additionally, effective December 31,
1998, Kroll-O'Gara established the Information Security Group and, on April 28,
1999, the Board of Directors approved a plan to discontinue operations of the
Voice and Data Communications Group. Historical revenue amounts have been
reclassified to conform to the current categories.
    
 
   
GENERAL
    
 
   
     Kroll-O'Gara 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. Kroll-O'Gara reports its revenue from continuing operations
through three groups. The Security Products and Services Group markets ballistic
and blast protected vehicles and security services and the Investigations and
Intelligence Group offers business intelligence and investigation services. With
the acquisition of Securify Inc., Kroll-O'Gara established a new Information
Security Group. The Information Security Group offers information and computer
security services, including network and system security review and repair. On
April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group. Accordingly,
these operations have been reclassified and reported as discontinued operations.
    
 
   
     On May 5, 1998, Kroll-O'Gara completed a public offering of 3,200,000
shares of its common stock at $20.50 per share, resulting in net proceeds to
Kroll-O'Gara of $60.4 million. A portion of the net proceeds was used to repay
$14.8 million of indebtedness, with the balance available for potential
acquisitions, working capital and other general corporate purposes. In addition
to the shares sold by Kroll-O'Gara, certain shareholders sold 1,860,000 shares
of Kroll-O'Gara common stock in conjunction with the offering. The offering
followed Kroll-O'Gara'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 with Kroll Holdings. The merger with Kroll Holdings, Inc. was
completed on December 1, 1997. In the Kroll Holdings merger, 6,098,561 shares of
common stock were issued and an aggregate of $14.5 million in outstanding
indebtedness of Kroll Holdings was repaid. Approximately 550,000 additional
shares of Kroll-O'Gara common stock were reserved for issuance upon the exercise
of options held by Kroll Holdings employees, which were assumed by Kroll-O'Gara.
    
 
   
     Other Acquisitions. Kroll-O'Gara has pursued a strategy of aggressive
growth and has completed numerous other acquisitions in 1997 and 1998, some of
which have been accounted for as poolings of interest and others of which have
been accounted for as purchases. These acquisitions are listed in the chart
which follows.
    
 
                                       21
<PAGE>   23
 
   
POOLINGS(1)
    
 
   
<TABLE>
<CAPTION>
       COMPANY                  BUSINESS                  GROUP             DATE ACQUIRED              PRICE
       -------                  --------                  -----             -------------              -----
<S>                     <C>                        <C>                    <C>                 <C>
Laboratory Specialists  Drug testing               Investigations and     December 7, 1998    1,209,053 shares
of America, Inc.(2)                                Intelligence
Securify Inc.           Information security       Information Security   December 31, 1998   1,430,936 shares
                        services
Schiff & Associates,    Security architectural     Investigations and     December 31, 1998   169,521 shares
Inc.                    services                   Intelligence
</TABLE>
    
 
   
PURCHASES(3)
    
 
   
<TABLE>
<CAPTION>
       COMPANY                  BUSINESS                  GROUP             DATE ACQUIRED              PRICE
       -------                  --------                  -----             -------------              -----
<S>                     <C>                        <C>                    <C>                 <C>
Labbe, S.A.             Armors commercial          Security Products      January 1, 1997     $10.7 million in cash
                        vehicles and builds        and Services                               and 376,597 shares
                        truck bodies in France
Next Destination,       Distributes high           Voice and Data         February 1, 1997    170,234 shares and $1.6
Limited                 technology products for    Communications                             million in financing
                        the global positioning
                        satellite and satellite
                        communications markets
International           Advanced security          Security Products      March 1, 1997       $0.5 million in cash,
Training, Incorporated  training                   and Services                               68,086 shares and $1.2
                                                                                              million in financing
ZAO IMEA                Armors cash-in transit     Security Products      December 2, 1997    $0.6 million in cash and
                        vehicles and distributes   and Services                               138,889 shares
                        commercial bank
                        equipment in Russia
Corplex, Inc.           Investigative and          Investigations and     March 1, 1998       29,207 shares
                        executive protection       Intelligence
                        services
Lindquist Avey          Forensic and               Investigations and     June 1, 1998        $4.7 million in cash and
MacDonald Baskerville,  investigative accounting   Intelligence                               278,340 shares
Inc.                    services; headquartered
                        in Canada
Kizorek, Inc.           Video surveillance         Investigations and     July 1, 1998        $0.8 million in cash and
                        services                   Intelligence                               352,381 shares
Protec S.A.             Armors cars in Colombia    Security Products      September 30,       $3.2 million in cash and
                                                   and Services           1998                38,788 shares
Holder Associates,      Security services in       Investigations and     October 1, 1998     $4.5 million in cash and
S.A.                    Argentina                  Intelligence                               46,287 shares
Fact Finders Limited    Investigates               Investigations and     November 1, 1998    $3.2 million in cash,
                        intellectual property      Intelligence                               plus a 3-year earn-out
                        infringement cases in                                                 based on profits
                        Hong Kong and the
                        Peoples Republic of
                        China
</TABLE>
    
 
---------------
 
   
(1) Pooling of interest accounting requires the restating of all prior period
    consolidated financial information as though the acquired entity had always
    been a part of Kroll-O'Gara.
    
 
   
(2) In 1997 and 1998 Laboratory Specialists paid a total of approximately $5.9
    million to acquire customer lists and related assets from Pathology
    Laboratories, Ltd., Harrison Laboratories, Inc., Accu-Path Medical
    Laboratory, Inc., and TOXWORX Laboratories, Inc.
    
 
   
(3) Kroll-O'Gara's consolidated financial statements include the reported
    results of each entity from its effective date of acquisition forward.
    
 
   
     On January 21, 1999, Kroll-O'Gara entered into a definitive agreement to
acquire all of the capital stock of Background America, Inc. of Nashville,
Tennessee, in exchange for approximately 900,000 shares of Kroll-O'Gara common
stock. Background America provides background investigation services to
government, corporate, not-for-profit, professional and other clients. The
transaction is expected to be accounted for as a
    
                                       22
<PAGE>   24
 
   
pooling of interests. Background America will report revenue through the
Investigations and Intelligence Group.
    
 
   
     On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. of Fort Washington, Pennsylvania, in exchange for
101,553 shares of Kroll-O'Gara common stock valued at approximately $3.3
million, or $32.49 per share. The acquisition has been accounted for as a
pooling of interests. Financial Research provides business valuation and
economic damage analysis services throughout the United States. It reports
revenue through the Investigation and Intelligence Group.
    
 
   
     Revenue recognition. Kroll-O'Gara recognizes net sales from government and
most commercial armoring contracts using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara
accrues estimated contract revenues based generally on the percentage that costs
to date bear to total estimated costs and recognizes estimated contract losses
in full when it becomes likely that a loss will occur. Accordingly, Kroll-O'Gara
periodically reviews and revises contract revenues and total cost estimates as
the work progresses and as change orders are approved. It reflects adjustments
in contract revenues, based upon the percentage of completion, in the period
when the estimates are revised. To the extent that these adjustments result in
an increase, a reduction or an elimination of previously reported contract
revenues, Kroll-O'Gara recognizes a credit or a charge against current earnings,
which could be material. Contract costs include all direct material and labor
costs, along with certain direct overhead costs related to contract production.
Kroll-O'Gara records provisions for any estimated total contract losses on
uncompleted contracts in the period in which it concludes that the losses will
occur. Changes in estimated total contract costs result in revisions to contract
revenue. The revisions are recognized when determined.
    
 
   
     Kroll-O'Gara recognizes revenue from investigative and intelligence
services as the services are performed. It records either billed or unbilled
accounts receivable based on case-by-case invoicing determinations.
    
 
   
     Kroll-O'Gara recognizes information security service revenues, which
consist of consulting fees on information security projects, ratably over the
period of the agreement or according to the completed contract method of
accounting for contract revenues, depending on the nature of the agreement.
    
 
                                       23
<PAGE>   25
 
   
RESULTS OF OPERATIONS
    
 
   
     The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
    
 
   
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1996     1997     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Security products and services
  Commercial................................................   15.6%    32.8%    31.2%
  Military..................................................   34.7     23.2     24.2
Investigations and intelligence.............................   49.6     44.1     44.6
Information security........................................     --       --       --
                                                              -----    -----    -----
  Total net sales...........................................  100.0%   100.0%   100.0%
Cost of sales...............................................   71.0     66.5     64.4
                                                              -----    -----    -----
  Gross profit..............................................   29.0     33.5     35.6
Operating expenses:
  Selling and marketing.....................................    6.3      6.8      7.7
  General and administrative................................   16.7     16.8     15.7
  Asset impairment..........................................    0.1       --       --
  Merger related costs......................................     --      3.8      2.2
                                                              -----    -----    -----
Operating income............................................    5.9      6.1     10.0
Other income (expense):
  Interest expense..........................................   (1.9)    (2.5)    (1.7)
  Interest income...........................................    0.0      0.0      0.5
  Other, net................................................    0.2     (0.3)     0.1
                                                              -----    -----    -----
Income from continuing operations before provision for
  income taxes, extraordinary item and cumulative effect of
  accounting change.........................................    4.2      3.3      8.9
Provision for income taxes..................................    0.2      1.8      3.0
                                                              -----    -----    -----
Income from continuing operations before extraordinary item
  and cumulative effect of accounting change................    4.0      1.5      5.8
Income (loss) from operations of discontinued Voice and Data
  Communications Group, net.................................    0.2     (0.2)    (0.5)
Loss from operations and disposal of discontinued clinical
  business, net of tax......................................   (0.8)      --       --
                                                              -----    -----    -----
Income before extraordinary item and cumulative effect of
  accounting change.........................................    3.4      1.4      5.3
Extraordinary item..........................................     --     (0.1)      --
Cumulative effect of accounting change......................     --     (0.2)      --
                                                              -----    -----    -----
Net income..................................................    3.4%     1.1%     5.3%
                                                              =====    =====    =====
</TABLE>
    
 
   
1998 COMPARED TO 1997
    
 
   
     NET SALES. Net sales for the year ended December 31, 1998 increased $58.5
million, or 31%, from $188.7 million in 1997 to $247.2 million in 1998.
    
 
   
     Security Products and Services Group. For the year ended December 31, net
sales for the Security Products and Services Group increased $31.3 million, or
30%, from $105.6 million in 1997 to $136.8 million in 1998. The increase
includes net sales of commercial products and security services, which increased
$15.2 million, or 25%, from $61.8 million in 1997 to $77.0 million in 1998. The
increase in commercial net sales was primarily due to continued growth in
Kroll-O'Gara's international armoring divisions. During 1996, 1997, and 1998,
Kroll-O'Gara initiated start-up armoring operations in Mexico, Brazil and the
Philippines,
    
 
                                       24
<PAGE>   26
 
   
and acquired Labbe, IMEA and the assets of Protec. Kroll-O'Gara will continue
its efforts to expand the operations of its existing foreign subsidiaries along
with evaluating new acquisition opportunities and opportunities for entry into
new markets.
    
 
   
     Increases in net sales for security services also contributed to the
increase in commercial net sales for the Security Products and Services Group.
Net sales of these services increased $2.1 million, or 29%, for the year ended
December 31, 1998 in comparison with 1997.
    
 
   
     Net sales for the Security Products and Services Group include sales of
military products and services, which increased $16.1 million, or 37%, from
$43.7 million in 1997 to $59.8 million in 1998. In April 1998, Kroll-O'Gara
began work on a new contract with the U.S. Military to supply 738 Up-Armored
HMMWVs to the U.S. Army and the U.S. Air Force (the "738 Contract"). Production
on Kroll-O'Gara's previous contract with the U.S. Military for 360 Up-Armored
HMMWVs continued through July 1998. The combination of production on the two
contracts was a factor in the increase in net sales. Currently, HMMWV production
is based only on the 738 Contract.
    
 
   
     The U.S. Air Force has dictated an aggressive delivery schedule for the 738
Contract. This delivery schedule required Kroll-O'Gara to maintain an increased
level of production in 1998 for the Up-Armored HMMWV in comparison with
production levels in previous periods. Management expects the level of
production and net sales in 1999 to more nearly approximate those of 1997.
    
 
   
     Investigations and Intelligence Group. For the year ended December 31, net
sales for the Investigations and Intelligence Group increased $27.1 million, or
33%, from $83.1 million in 1997 to $110.2 million in 1998. The increases in 1998
were primarily due to the inclusion of net sales from the acquisitions of
Lindquist Avey, InPhoto, Corplex, Fact Finders, and Holder. Excluding net sales
reported by these acquired entities, net sales for the Investigations and
Intelligence Group would have been $90.9 million for the year ended December 31,
1998, in comparison with $83.1 million for the year ended December 31, 1997, an
increase of 9%.
    
 
   
     The increase in net sales without acquisitions in the Investigations and
Intelligence Group was the result of an internal growth plan carried out by the
Group in 1998. During the year, the Investigations and Intelligence Group opened
offices in Dallas, Boston, Houston and Mexico City. The internal growth plan
will continue in 1999, with the Group seeking additional markets for its
products, both domestic and foreign.
    
 
   
     Information Security Group. The Information Security Group initiated
operations in 1998, recording net sales of $0.1 million. Management expects the
Information Security Group's product offerings to result in significantly higher
Group sales in 1999.
    
 
   
     COST OF SALES AND GROSS PROFIT. For the year ended December 31, cost of
sales increased $33.7 million, or 27%, from $125.5 million in 1997 to $159.2
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
was 33.5% and 35.6% for 1997 and 1998, respectively. This increase is primarily
due to an increase in gross profit as a percent of net sales experienced in the
Investigations and Intelligence Group. This increase, approximately 5%, was due
to high margin engagements booked during the year which are historically
infrequent in nature.
    
 
   
     The gross profit percents for the Security Products and Services Group were
28.5% and 28.4% in 1998 and 1997, respectively.
    
 
   
     Because the high margin engagements booked in 1998 are historically
infrequent, management does not expect to maintain the level of gross profit as
a percent of net sales reflected in the results of the Investigations and
Intelligence Group for the year ended December 31, 1998. As always, the gross
profit percent will vary on the mix of sales from the three Groups. Kroll-O'Gara
historically has experienced its highest levels of gross profit as a percent of
net sales in the Investigations and Intelligence Group. As revenue from the
Investigations and Intelligence Group increases as a percent of total net sales,
the gross profit percent should increase as well.
    
 
   
     OPERATING EXPENSES. Operating expenses for the year ended December 31,
1998, increased $11.4 million, or 22%, to $63.2 million from $51.8 million for
the same period in 1997. Included in operating
    
                                       25
<PAGE>   27
 
   
expenses in 1997 were approximately $7.2 million in expenses related to the
merger with Kroll Holdings. In 1998 Kroll-O'Gara recorded approximately $5.3
million in merger related expenses associated with the Laboratory Specialists,
Schiff and Securify mergers.
    
 
   
     Before merger related expenses, operating expenses increased $13.3 million,
or 30%, from $44.6 million in 1997 to $57.9 million in 1998. The increase was
primarily attributable to an increase in the level of personnel and professional
services required to administer the growth experienced by Kroll-O'Gara in 1998.
    
 
   
     As a percent of net sales, operating expenses, before merger related costs,
were 24% in 1997 and 23% in 1998. As a result of investments made by
Kroll-O'Gara in facilities and personnel in previous periods, Kroll-O'Gara did
not require additional commitment of fixed cost relative to the level of net
sales in 1998. As sales increase further, Kroll-O'Gara will be required to
commit additional amounts of fixed cost to secure increased incremental net
sales.
    
 
   
     INTEREST EXPENSE. Interest expense for the year ended December 31, 1998
decreased $0.5 million, or 11%, to $4.2 million, compared to $4.7 million in
1997. With the completion of Kroll-O'Gara's May 1998 offering, a significant
portion of Kroll-O'Gara's indebtedness was repaid (approximately $14.8 million).
As a result, Kroll-O'Gara experienced lower interest expense starting in the
third quarter of 1998 and expects interest expense to be lower in comparison
with periods prior to that offering.
    
 
   
     On May 30, 1997, Kroll-O'Gara entered into an agreement with institutional
investors to issue and sell $35.0 million worth of Senior Notes. This agreement
contained a provision for a reduction of the interest rate if specified criteria
were met. Kroll-O'Gara complied with the criteria and the step down of rates
commenced in the second quarter of 1998. The reduction, which changed the
interest rate from 9.56% to 8.56%, contributed to the decrease in interest
expense in 1998.
    
 
   
     INTEREST INCOME. Interest income for the year ended December 31, 1998
increased $1.1 million, or 1,377%, to $1.2 million, compared to $0.1 million in
1997. Net proceeds of the May 1998 offering that were not used to repay debt
were invested in short-term instruments with maturities of three months or less.
The return on these investments was 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, Kroll-O'Gara
anticipates it will continue to experience higher levels of interest income in
1999 in comparison with periods prior to the May 1998 offering.
    
 
   
     PROVISION FOR INCOME TAXES. The provision for income taxes was $7.5 million
for the year ended December 31, 1998 in comparison with $3.3 million for the
same period in 1997. The effective tax rates for the periods were 53% in 1997
and 34% in 1998. In 1997, Kroll-O'Gara booked taxes at an effective rate
significantly higher than it had previously experienced largely due to the
non-deductibility of some of the merger related expenses incurred in the period.
In 1998, Kroll-O'Gara determined that certain of the Kroll Holdings merger
expenses qualified for future deductibility which favorably impacted the
effective tax rate in 1998.
    
 
   
     In addition, the 1998 tax provision also reflects the favorable impact of
foreign locations with statutory tax rates at levels below U.S. tax rates and
the reversal of the valuation allowance related to certain foreign net operating
loss carryforwards. Management expects the effective tax rate to be
approximately 40% in 1999.
    
 
   
     DISCONTINUED OPERATIONS. The loss from operations of the discontinued Voice
and Data Communications Group increased $1.0 million from $0.3 million in 1997
to $1.3 million in 1998. This increase was due to increased operating expenses,
primarily selling expenses, to support expected revenue growth in 1998. Revenue
growth did not occur in 1998 and sales levels remained consistent with 1997
levels. Due to the uncertainty surrounding the future realizability of the tax
benefit associated with the Voice and Data Communications Group's losses,
management concluded that a valuation allowance for the entire tax benefit was
required in both 1997 and 1998. No provision was made for a loss on disposal of
the business as management expects proceeds from the sale of this business to
cover Kroll-O'Gara's investment in net assets as well as any costs incurred to
sell the business.
    
 
                                       26
<PAGE>   28
 
   
     NET INCOME. Net income increased $11.0 million, or 540%, from $2.0 million
in 1997 to $13.1 million in 1998. The increase was due primarily to a $24.8
million increase in gross profit, offset by $11.4 million in increased operating
expenses and an increased provision for income taxes, as discussed above.
    
 
   
1997 COMPARED TO 1996
    
 
   
     NET SALES. Net sales increased $31.5 million, or 20%, from $157.1 million
in 1996 to $188.7 million in 1997. The primary reasons for this change were the
acquisitions made in Kroll-O'Gara's Security Products and Services Group in
1997.
    
 
   
     Security Products and Services Group. Net sales for the Security Products
and Services Group increased $26.4 million, or 33%, from $79.2 million in 1996
to $105.6 million in 1997.
    
 
   
     The Group's net sales for 1997 from commercial products and security
services were $61.8 million, an increase of $37.3 million, or 152%, over 1996.
This increase was due to several factors, including primarily the incorporation
of net sales from Labbe and International Training in the Groups's results.
Excluding acquisitions, net sales from commercial products and services
increased $12.7 million, or 52%. Kroll-O'Gara experienced significant growth in
its Brazilian and Mexican armoring subsidiaries. With the purchase of IMEA and
the initiation of a start-up armoring operation in the Philippines, the Security
Products and Services Group continued its expansion in existing and new markets.
    
 
   
     In 1996, the U.S. Military requested accelerated production of Up-Armored
HMMWV's. This resulted in net sales of $54.6 million in 1996. Military net sales
returned to a non-accelerated level in 1997, resulting in net sales from
military products decreasing by $10.9 million, or 20%, to $43.7 million in 1997.
    
 
   
     Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $5.1 million, or 7%, from $78.0 million in 1996 to
$83.1 million in 1997. This increase was primarily due to an increase in
specimens analyzed by Laboratory Specialists, Kroll-O'Gara's drug testing
subsidiary. The increase in specimens analyzed was due to asset purchases made
in early 1997, along with additional accounts obtained through normal sales and
marketing efforts.
    
 
   
     Most of the revenue reported by the Investigations and Intelligence Group
is generated by Kroll Holdings. Throughout 1997, Kroll Holdings was actively
involved in various strategic discussions that contemplated the sale of the
company. Pending the outcome of the discussions, Kroll Holdings delayed
implementation of its internal growth plans. In addition, uncertainties
surrounding the outcome of the discussions resulted in the departure of some
managers at Kroll Holdings prior to the Kroll Holdings merger. Finally, in
connection with the Kroll Holdings merger and in an effort to improve its cost
structure, Kroll-O'Gara reduced personnel in some markets. As a result, revenue
growth at Kroll Holdings was flat in comparison with 1996.
    
 
   
     COST OF SALES AND GROSS PROFIT. Cost of sales increased $13.8 million, or
12%, from $111.6 million in 1996 to $125.5 million in 1997. The increase in cost
of sales was due to increases in Kroll-O'Gara's level of business activity as a
result of the acquisitions made in 1997.
    
 
   
     Security Products and Services Group. Gross profit as a percentage of net
sales for the Security Products and Services Group improved from 25.8% in 1996
to 28.4% in 1997. As revenues and costs are recognized using the
percentage-of-completion method of accounting, actual cost and gross profit may
be revised from previously estimated amounts. Historically Kroll-O'Gara has
experienced a higher gross profit percent related to net sales of commercial
armoring products in comparison with those of military armoring products. In the
future, Kroll-O'Gara expects to increase its percentage of sales from commercial
armoring products.
    
 
   
     Investigations and Intelligence Group. Gross profit as a percent of net
sales for the Investigations and Intelligence Group increased from 32.1% in 1996
to 40.0% in 1997. Gross profit percent in 1996 was unfavorably affected by a
write-off of $5.0 million in uncollectible accounts receivable relating to
services provided in earlier periods. Without the write-off, the gross profit
percentages would have been comparable between periods.
    
 
                                       27
<PAGE>   29
 
   
     OPERATING EXPENSES. Excluding expenses of $7.2 million related to the Kroll
Holdings merger, operating expenses increased $8.3 million, or 23%, from $36.3
million in 1996 to $44.6 million in 1997. The $7.2 million in expenses related
to the Kroll Holdings merger consisted of approximately $4.6 million in
professional fees and expenses and approximately $2.6 million relating to the
integration of the operations of the two companies. Included in the integration
expenses were bonuses paid to key employees as incentives to remain with
Kroll-O'Gara and severance payments made to employees who left Kroll-O'Gara in
connection with the merger. Also included was a charge made as a result of the
acceleration of the vesting of shares of restricted Kroll Holdings stock
immediately prior to the merger. All of the costs related to the Kroll Holdings
merger were recognized in 1997 and will have no effect on the earnings of
Kroll-O'Gara in future periods.
    
 
   
     Of the $8.3 million increase in operating expenses, exclusive of expenses
related to the Kroll Holdings merger, $2.9 million was attributable to the
inclusion of operations from the acquisitions made in 1997. The remaining
increase in operating expenses reflects Kroll-O'Gara's efforts to expand into
new markets, both in the Security Products and Service Group and the
Investigations and Intelligence Group. Excluding expenses related to the Kroll
Holdings merger, operating expenses as a percent of net sales stayed essentially
consistent between the periods at 23.6% in 1997 and 23.1% in 1996.
    
 
   
     Prior to the Kroll Holdings merger, Kroll Holdings was involved in merger
discussions with Choicepoint, Inc., then a subsidiary of Equifax, Inc.
Choicepoint and Kroll Holdings did not reach a final agreement, and as a result
did not consummate the transaction. Approximately $0.5 million of professional
fees associated with the Choicepoint transaction are included in Kroll-O'Gara's
operating expenses in 1997.
    
 
   
     INTEREST EXPENSE. Interest expense for 1997 increased $1.7 million, or 57%,
to $4.7 million, compared to $3.0 million in 1996. The increase in 1997 was the
result of increased borrowing to finance Kroll-O'Gara's 1997 acquisitions.
Kroll-O'Gara retired a portion of its debt with proceeds from the May 1998
offering.
    
 
   
     OTHER, NET. Other income (expense), net decreased from $0.3 million of
income in 1996 to ($0.4) million in expense in 1997. The change was primarily
due to an increase in foreign currency translation losses recognized in 1997.
    
 
   
     PROVISION FOR INCOME TAXES. The provision for income taxes was increased
from $0.4 million in 1996 to $3.3 million in 1997. Kroll-O'Gara's O'Gara-Hess &
Eisenhardt Armoring Company ("OHE") subsidiary did not book a tax provision for
the first ten months of 1996 due to OHE's S Corporation status, which was
terminated on October 28, 1996 in conjunction with a reorganization in advance
of Kroll-O'Gara's initial public offering.
    
 
   
     Kroll-O'Gara incurred taxes at the effective rate of 53% in 1997 due to the
non-deductibility of expenses related to the Kroll Holdings merger in the period
and the impact of foreign losses for which no benefit can be provided.
    
 
   
     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs related to the reengineering of some of its
information systems. The capitalized amount, approximately $0.6 million before
tax, was expensed in 1997 in accordance with Emerging Issues Task Force No.
97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract
that Combines Business Process Reengineering and Information Technology
Transformation." The amount expensed is shown net of applicable tax benefit of
$0.2 million.
    
 
   
     DISCONTINUED OPERATIONS. In connection with the acquisition of National
Psychopharmacology Laboratory, Inc. Kroll-O'Gara's Laboratory Specialists
subsidiary attempted to sell the clinical testing and analysis lines of business
of National Psychopharmacology without success. In the fourth quarter of 1996,
Laboratory Specialists discontinued these operations resulting in a loss from
the discontinued operation of $0.5 million and a loss on the disposal of $0.8
million, after giving effect to tax benefits of $0.3 million and $0.5 million,
respectively.
    
 
   
     In 1997, the loss from operations related to the discontinued Voice and
Data Communications Group was $0.3 million compared to income from operations of
this business in 1996 of $0.3 million. The $0.6 million decrease was directly
related to an increase in interest and amortization expense as a result of the
acquisition
    
 
                                       28
<PAGE>   30
 
   
of Next Destination in February 1997. No tax provision was provided for in 1996
due to the S corporation status of OHE described above. Due to the uncertainty
surrounding the future realizability of the tax benefit associated with the
Voice and Data Communications Group's loss in 1997, management concluded that a
valuation allowance for the entire tax benefit was required.
    
 
   
     NET INCOME. Net income decreased $3.2 million, or 61%, from $5.3 million in
1996 to $2.0 million in 1997. This decrease was due primarily to increased
operating expenses of $8.3 million, $7.2 million in merger expenses and an
increased provision for income taxes of $2.9 million, offset in part by
increased gross profit of $17.7 million, as discussed above.
    
 
   
LIQUIDITY AND CAPITAL RESOURCES
    
 
   
     General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements and net proceeds from public
offerings to supplement cash provided by operations, excluding non-cash charges
such as depreciation and amortization.
    
 
   
     Credit Facility. Kroll-O'Gara's credit agreement with KeyBank National
Association, entered into in May 1997, was amended effective October 30, 1998.
The amendment to the credit agreement allows Kroll-O'Gara to maintain the same
capacity on its revolving credit facility ($7.0 million) and its letter of
credit facility (approximately $7.7 million), while reducing the applicable
interest rates and revising the covenant restrictions. The interest rate on the
revolving credit facility will vary based on financial ratios between prime less
1.75% to prime less 0.25%, or, at Kroll-O'Gara's option, LIBOR plus 0.75% to
LIBOR plus 1.50%. The covenants contained in the original credit agreement were
no longer appropriate given Kroll-O'Gara's capital structure following the May
1998 offering. The covenants were adjusted to reflect the changes experienced by
Kroll-O'Gara and the changes anticipated in future periods.
    
 
   
     As of March 31, 1999, there were no borrowings under the revolving credit
agreement. The remaining proceeds from the May 1998 offering along with the
unused capacity on the revolving line of credit will be sufficient to fund the
working capital needs of Kroll-O'Gara for the next twelve months. In addition,
Kroll-O'Gara expects to have proceeds available from the sale of its Voice and
Data Communications Group.
    
 
   
     Kroll-O'Gara intends to pursue its strategy of acquiring risk mitigation
companies in an effort to consolidate its position in the industry. To that end,
Kroll-O'Gara will continue to review additional sources of capital, which may
include additional bank borrowings or equity offerings, as they become
necessary.
    
 
   
     Cash flows from operating activities. Operating activities used $10.5
million in net cash for the year ended December 31, 1998 in comparison with
$11.2 million in net cash provided by operating activities in 1997. Since the
inception of Kroll-O'Gara's contract with the U.S. Government to armor the HMMWV
through the time of the merger with Kroll Holdings and the acquisitions
completed in 1997 and the first quarter of 1998, Kroll-O'Gara was designated a
Small Business according to U.S. Government procurement regulations. Thereafter,
Kroll-O'Gara's designation was changed to Large Business for government
procurement purposes.
    
 
   
     The change in designation affects progress payments made by the government
to Kroll-O'Gara over the course of a contract, and Kroll-O'Gara's cash flow, in
two ways. First, the progress payments are determined using a smaller percentage
of total cost committed than before. Second, Kroll-O'Gara is reimbursed for
vendor invoices paid instead of expenses incurred. Although these changes will
not affect the total amount ultimately collected, they defer some of the amounts
previously included as part of a progress payment until the vehicles are
delivered.
    
 
   
     The majority of these adjustments to the way Kroll-O'Gara is reimbursed for
its military business were applied to the HMMWV contracts in 1998. 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.
    
 
   
     Kroll-O'Gara will continue to absorb the effect of the change in
procurement designation throughout the life of the HMMWV contract. Although
there will be no effect on Cash Flows from Operating Activities on a
    
 
                                       29
<PAGE>   31
 
   
cumulative basis, the change in payment terms will impact accounts receivable
and Cost and Estimated Earnings in Excess of Billings on Uncompleted Contracts
from period-to-period.
    
 
   
     Also, Kroll-O'Gara's level of accounts receivable was higher in 1998
compared to 1997 due to the increased level of business activity experienced in
1998. Additionally, due to provisions of the purchase agreement, Kroll-O'Gara
did not record any accounts receivable on the opening balance sheet in
connection with the acquisition of Lindquist Avey. As of December 31, 1998,
Lindquist Avey had approximately $2.8 million recorded in accounts receivable,
helping to explain the significant amount of cash used by changes in accounts
receivable.
    
 
   
     Cash flows from investing activities. Historically, Kroll-O'Gara has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $7.0 million for the year ended December 31, 1998, and $5.5
million for the same period in 1997. Additions to databases totaled $4.2 million
and $3.9 million for the year ended December 31, 1998 and 1997, respectively.
    
 
   
     The levels of capital expenditures and additions to databases are in excess
of the amounts permitted by the credit agreement between Kroll-O'Gara and
KeyBank, due mainly to Kroll-O'Gara's mergers and acquisitions in 1998. KeyBank
has provided Kroll-O'Gara a waiver from the requirements of these covenants.
    
 
   
     In addition to capital expenditures, 1997 investing activities included the
acquisitions of Labbe, IMEA and International Training, which required a total
cash outlay of $10.7 million, net of cash acquired. In 1998, the acquisitions of
Lindquist Avey, InPhoto, Holder and Fact Finders as well as the assets of
Protec, Pathology Laboratories, Accu-Path, Harrison Laboratories and TOXWORX
Laboratories required cash of approximately $18.5 million, net of cash acquired.
Management anticipates that, as Kroll-O'Gara continues to pursue strategic
acquisitions, additional cash outlays will be required.
    
 
   
     Cash flows from financing activities. Net cash provided by financing
activities was $58.3 million and $17.9 million for the year ended December 31,
1998 and 1997, respectively. Cash from financing activities in 1998 includes
approximately $60.4 million in net proceeds from the May 1998 offering. In
addition, Laboratory Specialists completed a private offering of its stock in
June 1998 with proceeds of approximately $2.3 million. Approximately $14.8
million of the proceeds from these transactions was used to repay indebtedness
of Kroll-O'Gara. The amounts not used to repay debt were invested in short-term
instruments and are being used as necessary for acquisitions, working capital
and other general corporate purposes.
    
 
   
     Cash flows from Financing Activities also include convertible preferred
stock issued by Securify in 1998, which was converted to Kroll-O'Gara common
stock in Kroll-O'Gara's acquisition of Securify. The net proceeds to Securify
associated with these shares were approximately $5.5 million.
    
 
   
     Net cash provided by financing activities in 1997 largely reflects
borrowing under the Senior Notes that was used to finance certain acquisitions
and working capital requirements.
    
 
   
     Net cash used in discontinued operations was $5.3 million in 1997 compared
with $1.8 million in 1998. Cash used in 1997 reflects increased working capital
investments due to the acquisition of Next Destination in February 1997. Cash
was used in 1998 primarily to fund the Voice and Data Communications Group's net
loss.
    
 
   
     Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in
those 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 Kroll-O'Gara's risk from translation
gains and losses.
    
 
   
     Kroll-O'Gara utilizes derivative financial instruments, in the form of
forward contracts, to hedge some of its exposure to foreign currency rate
fluctuations. At December 31, 1998 eight such contracts, maturing between
January 1999 and December 2000, were outstanding in connection with intercompany
demand notes with Labbe and Lindquist Avey. These contracts are intended to
hedge Kroll-O'Gara'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
    
 
                                       30
<PAGE>   32
 
$18.3 million and $0.9 million, respectively. 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.
Kroll-O'Gara does not hold or issue derivative financial instruments for trading
purposes.
 
     Year 2000 Issues. Kroll-O'Gara has initiated a program to prepare for the
year 2000. During 1997, Kroll-O'Gara began the process of replacing the
enterprise systems at its two largest subsidiaries, both for the purpose of
making the systems Year 2000 compliant and to enhance the information systems
capabilities of these subsidiaries. The new systems are scheduled to be
operational by the end of the third quarter of 1999.
 
   
     Additionally, Kroll-O'Gara is implementing a plan to prepare its remaining
systems for Year 2000. Kroll-O'Gara has completed an inventory of all its
computer software and embedded technology and has prepared a master database of
all technology potentially impacted by the Year 2000 issue. In conjunction with
outside consultants, Kroll-O'Gara now is in the process of evaluating the
findings from its inventory and formulating plans of action. Kroll-O'Gara
anticipates that it will have taken all the necessary steps to ensure no
interruption of services as a result of the Year 2000 issue by the third quarter
of 1999.
    
 
   
     Total Year 2000 compliance cost is estimated to be approximately $4.0
million, of which approximately $3.6 million relates to the new enterprise
systems and will be capitalized. The remaining approximately $0.4 million will
be charged to expense over several reporting periods in accordance with
established accounting pronouncements, and is not expected to be material to
Kroll-O'Gara's results of operations or cash flows. Total costs relating to this
plan paid as of December 31, 1998 were $0.2 million. There can be no assurance
that the final costs of the Year 2000 program will not exceed current management
estimates.
    
 
   
     Many of the operations of Kroll-O'Gara's largest revenue groups are manual.
The manufacture of bullet resistant vehicles and some of the investigation and
intelligence services provided by Kroll-O'Gara are not largely dependent on
embedded technology. If, however, the databases of public records relied upon by
the Investigations and Intelligence Group are not available due to lack of
compliance with Year 2000, manual searches would be required, which would
increase the cost and length of time as well as negatively effect the quality of
investigations. Kroll-O'Gara is actively engaged in evaluating and confirming
compliance in this area. To the extent that third party providers upon which
Kroll-O'Gara is dependent are not Year 2000 compliant or are likely not to be
compliant, contingency plans will be prepared if possible, although there
currently is no timetable in place for this action. However, viable alternatives
may not be available.
    
 
   
     Kroll-O'Gara believes that its internal computer software and systems will
not experience significant disruption in connection with Year 2000. However,
there can be no assurance that third-party failures to resolve the Year 2000
issue will not have an adverse effect on Kroll-O'Gara. In particular, if
Kroll-O'Gara's internal computer software and systems or those of one or more
third parties experience any significant disruption in connection with the Year
2000 issue, the disruption could affect Kroll-O'Gara's ability to conduct
business and may have a material adverse effect on operations and results.
    
 
     Quarterly fluctuations. Kroll-O'Gara'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. Kroll-O'Gara 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. This annual report contains statements which
Kroll-O'Gara believes are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are made
particularly in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, but also appear elsewhere in this document.
Forward-looking statements can be identified by the use of language such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Kroll-O'Gara's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and
    
 
                                       31
<PAGE>   33
 
   
involve risks and uncertainties that could significantly affect expected
results. For example, operating results may be affected by a number of 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. Particular risks are discussed in more
detail in "Business -- Risk Factors."
    
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
   
     See "Business -- Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Foreign operations." In
addition, the information set forth in Note 13 "Fair Value of Financial
Instruments" to Kroll-O'Gara's 1998 Consolidated Financial Statements is
incorporated herein by reference.
    
 
                                       32
<PAGE>   34
 
   
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
 
   
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
    
 
   
     To The Kroll-O'Gara Company:
    
 
   
     We have audited the accompanying consolidated balance sheets of THE
KROLL-O'GARA COMPANY (Note 1) and subsidiaries as of December 31, 1997 and 1998
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1996 financial statements of Kroll Holdings,
Inc., a company acquired during 1997 in a transaction accounted for as a pooling
of interests, as discussed in Note 1. Such statements are included in the
consolidated financial statements of The Kroll-O'Gara Company and reflect total
revenues of 45 percent of the consolidated totals. These statements were audited
by other auditors whose report has been furnished to us and our opinion, insofar
as it relates to amounts included for Kroll Holdings, Inc., is based solely upon
the report of the other auditors.
    
 
   
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
    
 
   
     In our opinion based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Kroll-O'Gara Company and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
    
 
   
     As explained in Note 2(s) to the consolidated financial statements,
effective in the fourth quarter of 1997, the Company changed its method of
accounting for costs incurred in connection with business process reengineering
activities.
    
 
   
                                        Arthur Andersen LLP
    
 
   
Cincinnati, Ohio
    
   
  April 28, 1999
    
 
                                       33
<PAGE>   35
 
                          INDEPENDENT AUDITORS' REPORT
 
The Stockholders of
Kroll Holdings, Inc.
 
     We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows (not presented separately herein) of Kroll
Holdings, Inc. (the "Company") and subsidiaries for the year ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of the Company's and subsidiaries' operations
and their cash flows for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
 
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 13, 1997
(August 8, 1997 as to Notes 7 and 17)
 
                                       34
<PAGE>   36
 
   
                            THE KROLL-O'GARA COMPANY
    
 
   
                          CONSOLIDATED BALANCE SHEETS
    
   
                        AS OF DECEMBER 31, 1997 AND 1998
    
 
   
<TABLE>
<CAPTION>
                                                                  1997            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS (NOTE 7)
CURRENT ASSETS:
     Cash and cash equivalents..............................  $  9,444,916    $ 12,716,709
     Marketable securities..................................        22,969      13,285,322
     Trade accounts receivable, net of allowance for
       doubtful accounts of approximately $2,984,789 and
       $2,375,142 in 1997 and 1998, respectively (Notes 2
       and 4)...............................................    33,044,536      47,547,106
     Unbilled revenues (Note 2).............................     3,081,481       7,766,015
     Related party receivables (Note 6).....................       920,067       2,720,464
     Costs and estimated earnings in excess of billings on
       uncompleted contracts (Note 4).......................    11,897,801      26,408,097
     Inventories (Note 4)...................................    16,665,644      18,607,062
     Prepaid expenses and other.............................     5,313,942       7,683,774
     Deferred tax asset (Note 5)............................       572,697              --
     Net current assets of discontinued operations (Note
       17)..................................................     6,026,768       6,836,920
                                                              ------------    ------------
          Total current assets..............................    86,990,821     143,571,469
                                                              ------------    ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
     Land...................................................     1,827,507       1,856,003
     Buildings and improvements.............................     8,081,013       8,271,967
     Leasehold improvements.................................     5,212,513       6,276,054
     Furniture and fixtures.................................     4,680,699       5,944,300
     Machinery and equipment................................    13,500,247      18,303,405
     Construction-in-progress...............................     1,037,528       2,860,011
                                                              ------------    ------------
                                                                34,339,507      43,511,740
     Less- accumulated depreciation.........................   (16,904,830)    (19,686,536)
                                                              ------------    ------------
                                                                17,434,677      23,825,204
                                                              ------------    ------------
DATABASES, net of accumulated amortization of $19,505,625
  and $22,788,857 in 1997 and 1998, respectively (Note 2)...     8,335,211       9,238,903
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
  ASSETS, net of accumulated amortization of $1,457,021 and
  $3,750,180 in 1997 and 1998, respectively (Notes 2 and
  3)........................................................    23,426,486      57,943,319
OTHER ASSETS:
     Other assets (Note 4)..................................     2,976,549       4,867,958
     Net non-current assets of discontinued operations (Note
       17)..................................................     4,704,972       4,274,853
                                                              ------------    ------------
                                                                39,443,218      76,325,033
                                                              ------------    ------------
                                                              $143,868,716    $243,721,706
                                                              ============    ============
</TABLE>
    
 
   
          The accompanying notes to consolidated financial statements
    
   
           are an integral part of these consolidated balance sheets.
    
                                       35
<PAGE>   37
 
   
                            THE KROLL-O'GARA COMPANY
    
 
   
                          CONSOLIDATED BALANCE SHEETS
    
   
                        AS OF DECEMBER 31, 1997 AND 1998
    
 
   
<TABLE>
<CAPTION>
                                                                  1997            1998
                                                              ------------    ------------
<S>                                                           <C>             <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
     Revolving lines of credit (Note 7).....................  $    559,112    $         --
     Current portion of long-term debt (Note 8).............     4,038,080       1,965,752
     Trade accounts payable.................................    27,321,823      32,121,642
     Related party payables (Note 6)........................       998,152         341,358
     Billings in excess of costs and estimated earnings on
       uncompleted contracts................................       250,870         182,656
     Accrued liabilities....................................    14,132,579      19,963,608
     Income taxes currently payable.........................       845,753         760,340
     Deferred income taxes (Note 5).........................            --         895,108
     Customer deposits......................................     3,566,097       3,970,607
                                                              ------------    ------------
          Total current liabilities.........................    51,712,466      60,201,071
                                                              ------------    ------------
OTHER LONG-TERM LIABILITIES.................................     1,532,730       1,542,588
DEFERRED INCOME TAXES (Note 5)..............................     2,514,606       1,625,363
LONG-TERM DEBT, net of current portion (Note 8).............    49,641,484      39,257,245
                                                              ------------    ------------
          Total liabilities.................................   105,401,286     102,626,267
                                                              ------------    ------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
     Preferred stock, $.01 par value, 1,000,000 shares
       authorized; none issued..............................            --              --
     Common stock, $.01 par value, 50,000,000 shares
       authorized, 14,795,244 and 20,685,629 shares issued
       and outstanding in 1997 and 1998, respectively.......       147,952         206,856
     Additional paid-in-capital.............................    58,912,209     149,993,769
     Retained deficit.......................................   (20,208,821)     (7,119,915)
     Deferred compensation..................................            --      (1,113,936)
     Accumulated other comprehensive income (loss)..........      (383,910)       (871,335)
                                                              ------------    ------------
          Total shareholders' equity........................    38,467,430     141,095,439
                                                              ------------    ------------
                                                              $143,868,716    $243,721,706
                                                              ============    ============
</TABLE>
    
 
   
          The accompanying notes to consolidated financial statements
    
   
           are an integral part of these consolidated balance sheets.
    
                                       36
<PAGE>   38
 
   
                            THE KROLL-O'GARA COMPANY
    
 
   
                     CONSOLIDATED STATEMENTS OF OPERATIONS
    
   
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
    
 
   
<TABLE>
<CAPTION>
                                                                  1996           1997           1998
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
NET SALES................................................     $157,148,211   $188,665,197   $247,192,113
COST OF SALES............................................      111,639,843    125,453,193    159,186,573
                                                              ------------   ------------   ------------
         Gross profit....................................       45,508,368     63,212,004     88,005,540
OPERATING EXPENSES:
  Selling and marketing..................................        9,850,385     12,872,804     19,097,474
  General and administrative.............................       26,287,618     31,716,665     38,803,521
  Asset impairment (Note 2(i))...........................          124,531             --
  Merger related costs...................................               --      7,204,926      5,339,358
                                                              ------------   ------------   ------------
         Operating expenses..............................       36,262,534     51,794,395     63,240,353
                                                              ------------   ------------   ------------
         Operating income................................        9,245,834     11,417,609     24,765,187
OTHER INCOME (EXPENSE):
  Interest expense.......................................       (3,002,496)    (4,725,540)    (4,193,823)
  Interest income........................................            6,167         79,973      1,181,579
  Other, net.............................................          326,078       (405,101)       127,898
                                                              ------------   ------------   ------------
         Income from continuing operations before
           minority interest, provision for income taxes,
           extraordinary item and cumulative effect of
           change in accounting principle................        6,575,583      6,366,941     21,880,841
  Minority interest......................................               --       (156,223)            --
                                                              ------------   ------------   ------------
         Income from continuing operations before
           provision for income taxes, extraordinary item
           and cumulative effect of change in accounting
           principle.....................................        6,575,583      6,210,718     21,880,841
  Provision for income taxes.............................          365,547      3,304,993      7,466,464
                                                              ------------   ------------   ------------
         Income from continuing operations before
           extraordinary item and cumulative effect of
           change in accounting principle................        6,210,036      2,905,725     14,414,377
  Discontinued operations (Note 2(h) and 17(b)):
         Loss from operations of discontinued clinical
           business, net of tax benefit of $257,904......         (500,636)            --             --
         Loss on disposal of clinical business, net of
           tax benefit of $489,420.......................         (773,580)            --             --
         Income (loss) from operations of discontinued
           voice and data communications group, net (Note
           17(b))........................................          332,595       (305,207)    (1,325,471)
                                                              ------------   ------------   ------------
         Income before extraordinary item and cumulative
           effect of change in accounting principle......        5,268,415      2,600,518     13,088,906
  Extraordinary loss, net of applicable tax benefit of
    $129,250 (Note 7)....................................               --       (193,875)            --
                                                              ------------   ------------   ------------
         Income before cumulative effect of change in
           accounting principle..........................        5,268,415      2,406,643     13,088,906
  Cumulative effect of change in accounting principle,
    net of applicable tax benefit of $240,000 (Note
    2(s))................................................               --       (360,000)            --
                                                              ------------   ------------   ------------
         Net income......................................     $  5,268,415   $  2,046,643   $ 13,088,906
                                                              ============   ============   ============
  Earnings per share (Note 2(p)):
         Basic...........................................     $       0.45   $       0.15   $       0.71
                                                              ============   ============   ============
         Diluted.........................................     $       0.42   $       0.14   $       0.69
                                                              ============   ============   ============
  Weighted average shares outstanding (Note 2(p)):
         Basic...........................................       11,607,329     14,006,638     18,438,919
                                                              ============   ============   ============
         Diluted.........................................       12,160,974     14,799,322     18,964,734
                                                              ============   ============   ============
</TABLE>
    
 
   
          The accompanying notes to consolidated financial statements
    
   
             are an integral part of these consolidated statements.
    
 
                                       37
<PAGE>   39
 
   
                            THE KROLL-O'GARA COMPANY
    
   
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
    
   
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
    
   
<TABLE>
<CAPTION>
 
                                                                              ADDITIONAL
                                                  COMPREHENSIVE    COMMON      PAID-IN        RETAINED       DEFERRED
                                       SHARES        INCOME        STOCK       CAPITAL        DEFICIT      COMPENSATION
                                     ----------   -------------   --------   ------------   ------------   ------------
<S>                                  <C>          <C>             <C>        <C>            <C>            <C>
BALANCE, December 31, 1995, as
  previously reported..............  10,020,277                   $ 70,534   $ 22,040,722   $(17,652,332)  $        --
Adjustment for pooling of interests
  (Note 3).........................     862,846                      8,628      5,374,337      1,430,709            --
                                     ----------                   --------   ------------   ------------   -----------
BALANCE, December 31, 1995, as
  restated.........................  10,883,123                     79,162     27,415,059    (16,221,623)           --
Distributions to shareholders,
  prior to the offering............          --                         --             --       (230,000)           --
Sale of common stock between
  shareholders prior to the
  offering.........................          --                         --         39,780             --            --
Issuances of stock under employee
  benefit plans (Note 11)..........     528,308                      4,073        911,813             --            --
Initial public offering of common
  stock, net of issuance costs of
  approximately $3,550,000 (Note
  1)...............................   2,048,000                     51,359     14,820,458             --            --
Distribution of previously taxed S
  Corp earnings to S Corp
  shareholders (Note 1)............          --                         --             --     (9,000,000)           --
Forgiveness of affiliate obligation
  (Note 6).........................          --                         --             --        122,000            --
Comprehensive income:
    Net income.....................          --    $ 5,268,415          --             --      5,268,415            --
    Other comprehensive income, net
      of tax:
      Foreign currency translation
        adjustment, net of $237,000
        tax benefit................          --       (355,534)         --             --             --            --
      Unrealized appreciation of
        marketable securities, net
        of $9,000 tax provision....          --         14,167          --             --             --            --
      Other comprehensive income
        (loss).....................          --       (341,367)         --             --             --            --
      Comprehensive income.........          --    $ 4,927,048          --             --             --            --
                                     ----------    -----------    --------   ------------   ------------   -----------
BALANCE, December 31, 1996.........  13,459,431                    134,594     43,187,110    (20,061,208)           --
Issuances of stock under employee
  benefit plans, including related
  tax benefit (Note 11)............     749,757                      7,497      6,296,786             --            --
Issuance of stock in conjunction
  with the acquisition of
  businesses and minority interest
  (Note 3).........................     823,371                      8,234      9,695,009             --            --
Issuance of stock in conjunction
  with the settlement of a note
  payable..........................      21,721                        217        232,282             --            --
Purchase and retirement of common
  stock (Note 11 (c))..............    (259,036)                    (2,590)      (498,978)    (2,194,256)           --
Comprehensive income:
    Net income.....................          --    $ 2,046,643          --             --      2,046,643            --
    Other comprehensive income, net
      of tax:
      Foreign currency translation
        adjustment, net of $157,000
        tax benefit................          --       (236,393)         --             --             --            --
      Unrealized depreciation of
        marketable securities, net
        of $2,400 tax benefit......          --         (3,698)         --             --             --            --
      Other comprehensive income
        (loss).....................          --       (240,091)         --             --             --            --
 
<CAPTION>
                                      ACCUMULATED
                                         OTHER
                                     COMPREHENSIVE
                                     INCOME (LOSS)      TOTAL
                                     -------------   ------------
<S>                                  <C>             <C>
BALANCE, December 31, 1995, as
  previously reported..............    $ 197,548     $  4,656,472
Adjustment for pooling of interests
  (Note 3).........................           --        6,813,674
                                       ---------     ------------
BALANCE, December 31, 1995, as
  restated.........................      197,548       11,470,146
Distributions to shareholders,
  prior to the offering............           --         (230,000)
Sale of common stock between
  shareholders prior to the
  offering.........................           --           39,780
Issuances of stock under employee
  benefit plans (Note 11)..........           --          915,886
Initial public offering of common
  stock, net of issuance costs of
  approximately $3,550,000 (Note
  1)...............................           --       14,871,817
Distribution of previously taxed S
  Corp earnings to S Corp
  shareholders (Note 1)............           --       (9,000,000)
Forgiveness of affiliate obligation
  (Note 6).........................           --          122,000
Comprehensive income:
    Net income.....................           --        5,268,415
    Other comprehensive income, net
      of tax:
      Foreign currency translation
        adjustment, net of $237,000
        tax benefit................           --               --
      Unrealized appreciation of
        marketable securities, net
        of $9,000 tax provision....           --               --
      Other comprehensive income
        (loss).....................     (341,367)        (341,367)
      Comprehensive income.........           --               --
                                       ---------     ------------
BALANCE, December 31, 1996.........     (143,819)      23,116,677
Issuances of stock under employee
  benefit plans, including related
  tax benefit (Note 11)............           --        6,304,283
Issuance of stock in conjunction
  with the acquisition of
  businesses and minority interest
  (Note 3).........................           --        9,703,243
Issuance of stock in conjunction
  with the settlement of a note
  payable..........................           --          232,499
Purchase and retirement of common
  stock (Note 11 (c))..............           --       (2,695,824)
Comprehensive income:
    Net income.....................           --        2,046,643
    Other comprehensive income, net
      of tax:
      Foreign currency translation
        adjustment, net of $157,000
        tax benefit................           --               --
      Unrealized depreciation of
        marketable securities, net
        of $2,400 tax benefit......           --               --
      Other comprehensive income
        (loss).....................     (240,091)        (240,091)
</TABLE>
    
 
                                       38
<PAGE>   40
   
<TABLE>
<CAPTION>
 
                                                                              ADDITIONAL
                                                  COMPREHENSIVE    COMMON      PAID-IN        RETAINED       DEFERRED
                                       SHARES        INCOME        STOCK       CAPITAL        DEFICIT      COMPENSATION
                                     ----------   -------------   --------   ------------   ------------   ------------
<S>                                  <C>          <C>             <C>        <C>            <C>            <C>
      Comprehensive income.........          --    $ 1,806,552          --             --             --            --
                                     ----------    -----------    --------   ------------   ------------   -----------
BALANCE, December 31, 1997.........  14,795,244                    147,952     58,912,209    (20,208,821)           --
Public and private offerings of
  common stock, net of issuance
  costs of approximately
  $1,431,000.......................   4,716,757                     47,168     68,289,755             --            --
Net issuances of stock under
  employee benefit plans, including
  related tax benefit (Note 11)....     428,625                      4,286      4,473,859             --            --
Issuance of stock in conjunction
  with the acquisition of
  businesses (Note 3)..............     745,003                      7,450     17,125,850             --            --
Deferred compensation related to
  stock options....................          --                         --      1,192,096             --    (1,113,936)
Comprehensive income:
      Net income...................          --    $13,088,906          --             --     13,088,906            --
      Other comprehensive income,
        net of tax:
        Foreign currency
          translation adjustment,
          net of $764,000 tax
          benefit..................          --       (476,956)         --             --             --            --
        Reclassification adjustment
          for gain on securities
          included in net income,
          net of $7,000 tax
          benefit..................          --        (10,469)         --             --             --            --
        Other comprehensive income
          (loss)...................          --       (487,425)         --             --             --            --
        Comprehensive income.......          --    $12,601,481          --             --             --            --
                                     ----------    ===========    --------   ------------   ------------   -----------
BALANCE, December 31, 1998.........  20,685,629                   $206,856   $149,993,769   $ (7,119,915)  $(1,113,936)
                                     ==========                   ========   ============   ============   ===========
 
<CAPTION>
                                      ACCUMULATED
                                         OTHER
                                     COMPREHENSIVE
                                     INCOME (LOSS)      TOTAL
                                     -------------   ------------
<S>                                  <C>             <C>
      Comprehensive income.........           --               --
                                       ---------     ------------
BALANCE, December 31, 1997.........     (383,910)      38,467,430
Public and private offerings of
  common stock, net of issuance
  costs of approximately
  $1,431,000.......................           --       68,336,923
Net issuances of stock under
  employee benefit plans, including
  related tax benefit (Note 11)....           --        4,478,145
Issuance of stock in conjunction
  with the acquisition of
  businesses (Note 3)..............           --       17,133,300
Deferred compensation related to
  stock options....................           --           78,160
Comprehensive income:
      Net income...................           --       13,088,906
      Other comprehensive income,
        net of tax:
        Foreign currency
          translation adjustment,
          net of $764,000 tax
          benefit..................           --               --
        Reclassification adjustment
          for gain on securities
          included in net income,
          net of $7,000 tax
          benefit..................           --               --
        Other comprehensive income
          (loss)...................     (487,425)        (487,425)
        Comprehensive income.......           --               --
                                       ---------     ------------
BALANCE, December 31, 1998.........    $(871,335)    $141,095,439
                                       =========     ============
</TABLE>
    
 
   
          The accompanying notes to consolidated financial statements
    
   
             are an integral part of these consolidated statements.
    
 
                                       39
<PAGE>   41
 
   
                            THE KROLL-O'GARA COMPANY
    
 
   
                CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
    
   
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
    
 
   
<TABLE>
<CAPTION>
                                                                 1996          1997          1998
                                                              ----------   ------------   -----------
<S>                                                           <C>          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $5,268,415   $  2,046,643   $13,088,906
  Adjustments to reconcile net income to net cash provided
    by (used in) continuing operations-
    Loss (income) from discontinued operations..............    (332,595)       305,207     1,325,471
    Depreciation and amortization...........................   5,248,788      6,285,168     8,346,384
    Bad debt expense........................................   8,508,317      2,034,151     1,199,355
    Shareholder stock compensation..........................     930,846      1,356,280            --
    Loss on write-off of notes receivable...................          --         35,434            --
    Share in net income of joint ventures...................     (19,224)      (121,650)           --
    Gain on sale of marketable securities...................    (108,646)       (14,503)      (10,469)
    Asset impairment........................................     174,531             --            --
    Disposal of clinical business...........................   1,263,000             --            --
    Noncash compensation expense............................          --             --        78,160
  Change in assets and liabilities, net of effects of
    acquisitions and dispositions-
    Receivables-trade and unbilled..........................  (6,094,993)    (5,916,021)  (11,667,459)
    Costs and estimated earnings in excess of billings on
      uncompleted contracts.................................  (7,237,435)     3,290,709   (14,510,296)
    Inventories, prepaid expenses and other assets..........  (2,014,575)    (5,960,074)   (4,701,950)
    Accounts payable and income taxes currently payable.....   1,393,907      8,432,316     2,618,406
    Billings in excess of costs and estimated earnings on
      uncompleted contracts.................................    (653,807)      (801,365)      (68,214)
    Amounts due to/from related parties.....................    (472,124)       412,999    (2,457,191)
    Deferred taxes..........................................  (1,150,316)      (156,892)     (725,135)
    Accrued liabilities, long-term liabilities and customer
      deposits..............................................   4,551,759        (14,923)   (3,037,603)
                                                              ----------   ------------   -----------
         Net cash provided by (used in) continuing
           operations.......................................   9,255,848     11,213,479   (10,521,635)
                                                              ----------   ------------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment, net...........  (3,473,979)    (5,475,361)   (6,980,754)
  Additions to databases....................................  (3,250,360)    (3,856,914)   (4,186,924)
  Decrease in notes receivable -- shareholder...............     233,253             --            --
  Acquisitions, net of cash acquired (Note 3)...............  (2,139,123)   (10,710,128)  (18,462,000)
  Sale (purchases) of marketable securities, net............     200,313         35,424   (13,262,353)
  Other.....................................................     (66,711)       266,004            --
                                                              ----------   ------------   -----------
         Net cash used in investing activities of continuing
           operations.......................................  (8,496,607)   (19,740,975)  (42,892,031)
                                                              ----------   ------------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loan financing fees.......................................          --       (723,727)           --
  Net repayments under revolving lines of credit............    (252,818)    (9,376,835)     (559,112)
  Proceeds from debt........................................     179,569     44,902,987       284,877
  Payments of long-term debt................................  (3,245,524)   (10,042,503)  (13,662,425)
  Proceeds from notes payable -- shareholder................   2,000,000        500,000            --
  Repayment of notes payable -- shareholder.................    (803,745)    (7,238,766)           --
  Net proceeds from issuances of common stock...............  14,871,817             --    68,336,923
  Purchase and retirement of stock..........................          --     (2,695,824)           --
  Foreign currency translation..............................     (46,185)      (189,497)     (548,602)
  Distributions to shareholders, including preferred
    dividends...............................................  (9,230,000)            --            --
  Proceeds from exercise of stock options and warrants......         445      2,776,466     4,478,145
                                                              ----------   ------------   -----------
         Net cash provided by financing activities of
           continuing operations............................   3,473,559     17,912,301    58,329,806
                                                              ----------   ------------   -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................   4,232,800      9,384,805     4,916,140
Effects of foreign currency exchange rates on cash and cash
  equivalents...............................................      34,032        (75,931)      106,049
Net cash used in discontinued operations....................  (3,817,805)    (5,276,535)   (1,750,396)
                                                              ----------   ------------   -----------
CASH AND CASH EQUIVALENTS, beginning of year................   4,963,550      5,412,577     9,444,916
                                                              ----------   ------------   -----------
CASH AND CASH EQUIVALENTS, end of year......................  $5,412,577   $  9,444,916   $12,716,709
                                                              ==========   ============   ===========
</TABLE>
    
 
   
          The accompanying notes to consolidated financial statements
    
   
             are an integral part of these consolidated statements.
    
                                       40
<PAGE>   42
 
   
                            THE KROLL-O'GARA COMPANY
    
 
   
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
   
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
    
 
   
(1) NATURE OF OPERATIONS AND 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 and security
services. The Investigations and Intelligence Group offers business intelligence
and investigation services. The Information Security Group offers information
and computer security services, including network and system security review and
repair. See Note 17(b) for a discussion of the discontinuance of the Voice and
Data Communications Group.
    
 
   
     The Company was originally formed in 1996 for the purposes of becoming a
holding company, effecting a reorganization and a combination of certain
affiliated entities and carrying out an initial public offering of common stock.
On October 28, 1996, various O'Gara entities (primarily O'Gara-Hess & Eisenhardt
Armoring Company (OHE)) and their related shareholders (primarily one
shareholder who owned or controlled approximately 86% to 88% of each entity)
entered into the reorganization plan. Accordingly, the accompanying consolidated
financial statements present, as a combination of entities under common control
as if using the pooling method of accounting, the financial position and related
results of operations of the O'Gara entities on a consolidated basis for all
periods presented.
    
 
   
     In December 1997, a wholly owned subsidiary of The O'Gara Company (O'Gara)
was merged 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.
The consolidated financial statements include the historical consolidated
financial statements of the Company and the financial position, results of
operations and cash flows of entities which were merged with the Company in
connection with pooling of interests business combinations (See Note 3).
    
 
   
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
 
   
     (a) Consolidation -- The consolidated financial statements include the
accounts of all majority-owned subsidiaries. All material intercompany accounts
and transactions are eliminated. Investments in 20% to 50% owned entities are
accounted for on the equity method and investments in less than 20% owned
entities are accounted for on the cost method. Affiliated entities are not
included in the accompanying consolidated financial statements, and include
entities that are directly or indirectly owned by current shareholders or former
shareholders.
    
 
   
     (b) Revenue Recognition -- Revenue related to contracts for security
products (both government and commercial) results principally from long-term
fixed price contracts and is recognized on the percentage-of-completion method
calculated utilizing the cost-to-cost approach. The percent deemed to be
complete is calculated by comparing the costs incurred to date to 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 intelligence and investigation services and information
security services is recognized as the services are performed. The Company
records either billed or unbilled accounts receivable based on case-by-case
invoicing determination.
    
 
                                       41
<PAGE>   43
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     (c) Cash and Cash Equivalents -- Cash equivalents consist of all highly
liquid debt instruments with an initial maturity of three months or less at the
date of purchase. The Company invests excess cash in overnight repurchase
agreements, which are government collateralized securities. The carrying amount
of cash and cash equivalents approximates fair value of those instruments due to
their short maturity.
    
 
   
     (d) Marketable Securities -- The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115) for the year ended
December 31, 1996. Under SFAS 115, the Company must classify its debt and
marketable securities as either trading, available-for-sale or held-to-maturity.
The Company's marketable security investments consist largely of
available-for-sale municipal obligations. These securities are valued at current
market value, which approximates cost.
    
 
   
     Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities are excluded from earnings and are reported
as a separate component of shareholders' equity until realized. The Company
recorded an unrealized loss of $3,698 as of December 31, 1997. There were no
such unrealized gains (losses) as of December 31, 1998.
    
 
   
     (e) Concentrations of Credit Risk -- Financial instruments that subject the
Company to credit risk consist principally of trade receivables. Concentrations
of credit risk with respect to accounts receivable are limited by the number of
clients that comprise the Company's client base, along with the different
industries and geographic regions in which the Company's clients operate. The
Company does not generally require collateral or other security to support
client receivables, although the Company does require retainers, up-front
deposits or irrevocable letters-of-credit in many situations. The Company has
established an allowance for doubtful accounts based upon facts surrounding the
credit risk of specific clients and past history. Management does not anticipate
incurring losses on its trade receivables in excess of established allowances.
    
 
   
     (f) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:
    
 
   
<TABLE>
<S>                                                      <C>
Buildings and improvements...........................    5-40 years
Furniture and fixtures...............................    5-10 years
Machinery and equipment..............................    5-12 years
Leasehold improvements...............................    Life of lease
Vehicles.............................................    5 years
</TABLE>
    
 
   
     (g) Databases -- Databases are capitalized costs incurred to obtain
information from third party providers. The Company relies on this information
to create and maintain its proprietary and non-proprietary databases. Because of
the continuing accessibility of the information and its usefulness to future
investigative procedures, the cost of acquiring the information is capitalized
and amortized over a five year period. Amortization of databases for the years
ended December 31, 1996, 1997 and 1998 was $2,949,134, $2,937,152 and
$3,283,232, respectively.
    
 
   
     (h) Discontinued Operation -- Clinical Business -- In connection with the
acquisition of a company specializing in forensic and clinical testing and
analysis, the Company shut down the clinical operations effective in the fourth
quarter of 1996. The Company had intended to sell the clinical business,
however, negotiations with three potential buyers failed. The revenues related
to the discontinued clinical operation for the year ended December 31, 1996 were
approximately $3,413,000. The related operating loss and shut down expenses of
the clinical business are included in the accompanying consolidated statements
of operations as "loss from operations of discontinued clinical business" and
"loss on disposal of clinical business," respectively.
    
 
   
     (i) Impairment of Long-Lived Assets -- Effective January 1, 1996, the
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be
    
 
                                       42
<PAGE>   44
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
Disposed Of" (SFAS 121). This standard requires that long-lived assets, certain
identifiable intangibles and goodwill related to those assets be reviewed for
impairment by asset group for which the lowest level of independent cash flows
can be identified. In accordance with this standard, the Company periodically
reviews the carrying value of these assets and impairments are recognized when
the expected undiscounted future cash flows are less than the carrying amount of
the asset. Based on its most recent analysis, the Company believes no impairment
exists at December 31, 1998. However, it is possible, due to a change in
circumstances, that carrying values could become impaired in the future. Such
impairment could have a material effect on the results of operations in a
particular reporting period.
    
 
   
     The adoption of SFAS 121 in 1996 resulted in no adjustment to the
consolidated financial statements of the Company. However, during the fourth
quarter of 1996, the Company made a decision to hold for sale a former
laboratory building, which resulted in an impairment of approximately $111,000
being recorded, which reduced the net book value of the building to $225,000.
This impairment, in addition to an approximate $13,000 laboratory equipment
impairment, is included in "asset impairment" in the accompanying consolidated
statements of operations.
    
 
   
     (j) Costs in Excess of Assets Acquired -- Costs in excess of assets
acquired represents the excess of the purchase cost over the fair value of net
assets acquired in a purchase business combination. Amortization is recorded on
a straight-line basis over periods ranging from 15 to 40 years. Amortization of
costs in excess of assets acquired for the years ended December 31, 1996, 1997
and 1998 was $129,243, $550,156 and $1,388,077, respectively.
    
 
   
     (k) Other Intangible Assets -- Other intangible assets, comprised mainly of
customer lists and non-compete agreements, are amortized on a straight-line
basis. Customer lists are amortized over a fifteen year period and the
non-compete agreements are amortized over the lives of the respective
agreements, which range from six months to five years. Amortization of other
intangible assets for the years ended December 31, 1996, 1997 and 1998 was
$138,646, $333,898 and $905,078, respectively.
    
 
   
     (l) Foreign Currency Translation -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity.
    
 
   
     Gains or losses resulting from foreign currency transactions are translated
to local currency at the rates of exchange prevailing at the dates of the
transactions. Amounts receivable or payable in foreign currencies, other than
the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance sheet date. The effect of transactional gains or
losses is included in other income (expense) in the accompanying consolidated
statements of operations.
    
 
   
     (m) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
    
 
   
     (n) Research and Development -- Research and development costs are expensed
as incurred. The Company incurred approximately $130,000, $121,000 and $537,000
for the years ended December 31, 1996, 1997 and 1998, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.
    
 
   
     (o) Advertising -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1996, 1997 and
1998 were approximately $745,000, $984,000 and $1,798,000, respectively.
    
 
                                       43
<PAGE>   45
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     (p) Earnings Per Share -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). In
accordance with SFAS 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 common stock
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and warrants,
assumed issuance of restricted stock and assumed conversion of the convertible
note payable. The following is a reconciliation of the numerator and denominator
for basic and diluted earnings per share for the years ended December 31, 1996,
1997 and 1998:
    
 
   
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1996
                                                 -----------------------------------------
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic earnings per share.......................  $ 5,268,415     11,607,329        $0.45
                                                                                   =====
Effect of dilutive securities:
  Options......................................           --        131,932
  Restricted stock.............................     (162,443)       287,482
  Warrants.....................................           --        101,797
  Convertible note payable.....................           --         32,434
                                                 -----------     ----------
Diluted earnings per share.....................  $ 5,105,972     12,160,974        $0.42
                                                 -----------     ----------        -----
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1997
                                                 -----------------------------------------
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic earnings per share.......................  $ 2,046,643     14,006,638        $0.15
                                                                                   =====
Effect of dilutive securities:
  Options......................................           --        238,570
  Restricted stock.............................           --        443,152
  Warrants.....................................           --         96,740
  Convertible note payable.....................           --         14,222
                                                 -----------     ----------
Diluted earnings per share.....................  $ 2,046,643     14,799,322        $0.14
                                                 ===========     ==========        =====
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1998
                                                 -----------------------------------------
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic earnings per share.......................  $13,088,906     18,438,919        $0.71
                                                                                   =====
Effect of dilutive securities:
  Options......................................           --        524,040
  Warrants.....................................           --          1,775
                                                 -----------     ----------
Diluted earnings per share.....................  $13,088,906     18,964,734        $0.69
                                                 ===========     ==========        =====
</TABLE>
    
 
   
     Basic and diluted earnings per share based on income from continuing
operations were $0.54 and $0.50, respectively, for the year ended December 31,
1996. The basic and diluted per share impact of the discontinued operations was
$0.08.
    
 
   
     Basic and diluted earnings per share based on income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle were $0.21 and $0.20, respectively, for the year
    
 
                                       44
<PAGE>   46
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
ended December 31, 1997. The basic and diluted per share impact of the
discontinued operation was $0.02, the extraordinary item was $0.01 and the basic
and diluted per share impact of the change in accounting principle were $0.03
and $0.02, respectively.
    
 
   
     Basic and diluted earnings per share based on income from continuing
operations were $0.78 and $0.76, respectively, for the year ended December 31,
1998. The basic and diluted per share impact of the discontinued operation was
$0.07.
    
 
   
     During 1997, 66,000 warrants to purchase a total of 27,746 shares of common
stock of the Company at $7.20 per warrant were outstanding but were not included
in the computation of diluted earnings per share because the warrants' exercise
price was greater than the average market price of the common shares.
    
 
   
     During 1998, 11,666 warrants to purchase an equivalent amount of shares of
common stock of the Company at $25.69 per warrant were outstanding but were not
included in the computation of diluted earnings per share because the warrants'
exercise price was greater than the average market price of the common shares.
    
 
   
     (q) New Accounting Pronouncements -- In 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), which established standards for reporting and displaying
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,
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 130 requirements. The
accumulated other comprehensive income (loss) balance of ($0.1) million at
December 31, 1996 consisted of ($0.2) million of foreign currency translation
adjustments and $0.01 million of unrealized appreciation of marketable
securities. The accumulated other comprehensive income (loss) balance of ($0.4)
million at December 31, 1997 consisted of ($0.4) million of foreign currency
translation adjustments and $0.01 million of unrealized appreciation of
marketable securities. The accumulated other comprehensive income (loss) balance
of ($0.9) million at December 31, 1998 consisted entirely of foreign currency
translation adjustments.
    
 
   
     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(SFAS 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 adopted SFAS 131 during
fiscal 1998. This statement, which requires expansion or modification to
existing disclosures, had no impact on the Company's reported consolidated
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 certain of 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 December 31, 1997 and
1998 consolidated balance sheets are approximately $1.0 million and $1.2
million, respectively, 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 133). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain
    
 
                                       45
<PAGE>   47
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company 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 133 on its financial statements
and has not determined the timing of or method of adoption of SFAS 133. However,
SFAS 133 could increase volatility in earnings and other comprehensive income.
    
 
   
     (r) Stock-Based Compensation -- The Company has elected to account for the
cost of its employee stock options and other forms of employee stock-based
compensation plans utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25) as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). APB 25 requires compensation cost for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stock-based compensation plans. SFAS 123 allows an
entity to continue to measure compensation cost using the principles of APB 25
if certain pro forma disclosures are made. The pro forma disclosures required by
SFAS 123 are presented in Note 11(e).
    
 
   
     (s) Change in Accounting Principle -- In the fourth quarter of 1997, the
Company changed its method of accounting for costs incurred in connection with
business process reengineering activities relating to information technology
transformation. Consistent with a consensus reached by the Emerging Issues Task
Force (EITF) under Issue 97-13, in late November 1997, the Company expensed
costs previously capitalized in earlier quarters of 1997 (approximately
$360,000, net of tax benefit of $240,000) as a cumulative effect of change in
accounting principle.
    
 
   
     (t) 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.
    
 
   
     (u) Reclassifications -- Certain reclassifications have been reflected in
1996 and 1997 to conform with the current period presentation.
    
 
   
(3) MERGERS AND ACQUISITIONS
    
 
   
     The Company has completed numerous business combinations in the periods
presented. These transactions were accounted for as both purchase business
combinations and pooling of interests business combinations as follows:
    
 
   
     (a) Pooling of Interests Transactions -- In December 1997, a wholly owned
subsidiary of the Company was merged with and into Kroll. Effective upon the
consummation of the merger with Kroll, each then issued and outstanding share of
Kroll common stock, including shares subject to issuance under the Kroll
restricted stock plan (See Note 11), were 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 of Kroll were converted at the same exchange
factor into options to purchase 551,492 shares of Company common stock (See Note
11).
    
 
   
     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
    
 
                                       46
<PAGE>   48
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
combined results of operations, financial position and cash flows of Kroll as
though it had always been a part of the Company.
    
 
   
     There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform Kroll's
accounting policies. Certain reclassifications were made to the Kroll financial
statements to conform to the Company's presentations. The results of operations
for the separate companies and the combined amounts presented in the
consolidated financial statements follow:
    
 
   
<TABLE>
<CAPTION>
                                               O'GARA          KROLL         COMBINED
                                             -----------    -----------    ------------
<S>                                          <C>            <C>            <C>
Nine months ended September 30, 1997
  (unaudited)
  Revenue..................................  $70,206,200    $53,823,958    $124,030,158
  Loss from discontinued operation.........     (197,000)            --        (197,000)
  Extraordinary item.......................     (193,875)            --        (193,875)
  Net income...............................    4,181,387      1,796,124       5,977,511
Year ended December 31, 1996
  Revenue..................................  $75,007,589    $70,883,058    $145,890,647
  Income from discontinued operation.......      332,595             --         332,595
  Net income (loss)........................    6,658,962       (801,740)      5,857,222
</TABLE>
    
 
   
     In connection with the Kroll merger in 1997, the Company recorded, in the
fourth quarter, a charge to operating expenses of approximately $7.2 million
($5.7 million after taxes, or $0.39 per diluted share) for direct and other
merger-related costs pertaining to the merger transaction. Merger transaction
costs are nonrecurring and include $0.8 million for stock based compensation
costs triggered by the change in control of Kroll, $1.8 million for stay bonuses
and severance and $4.6 million which consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing, travel and other related
charges.
    
 
   
     In December 1998, a wholly owned subsidiary of the Company was merged with
and into Laboratory Specialists of America, Inc. (LSAI). Effective upon the
consummation of the merger, each then issued and outstanding share of LSAI
common stock was converted into .2102 shares of common stock of the Company or
1,209,053 shares of the Company's common stock in total. Outstanding stock
options and stock warrants of LSAI were converted at the same exchange factor
into options to purchase 39,094 and 24,386 shares, respectively, of the
Company's common stock (See Note 11). The financial position and results of
operations of LSAI are reported as part of the Company's Investigations and
Intelligence Group.
    
 
   
     In December 1998, a wholly owned subsidiary of the Company was merged with
and into Schiff & Associates, Inc. (Schiff). Effective upon the consummation of
the merger, each then issued and outstanding share of Schiff common stock was
converted into approximately 131.41 shares of common stock of the Company or
169,521 shares of the Company's common stock in total. The financial position
and results of operations of Schiff are reported as part of the Company's
Investigations and Intelligence Group.
    
 
   
     In December 1998, a wholly owned subsidiary of the Company was merged with
and into Securify Inc. (Securify). Effective upon the consummation of the
merger, all of the outstanding stock of Securify was converted to shares of the
Company's common stock at a rate of .110793 for Series A Preferred, .118273 for
Series B Preferred and .0955252 for Securify common stock. In total, the Company
issued 1,430,936 shares of common stock. In addition, outstanding employee stock
options of Securify were converted at the same exchange factor as Securify
common stock into options to purchase 179,877 shares of the Company's common
stock. Effective with the consummation of the merger, the Company created the
Information Security Group and Securify's results of operations and financial
position are reported in this group.
    
 
   
     The mergers with LSAI, Schiff and Securify constituted tax-free
reorganizations and have been accounted for as pooling of interests
transactions. Accordingly, all prior period consolidated financial
    
 
                                       47
<PAGE>   49
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
statements presented have been restated to include the combined results of
operations, financial position and cash flows of LSAI, Schiff and Securify as
though they had always been a part of the Company.
    
 
   
     There were no transactions between the Company and LSAI, Schiff and
Securify prior to the combination and immaterial adjustments were recorded to
conform LSAI's, Schiff's and Securify's accounting policies. Certain
reclassifications were made to the Company's, LSAI's, Schiff's and Securify's
financial statements to conform presentation. The results of operations for the
separate companies and the combined amounts presented in the consolidated
financial statements follow:
    
 
   
<TABLE>
<CAPTION>
                                      KROLL-
                                      O'GARA
                                    HISTORICAL        LSAI         SCHIFF     SECURIFY      COMBINED
                                    ----------     -----------   ----------   ---------   ------------
<S>                                <C>             <C>           <C>          <C>         <C>
Nine months ended September 30,
  1998 (unaudited)
     Revenue.....................  $164,146,336    $12,039,154   $3,531,062   $  48,000   $179,764,552
     Income from discontinued
       operation.................       287,000             --           --          --        287,000
     Net income (loss)...........    11,559,576      1,440,725      582,254    (944,196)    12,638,359
Year ended December 31, 1997
  Revenue........................  $172,975,941    $12,836,953   $2,852,303   $      --   $188,665,197
  Loss from discontinued
     operation...................      (305,207)            --           --          --       (305,207)
  Extraordinary item.............      (193,875)            --           --          --       (193,875)
  Cumulative effect of change in
     accounting principle........      (360,000)            --           --          --       (360,000)
  Net income.....................       709,866      1,329,103        7,674          --      2,046,643
Year ended December 31, 1996
  Revenue........................  $145,890,647    $ 8,726,799   $2,530,765   $      --   $157,148,211
  Income (loss) from discontinued
     operations..................       332,595     (1,274,216)          --          --       (941,621)
  Net income (loss)..............     5,857,222       (585,711)      (3,096)         --      5,268,415
</TABLE>
    
 
   
     In 1998, the Company recorded, in the fourth quarter, a charge to operating
expenses of approximately $5.3 million ($3.9 million after taxes, or $0.21 per
diluted share) for direct and other merger and integration related costs. Merger
transaction costs are non-recurring and include $0.8 million for stay bonuses
and $4.1 million which consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing, travel and other related charges.
Integration costs relate primarily to the merger with Kroll consummated in
December 1997 and were approximately $0.4 million.
    
 
   
     (b) Purchase Transactions -- In addition to the merger with Kroll, the
Company completed five other acquisitions in 1997 which were accounted for as
purchase business combinations. Three of the 1997 purchase acquisitions have
been included in the Company's Security Products and Services Group and two in
the Investigations and Intelligence Group. The aggregate purchase price of these
five acquisitions amounted to approximately $22.5 million and consisted of $13.4
million in cash, $2.5 million in seller-provided financing and 583,572 shares of
common stock (valued at approximately $6.6 million or an average of $11.31 per
share). In connection with these acquisitions, the Company entered into various
employment and non-compete agreements with officers and key employees of the
acquired companies with varying terms and conditions. The results of operations
of the acquired businesses are included in the consolidated financial statements
from the respective effective dates of acquisition. The resulting goodwill from
these transactions is being amortized over periods ranging from fifteen to
thirty years. In addition to these 1997 acquisitions, the Company also exercised
its option to acquire the minority interest in its O'Gara Brazilian subsidiary
for approximately 69,565 shares of common stock valued at approximately $1.2
million.
    
 
                                       48
<PAGE>   50
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The Company made one significant acquisition in 1997 which is included
above. In February 1997, Labbe, S.A. (Labbe), a company located in France
specializing in vehicle armoring systems, was acquired for approximately $14.2
million, consisting of $10.7 million in cash and 376,597 shares of the Company's
common stock valued at approximately $3.5 million or $9.29 per share. For
accounting purposes, the acquisition was effective on 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. The following unaudited pro
forma combined results of operations for the year ended December 31, 1996
assumes the Labbe acquisition occurred as of January 1, 1996 (in thousands,
except per share data):
    
 
   
<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                                      DECEMBER 31, 1996
                                                      -----------------
<S>                                                   <C>
Sales.............................................        $181,266
Income from continuing operations.................        $  6,405
Net income........................................        $  5,463
Earnings per share:
  Basic...........................................        $   0.46
  Diluted.........................................        $   0.42
</TABLE>
    
 
   
     In addition to the mergers with LSAI, Schiff and Securify, the Company
completed eight other acquisitions in 1998, all of which were accounted for as
purchase business combinations. Seven of the 1998 purchase acquisitions have
been included in the Company's Investigations and Intelligence Group and the
eighth has been included in the Security Products and Services Group. The
aggregate purchase price of these eight acquisitions amounted to approximately
$36.5 million and consisted of $19.4 million in cash and 745,003 shares of
common stock (valued at approximately $17.1 million or an average of $22.95 per
share). The $36.5 million aggregate purchase price for the 1998 acquisitions
excludes a potential earnout of $3.25 million applicable to one of the acquired
companies, which is payable over three years and is contingent upon the
achievement of specified operating income targets. In addition, in connection
with these acquisitions, the Company entered into various employment and
non-compete agreements with officers and key employees of the acquired companies
with varying terms and conditions. The results of operations of the acquired
businesses are included in the consolidated financial statements from the
respective effective dates of acquisition. The resulting goodwill from these
transactions is being amortized over periods ranging from fifteen to twenty-five
years.
    
 
   
     The Company made one significant acquisition in 1998 which is included
above. In September 1998, Kizorek, Inc., now renamed In Photo Surveillance, Inc.
(In Photo), a company located in Illinois specializing in video surveillance
services, was acquired for approximately $9.0 million, consisting of $0.8
million in cash and 352,381 shares of the Company's common stock valued at
approximately $8.2 million or $23.35 per share. For accounting purposes, the
acquisition was effective on July 1, 1998 and the results of operations of In
Photo are included in the consolidated results of operations of the Company from
that date forward. The
    
 
                                       49
<PAGE>   51
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
following unaudited pro forma combined results of operations for the years ended
December 31, 1997 and 1998 assumes the In Photo acquisition occurred as of
January 1, 1997 (in thousands, except per share data):
    
 
   
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                 1997          1998
                                                              ----------    ----------
<S>                                                           <C>           <C>
Sales.......................................................   $203,142      $253,577
Income from continuing operations before extraordinary item
  and cumulative effect of accounting change................   $  3,400      $ 14,330
Net income..................................................   $  2,541      $ 13,005
Earnings per share:
  Basic.....................................................   $   0.22      $   0.70
  Diluted...................................................   $   0.20      $   0.68
</TABLE>
    
 
   
     In connection with the 1997 and 1998 purchase acquisitions, assets were
acquired and liabilities were assumed as follows (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                              OTHER 1997                  OTHER 1998
                                                  LABBE      ACQUISITIONS    IN PHOTO    ACQUISITIONS
                                                 --------    ------------    --------    ------------
<S>                                              <C>         <C>             <C>         <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
  Cash.........................................  $  3,501      $   125       $   192       $    701
  Accounts Receivable..........................     4,689          242         1,743          5,146
  Inventories..................................     3,392          553            --             --
  Unbilled revenue.............................        --           --           269          1,561
  Other current assets.........................       316           11           450            551
  Property, plant and equipment................     3,360          298           955          1,213
  Other non-current assets.....................     2,357            4            --            266
  Costs in excess of assets acquired and other
     intangible assets.........................     7,802        8,268         8,995         27,476
                                                 --------      -------       -------       --------
                                                   25,417        9,501        12,604         36,914
  Less: Cash paid for net assets...............   (10,730)      (2,700)         (800)       (18,555)
  Fair value of debt issued....................        --       (2,551)           --             --
  Fair value of stock issued...................    (3,431)      (3,178)       (8,228)        (8,904)
                                                 --------      -------       -------       --------
                                                 $ 11,256      $ 1,072       $ 3,576       $  9,455
                                                 ========      =======       =======       ========
LIABILITIES ASSUMED INCLUDING:
  Liabilities assumed and acquisition costs....  $  9,287      $ 1,053       $ 3,376       $  8,746
  Debt.........................................     1,969           19           200            709
                                                 --------      -------       -------       --------
                                                 $ 11,256      $ 1,072       $ 3,576       $  9,455
                                                 ========      =======       =======       ========
</TABLE>
    
 
                                       50
<PAGE>   52
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(4) BALANCE SHEET ACCOUNTS
    
 
   
     (a) Trade Accounts Receivable and Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts -- The following summarizes the components of
trade accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts:
    
 
   
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                          --------------------------
                                                             1997           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
United States Military:
  Billed receivables....................................  $ 3,756,035    $ 3,225,664
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..............................    9,253,872     21,042,185
                                                          -----------    -----------
          Total United States Military..................  $13,009,907    $24,267,849
                                                          ===========    ===========
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                          --------------------------
                                                             1997           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
Other contracts:
  Billed receivables....................................  $29,288,501    $44,321,442
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..............................    2,643,929      5,365,912
                                                          -----------    -----------
  Total other contracts.................................  $31,932,430    $49,687,354
                                                          ===========    ===========
  Total trade accounts receivable.......................  $33,044,536    $47,547,106
                                                          ===========    ===========
  Total costs and estimated earnings in excess of
     billings on uncompleted contracts..................  $11,897,801    $26,408,097
                                                          ===========    ===========
</TABLE>
    
 
   
     Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $89,875,813 and $107,374,834 of progress billings to the United
States Military at December 31, 1997 and 1998, respectively.
    
 
   
     Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as the contract is substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
    
 
   
     The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:
    
 
   
<TABLE>
<CAPTION>
                                                    ADDITIONS
                                       BALANCE      CHARGED TO                    BALANCE
                                      BEGINNING     COSTS AND                      END OF
                                      OF PERIOD      EXPENSES     DEDUCTIONS       PERIOD
                                      ----------    ----------    -----------    ----------
<S>                                   <C>           <C>           <C>            <C>
Year ended December 31, 1996........  $2,685,171    $3,706,684    $(3,929,718)   $2,462,137
Year ended December 31, 1997........  $2,462,137    $2,043,814    $(1,521,162)   $2,984,789
Year ended December 31, 1998........  $2,984,789    $1,199,355    $(1,809,002)   $2,375,142
</TABLE>
    
 
   
     (b) Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
    
 
   
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                          --------------------------
                                                             1997           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
Raw materials...........................................  $ 8,192,678    $ 7,102,009
Vehicle costs and work-in-process.......................    8,472,966     11,505,053
                                                          -----------    -----------
                                                          $16,665,644    $18,607,062
                                                          ===========    ===========
</TABLE>
    
 
                                       51
<PAGE>   53
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The following summarizes activity in valuation reserves for inventory
obsolescence:
    
 
   
<TABLE>
<CAPTION>
                                                 ADDITIONS
                                    BALANCE      CHARGED TO                    BALANCE
                                   BEGINNING     COSTS AND                      END OF
                                   OF PERIOD      EXPENSES     DEDUCTIONS       PERIOD
                                   ----------    ----------    -----------    ----------
<S>                                <C>           <C>           <C>            <C>
Year ended December 31, 1996.....  $       --    $  252,114    $        --    $  252,114
Year ended December 31, 1997.....  $  252,114    $  112,000    $   (23,782)   $  340,332
Year ended December 31, 1998.....  $  340,332    $    9,668    $        --    $  350,000
</TABLE>
    
 
   
     (c) Other Assets -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight line basis over their
estimated useful lives, as applicable. Other assets consist of the following:
    
 
   
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                  USEFUL LIFE    ------------------------
                  DESCRIPTION                       (YEARS)         1997          1998
                  -----------                     -----------    ----------    ----------
<S>                                               <C>            <C>           <C>
Preoperating and start-up costs.................       --        $1,029,784    $1,185,574
Security deposits...............................       --           471,859       989,908
Pending acquisition costs.......................       --                --       573,035
Long-term receivable............................       --           380,000       380,000
Non-refundable deposit on an equipment lease
  with a related party..........................        5           297,025       537,784
Deferred financing fees.........................     7-30           876,667       906,667
Long-term investments...........................       --            21,971            --
Other long-term assets..........................       --            65,720       504,199
                                                                 ----------    ----------
                                                                  3,143,026     5,077,167
                                                                   (166,477)     (209,209)
                                                                 ----------    ----------
                                                                 $2,976,549    $4,867,958
                                                                 ==========    ==========
</TABLE>
    
 
   
     Preoperating and start-up costs include costs applicable to bids in process
which are deferred when management believes it is probable that future contracts
will be obtained. These costs are transferred to contract costs when contracts
are awarded or are expensed when the contract award is no longer considered
probable. Preopening and start-up costs also include certain costs incurred in
connection with establishing operations in new locations. In accordance with SOP
98-5, all such costs will be expensed in the first quarter of fiscal 1999 (see
Note 2(q)).
    
 
   
     (d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1997 and 1998:
    
 
   
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                       DESCRIPTION                             1997           1998
                       -----------                          -----------    -----------
<S>                                                         <C>            <C>
Payroll and related benefits..............................  $ 8,205,962    $ 9,720,120
Property, sales and other taxes payable...................      773,846      2,160,417
Accrued professional fees.................................      385,403      3,485,486
Accrued interest..........................................      564,168        460,923
Accrued hedge contract settlement.........................           --        710,760
Accrued customer list installment payments................      510,345        515,538
Other accruals............................................    3,692,855      2,910,364
                                                            -----------    -----------
                                                            $14,132,579    $19,963,608
                                                            ===========    ===========
</TABLE>
    
 
                                       52
<PAGE>   54
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(5) INCOME TAXES
    
 
   
     Prior to October 28, 1996, OHE was an S Corporation and generally was not
responsible for payment of income taxes. Rather, the OHE shareholders were taxed
on OHE's taxable income at their respective individual federal and state income
tax rates. Therefore, the income generated by OHE was not subject to federal,
state or certain foreign income taxes prior to the date of OHE's reorganization
on October 28, 1996. Schiff was also an S Corporation for all periods prior to
December 31, 1998. Accordingly, the accompanying consolidated financial
statements only reflect a provision (benefit) for income taxes for Kroll and
LSAI, both of which were C Corporations, for all periods prior to October 28,
1996.
    
 
   
     The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.
    
 
   
     The Company's provision (benefit) for income taxes on income (loss) from
continuing operations for all periods is summarized as follows:
    
 
   
<TABLE>
<CAPTION>
                                                            1996         1997          1998
                                                          --------    ----------    ----------
<S>                                                       <C>         <C>           <C>
Currently payable:
  Federal...............................................  $470,479    $2,800,720    $5,530,085
  State and local.......................................   383,563       576,837       965,158
  Foreign...............................................    83,000     1,364,873     1,834,143
                                                          --------    ----------    ----------
                                                           937,042     4,742,430     8,329,386
                                                          --------    ----------    ----------
Deferred:
  Federal...............................................  (425,558)   (1,213,147)     (733,485)
  State and local.......................................  (145,937)     (224,290)     (129,437)
  Foreign...............................................        --            --            --
                                                          --------    ----------    ----------
                                                          (571,495)   (1,437,437)     (862,922)
                                                          --------    ----------    ----------
                                                          $365,547    $3,304,993    $7,466,464
                                                          ========    ==========    ==========
</TABLE>
    
 
   
     A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
    
 
   
<TABLE>
<CAPTION>
                                      1996                   1997                   1998
                               -------------------    -------------------    ------------------
                                 AMOUNT      RATE       AMOUNT      RATE       AMOUNT      RATE
                               ----------    -----    ----------    -----    ----------    ----
<S>                            <C>           <C>      <C>           <C>      <C>           <C>
Provision for income taxes at
  the federal statutory
  rate.......................  $2,235,698     34.0%   $2,111,644     34.0%   $7,527,009    34.4%
State and local income taxes,
  net of federal benefit.....     156,912      2.4       295,119      4.8       637,004     2.9
Impact of S Corp income/loss,
  prior to reorganization....  (2,087,529)   (31.8)           --       --            --      --
Impact of foreign income,
  prior to reorganization....    (199,095)    (3.0)           --       --            --      --
Nondeductible expenses.......      34,766      0.5     1,338,819     21.5       163,362     0.7
Change in valuation
  allowance..................     109,303      1.7      (755,044)   (12.2)     (528,695)   (2.4)
Effect of foreign
  income/loss................     105,368      1.6       577,743      9.3       (47,924)   (0.2)
Other........................      10,124      0.2      (263,288)    (4.2)     (284,292)   (1.3)
                               ----------    -----    ----------    -----    ----------    ----
  Provision for income
     taxes...................  $  365,547      5.6%   $3,304,993     53.2%   $7,466,464    34.1%
                               ==========    =====    ==========    =====    ==========    ====
</TABLE>
    
 
                                       53
<PAGE>   55
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The components of the Company's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:
    
 
   
<TABLE>
<CAPTION>
                                                             1997           1998
                                                          -----------    -----------
<S>                                                       <C>            <C>
Deferred tax assets:
  Allowance for doubtful accounts.......................  $   844,101    $   432,027
  Depreciation and amortization.........................      564,262        244,693
  Net operating loss carryforwards......................    1,839,743      2,100,179
  Payroll and other benefits............................      594,401      1,721,081
  Other accruals........................................      336,817        707,708
  Acquisition costs.....................................      440,000      1,697,885
  Other.................................................      981,610        512,382
                                                          -----------    -----------
                                                            5,600,934      7,415,955
  Valuation allowance...................................   (2,126,035)    (1,742,925)
                                                          -----------    -----------
       Net deferred tax assets..........................    3,474,899      5,673,030
                                                          -----------    -----------
Deferred tax liabilities:
  Nonaccrual service fee receivable.....................     (212,079)      (156,804)
  Deferred revenue......................................   (1,908,823)    (3,540,825)
  Database capitalization...............................   (2,779,790)    (2,951,351)
  S to C conversion.....................................       (5,223)        (5,223)
  Customer lists, net of amortization...................     (344,000)      (310,667)
  Percentage of completion on foreign subsidiaries......           --       (381,917)
  Foreign leasing transactions..........................           --       (125,827)
  Other.................................................     (166,893)      (720,887)
                                                          -----------    -----------
                                                           (5,416,808)    (8,193,501)
                                                          -----------    -----------
       Net deferred tax liability.......................  $(1,941,909)   $(2,520,471)
                                                          ===========    ===========
</TABLE>
    
 
   
     The Company has certain foreign and domestic net operating loss
carryforwards, which approximated $1.8 million and $2.0 million at December 31,
1997 and 1998, respectively. The foreign net operating loss carryforwards relate
primarily to the United Kingdom, France and the Philippines. The carryforwards
expire beginning in 2001. A valuation allowance for the majority of all existing
foreign carryforwards has been provided as it is not certain that the tax
benefit will be realized in the foreseeable future. Adjustments to the valuation
allowance, if any, will be recorded in the periods in which it is determined the
asset is realizable.
    
 
                                       54
<PAGE>   56
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(6) RELATED PARTY TRANSACTIONS
    
 
   
     (a) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:
    
 
   
<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                         --------------------------------------
                                                            1996          1997          1998
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Sales
     to Shareholder....................................  $5,325,559    $6,412,244    $4,877,478
     to affiliated entities............................     236,000        21,000            --
Purchases
     from Shareholder..................................     824,348       814,154       474,800
     from affiliated entities..........................   1,176,000       411,000     1,325,410
Lease expense to affiliated entities...................   1,179,000       813,000       839,000
Consulting, commission and legal services expense
     provided by affiliated entities...................     348,000            --            --
     provided by minority shareholders.................     118,000            --            --
     provided by LSAI Director.........................      30,000       170,000       190,000
Non-interest bearing advances to shareholders..........     288,829       525,996       568,213
Air charter fees included in costs of the offering or
  merger costs.........................................     327,000       576,000       566,000
Interest on shareholder notes payable..................      27,000            --            --
Forgiveness of note payable to affiliated entity.......     122,000            --            --
Noninterest bearing advances to affiliates.............          --       282,346       615,851
</TABLE>
    
 
   
     (b) Notes Payable-Shareholders -- OHE had certain notes payable to
shareholders, which were repaid upon the completion of the Company's initial
public offering in 1996. Interest expense associated with these obligations
approximated $27,000 for the year ended December 31, 1996.
    
 
   
     The Company has certain amounts due to/from shareholders which include the
following amounts at December 31:
    
 
   
<TABLE>
<CAPTION>
                                                                1997        1998
                                                              --------    --------
<S>                                                           <C>         <C>
Amounts due from certain shareholders.......................  $525,996    $568,213
Amounts due to certain shareholders.........................  (309,500)         --
                                                              --------    --------
  Net due from (due to) shareholders........................  $216,496    $568,213
                                                              ========    ========
</TABLE>
    
 
   
     Balances included in amounts due to/from shareholders are classified as
open advance accounts or term loans. Substantially all amounts due to and due
from shareholders were paid off in connection with the Kroll merger except for a
loan payable of $309,500 which was paid off during 1998.
    
 
   
     (c) Sales-Shareholder -- During 1996, 1997 and 1998, the Company rendered
services to a corporation which is also a shareholder of the Company. Total
revenue recognized for the years ended December 31, 1996, 1997 and 1998 was
$5,325,559, $6,412,244 and $4,877,478, respectively. Additionally, this
corporation provided certain services to the Company which have been included in
cost of sales and operating expenses in the accompanying consolidated statements
of operations. These costs were approximately $824,348, $814,154 and $474,800
for the years ended December 31, 1996, 1997 and 1998, respectively. The yearend
accounts receivable balance for this customer was approximately $897,361 and
$1,290,558 at December 31, 1997 and 1998, respectively.
    
 
                                       55
<PAGE>   57
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     (d) Building and Equipment Leases -- Affiliated Entities -- Effective June
1, 1998, the Company reached an agreement to terminate the corporate aircraft
lease which originated in February 1995 with an affiliated entity. The terms of
the aircraft lease addendum will provide the Company with a future hourly
discount from the normal commercial hourly rate in order to amortize the
remaining portion of existing lease deposits from the original aircraft lease.
Rental expense, including amortization recognized, approximated $422,000,
$234,000 and $292,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company also paid this affiliated entity $327,000 in fiscal
1996 for usage of the aircraft during the roadshow for the initial public stock
offering and included such amount in issuance costs. The Company paid $576,000
in fiscal 1997 for usage of the aircraft to consummate the merger with Kroll and
included such amount in merger-related costs. The Company paid $296,000 in 1998
for usage of the aircraft during the roadshow for a stock offering and included
such amount in stock issuance costs. The Company also paid $270,000 in fiscal
1998 for usage of the aircraft to consummate the merger with Securify and
included such amount in merger related costs. Management is of the opinion that
the hourly rate paid by the Company was equivalent to the rate charged by the
affiliated entity to other unrelated companies for similar services and it was
favorably comparable to rates charged by another unrelated charter service for
similar aircraft. As of December 31, 1997 and 1998, the Company had
approximately $297,025 and $484,371, respectively in unamortized lease deposits
with this affiliated entity.
    
 
   
     The Company is also currently leasing equipment and a manufacturing
facility from two affiliated entities under various three year and
month-to-month lease agreements which began in July 1995. Rental expense
approximated $757,000, $579,000 and $547,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
    
 
   
(7) REVOLVING LINES OF CREDIT
    
 
   
     On October 30, 1998, the Company amended and restated its credit agreement
to provide for a revolving line of credit of $7.0 million and a letter of credit
facility of approximately $7.6 million which matures on May 31, 2000. The
revolving credit facility bears interest at rates ranging from prime less 1.75%
to prime less .25%, or, at the Company's option, LIBOR plus .75% to LIBOR plus
1.5%, dependent upon a defined financial ratio. Average borrowings under the
revolving line of credit and its predecessors were $9,915,663, $4,568,994 and
$1,659,131 during 1996, 1997 and 1998, respectively, at approximate weighted
average interest rates of 8.27%, 8.46% and 7.96%, respectively. The maximum
borrowings outstanding during 1996, 1997, and 1998 were $12,145,000, $11,600,000
and $7,735,029, respectively. Borrowings under this line of credit were $559,112
at December 31, 1997. There were no outstanding borrowings under this line of
credit at December 31, 1998.
    
 
   
     In connection with a refinancing in 1997, the Company fully amortized the
remaining deferred financing costs from a previous agreement, resulting in a one
time extraordinary charge to the company's net income of $193,875, after income
tax benefits of $129,250, or $0.01 per diluted share.
    
 
   
     This credit agreement includes financial covenants, which among other
restrictions, requires the maintenance of certain financial ratios, including
fixed charge coverage and net worth, and impose limitations on foreign
investment, total intangible assets, additional indebtedness and capital
expenditures. The Company was not in compliance with certain of these covenants
as of December 31, 1997 and 1998. These events of non-compliance were waived by
the lender. Had the lender not provided a waiver, all amounts outstanding under
the credit agreement would have been immediately payable.
    
 
                                       56
<PAGE>   58
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(8) LONG-TERM DEBT
    
 
   
     The components of long-term debt are as follows at:
    
 
   
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 1997           1998
                                                              -----------    -----------
<S>                                                           <C>            <C>
Senior unsecured notes payable to various institutions,
  interest at 8.56% (9.56% prior to May 1998) payable
  semi-annually, principal payable at maturity in May 2004,
  subject to prepayment penalties...........................  $35,000,000    $35,000,000
Economic Development Revenue Bonds, variable interest rate
  approximating 85% of the bond equivalent yield of 13 week
  U.S. Treasury bills (not to exceed 12%), which
  approximated 4.52% at December 31, 1998, payable in
  scheduled installments through September 2016, subject to
  optional tender by the bondholders and a corresponding
  remarketing agreement, secured by the property, plant and
  equipment of OHE and a bank letter of credit (Note 12)....    1,432,224      1,357,224
Notes payable to former shareholders of acquired companies,
  interest at fixed rates ranging from 6% to 10%, payable in
  scheduled installments through February 2000, certain
  notes secured by acquired assets..........................    3,345,989      2,526,361
Notes payable to banks, variable interest rates at prime to
  prime plus 0.5% or LIBOR plus 2.5%, fixed rates ranging
  from 8.65% to 10.95%, payable in scheduled installments
  through April 2003 with certain instruments subject to
  prepayment penalties, collateralized by certain real and
  personal property.........................................    9,801,780      1,001,204
Note payable to former shareholder of Kroll, non interest
  bearing, paid in full in January 1998.....................    1,255,402             --
Other notes payable, interest at 7% to 10.9%, payable in
  scheduled installments through September 2007, certain
  notes secured by various equipment........................    2,844,169      1,338,208
                                                              -----------    -----------
                                                               53,679,564     41,222,997
Less- current portion.......................................   (4,038,080)    (1,965,752)
                                                              -----------    -----------
                                                              $49,641,484    $39,257,245
                                                              ===========    ===========
</TABLE>
    
 
   
     The Company's $35 million of senior unsecured notes payable also contains
financial covenants, which among other restrictions, require the maintenance of
net worth and fixed charge coverage ratios.
    
 
   
     Scheduled maturities of long-term debt at December 31, 1998 are as follows:
    
 
   
<TABLE>
<S>                                                           <C>
1999......................................................    $ 1,965,752
2000......................................................      2,416,592
2001......................................................        404,637
2002......................................................        225,981
2003......................................................        196,119
Thereafter................................................     36,013,916
                                                              -----------
                                                              $41,222,997
                                                              ===========
</TABLE>
    
 
                                       57
<PAGE>   59
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(9) OPERATING LEASES
    
 
   
     The Company leases office space and certain equipment and supplies under
agreements with terms from one to ten years. The following is a schedule, by
year, of approximate future minimum rental or usage payments required under
operating leases that have initial or non-cancelable lease terms in excess of
one year as of December 31, 1998:
    
 
   
<TABLE>
<CAPTION>
                                                                 TOTAL
                                                              -----------
<S>                                                           <C>
  1999....................................................    $ 6,391,618
  2000....................................................      5,503,777
  2001....................................................      3,708,492
  2002....................................................      2,843,961
  2003....................................................      2,438,388
Thereafter................................................      8,766,311
                                                              -----------
                                                              $29,652,547
                                                              ===========
</TABLE>
    
 
   
     Rental expense charged against current operations amounted to approximately
$4,518,000, $4,080,000 and $6,379,000, for the years ended December 31, 1996,
1997 and 1998, respectively.
    
 
   
(10) DEFINED CONTRIBUTION AND BONUS PLANS
    
 
   
     As of December 31, 1998, the Company had the following employee benefit
plans in place:
    
 
   
     (a) Defined Contribution Plans -- The Company and its subsidiaries have
established various non-contributory profit sharing/401(k) plans covering
substantially all of the Company's employees. Contributions to the plans are
discretionary and are determined annually by the Company's Board of Directors.
Certain plans also offer a matching contribution whereby the Company will
contribute a percentage of the amount a participant contributes, limited to
certain maximum amounts. Plan contribution expense charged against current
operations for all such plans amounted to approximately $1,243,000, $1,211,140
and $797,003, for the years ended December 31, 1996, 1997 and 1998,
respectively.
    
 
   
     (b) Profit and Revenue Sharing Plans -- The Company and its subsidiaries
have established various profit and revenue sharing plans covering substantially
all of the Company's employees. The plans were established to provide employees
an annual cash incentive bonus based on various operating and non-operating
criteria. The Company may amend, modify or terminate these plans at any time.
    
 
   
     The Company expensed approximately $2,288,000, $516,000 and $476,000
associated with the profit and revenue sharing plans in 1996, 1997 and 1998,
respectively.
    
 
   
(11) EQUITY ARRANGEMENTS
    
 
   
     (a) Stock Option Plans -- In 1996, the Company adopted a stock option plan
(the 1996 Plan) for employee, non-employee directors and consultants. The
Company may grant options for up to 1,757,000 shares under the 1996 Plan.
Options for 180,000, 482,050 and 360,000 shares were granted during 1996, 1997
and 1998, respectively. Options granted under the plan are generally granted at
fair market value at the date of grant and are exercisable over periods not
exceeding ten years. Additionally, effective with the mergers with Kroll, LSAI
and Securify each outstanding stock option was converted at the respective
exchange factor into options to purchase Company common stock. After conversion,
total stock options granted under the previously existing Kroll, LSAI and
Securify stock option plans in 1996, 1997 and 1998 were 209,629, 124,018 and
218,319, respectively.
    
 
   
     In connection with stock options granted by Securify during the year ended
December 31, 1998, the Company recorded deferred compensation of $1,192,096,
representing the difference between the deemed
    
 
                                       58
<PAGE>   60
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
value of the common stock for accounting purposes and the option exercise price
of such options at the date of grant. This amount is presented as a reduction of
shareholders' equity and will be amortized ratably over the vesting periods of
the applicable options. Approximately $78,000 was expensed during the year ended
December 31, 1998, and the balance will be expensed ratably over the next four
years as the options vest.
    
 
   
     (b) Restricted Stock Plan -- Effective June 14, 1993, Kroll replaced a
previously existing long-term incentive plan with a restricted stock plan. The
restricted stock plan provided for cliff vesting after a five-year period from
the date the stock was awarded. Under the provisions of the plan, a participant
had the ability to put the stock back to Kroll and receive cash for the then
fair value of the stock. In addition, the plan included a provision which
resulted in accelerated vesting of all shares in the event of a change in
control of Kroll. The Company has accounted for this plan as a fixed plan and,
accordingly, compensation expense was based on the fair market value as
determined by independent appraisal at the date of grant. During 1996, 259,271
shares of restricted stock fully vested and were issued. Based on a valuation of
Kroll, the total value assigned to these shares was $572,286.
    
 
   
     Kroll also entered into other agreements with certain of its senior
executives which provided additional grants. During 1996, all 144,421 of these
previously granted shares fully vested and were issued. Based on a valuation of
Kroll, the total value assigned to these shares on the vesting date was
$318,780. As a result of the Kroll merger in December 1997, all remaining shares
associated with the restricted stock plan vested and all restrictions lapsed on
the merger date. In connection with this accelerated vesting the Company
recognized compensation expense of approximately $800,000 in 1997, which is
included with merger related costs in the accompanying consolidated statement of
operations. In addition to the regular tax benefits based on compensation
expense recognized, the Company also realized a tax benefit for the fair market
value of all restricted shares which became fully vested in 1997. This benefit
of approximately $2.2 million has been recognized as an increase to additional
paid in capital in the accompanying consolidated statement of shareholders'
equity. This balance represents the spread between cumulative compensation
expense recognized by the Company for accounting purposes and the cumulative
compensation expense recognized for tax purposes based on the fair market value
of the shares. No shares were outstanding under the plan as of December 31, 1997
and effective January 2, 1998, further issuances under the plan were ceased by a
board resolution.
    
 
   
     Effective August 12, 1998, the Company adopted a stock incentive plan (the
1998 Stock Incentive Plan) for employees. The Company may grant up to 500,000
shares under the 1998 Stock Incentive Plan. There were no shares granted under
the plan during 1998, however, effective January 4, 1999, 38,000 shares were
granted under the plan.
    
 
   
     (c) Purchase and Retirement of Common Stock -- In accordance with Kroll's
historical bylaws, restricted stock and stock option agreements, Kroll acquired
259,036 shares (representing shares and shares under options) of a former
director for approximately $2.7 million upon his leaving the employment of Kroll
in January 1997.
    
 
   
     (d) Common Stock Warrants -- In connection with LSAI's initial public
offering on October 11, 1994, LSAI issued 660,000 warrants. No warrants had been
exercised at December 31, 1996. Until April 15, 1997, each warrant could be
exercised to purchase .4204 shares of common stock of the Company for $16.65 per
share. After April 15, 1997, each warrant could be exercised to purchase .4204
shares of common stock for $9.51 per share. On September 3, 1997, LSAI gave
notice to the holders of these warrants of LSAI's election to redeem the
outstanding warrants at $0.01 each on October 14, 1997, unless extended, at the
sole discretion of LSAI, to a date not later than November 7, 1997 (the "Warrant
Redemption"). As a result, 658,290 of the warrants were exercised in September
and October 1997, and the remaining 1,710 warrants were redeemed.
    
 
   
     As a portion of the public offering underwriting compensation, LSAI also
issued warrants to purchase 66,000 units at $7.32 per unit, consisting of .4204
shares of common stock of the Company and one warrant
    
 
                                       59
<PAGE>   61
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
for .4204 additional shares of common stock of the Company, exercisable during a
four-year period commencing on October 11, 1995 (the "Underwriter Warrants").
The warrants included within each unit were exercisable under the same terms as
the warrants issued in connection with the public offering as described above.
As a result of the Warrant Redemption, 62,000 of these warrants were exercised
for $0.12 per warrant plus $9.51 per share in September and October 1997, and
the remaining 4,000 warrants were redeemed. After the Warrant Redemption, the
holders of the Underwriter Warrants continue to have the right to exercise the
Underwriter Warrants with respect to the .4204 shares of common stock of the
Company comprising the unit for $7.20. In November 1997, 30,000 of the
Underwriter Warrants were exercised with respect to the .4204 shares of common
stock of the Company comprising the unit for $7.20. The remaining 36,000 of the
Underwriter Warrants with respect to the .4204 shares of common stock had not
been exercised and were outstanding at December 31, 1997. The proceeds from the
exercise of all warrants during 1997 are included in net proceeds from exercise
of stock options and warrants in the accompanying consolidated statement of cash
flows and approximated $2.7 million, net of commissions and other offering
expenses.
    
 
   
     In connection with the Warrant Redemption, LSAI issued warrants to purchase
30,281 shares of common stock of the Company to various investment bankers as a
portion of their compensation for serving as managers of the Warrant Redemption
and certain other services. These warrants have an exercise price per share of
$10.47 and expire on October 14, 2000. Both the number of shares and the
exercise price per share are subject to adjustment under certain circumstances.
The value of these warrants, recognized as compensation paid to the investment
bankers for services provided, was treated as a reduction in the recognized net
proceeds to LSAI from the Warrant Redemption. The value of the outstanding
warrants is included in paid in capital in excess of par and entirely offsets
the recognized compensatory value of the warrants, resulting in no net effect on
shareholders' equity.
    
 
   
     As of December 31, 1998, 24,386 warrants were still outstanding.
    
 
   
     (e) Stock Based Compensation Disclosure -- SFAS 123 requires, at a minimum,
pro forma disclosures of expense for stock-based awards based on their fair
values. Had compensation cost for these plans been determined consistent with
SFAS 123, the Company's net income and diluted earnings per share for the years
ended December 31, 1996, 1997 and 1998 would have been as follows:
    
 
   
<TABLE>
<CAPTION>
                                                 1996          1997          1998
                                              ----------    ----------    -----------
<S>                                           <C>           <C>           <C>
Net income:
  As reported...............................  $5,268,415    $2,046,643    $13,088,906
  Pro forma.................................  $5,157,960    $  979,899    $10,677,643
Diluted earnings per share:
  As reported...............................  $     0.42    $     0.14    $      0.69
  Pro forma.................................  $     0.42    $     0.07    $      0.56
</TABLE>
    
 
   
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996, 1997 and 1998:
    
 
   
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                      ---------------------------------------------
                                         1996            1997             1998
                                      -----------    -------------    -------------
<S>                                   <C>            <C>              <C>
Dividend yield......................           --               --               --
Expected volatility.................  35% - 39.3%      38% - 40.5%            41.4%
Risk-free interest rate.............    6% - 6.5%    5.96% - 6.76%    4.61% - 5.67%
                                          5 - 7.5                         1.5 - 7.5
Expected lives......................        years    5 - 7.5 years            years
</TABLE>
    
 
   
     Option grants by the Company during 1996 for 218,887 shares have a
weighted -- average exercise price of $9.72, a weighted-average fair value of
$5.06 and remaining contractual lives, on a weighted-average basis, of 7.9
years. The remaining 170,742 options granted by the Company during 1996 were
determined to have a
    
 
                                       60
<PAGE>   62
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
fair value of $0. The 606,068 options granted by the Company during 1997 have a
weighted-average exercise price of $14.95, a weighted-average fair value of
$7.68 per option and remaining contractual lives, on a weighted-average basis,
of 9.9 years. The 578,319 options granted by the Company during 1998 have a
weighted-average exercise price of $13.03, a weighted-average fair value of
$9.03 and remaining contractual lives, on a weighted-average basis, of 9.7
years.
    
 
   
     A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998, and the change during the years then ended is presented in
the table below:
    
 
   
<TABLE>
<CAPTION>
                                          1996                  1997                   1998
                                   ------------------   --------------------   --------------------
                                             WEIGHTED               WEIGHTED               WEIGHTED
                                             AVERAGE                AVERAGE                AVERAGE
                                             EXERCISE               EXERCISE               EXERCISE
                                   SHARES     PRICE      SHARES      PRICE      SHARES      PRICE
                                   -------   --------   ---------   --------   ---------   --------
<S>                                <C>       <C>        <C>         <C>        <C>         <C>
Outstanding, beginning of year...  407,022    $6.91       796,651    $6.72     1,306,443    $ 9.47
Granted..........................  389,629     6.52       606,069    14.95       578,319     13.03
Exercised........................       --       --        (5,777)    9.14      (477,894)     8.52
Forfeited/Expired/Cancelled......       --       --       (90,500)   11.76       (33,850)    19.11
                                   -------    -----     ---------    -----     ---------    ------
Outstanding, end of year.........  796,651    $6.72     1,306,443    $9.47     1,373,018    $12.12
                                   =======    =====     =========    =====     =========    ======
Exercisable, end of year.........  261,538    $6.14       761,825    $6.52       855,122    $ 8.31
                                   =======    =====     =========    =====     =========    ======
</TABLE>
    
 
   
     Of the options outstanding at December 31, 1998, 312,389 options are
exercisable at prices per share ranging from $0.52 to $2.40 per share, 748,399
options are exercisable at prices per share ranging from $6.40 to $18.50 per
share and 312,230 options are exercisable at prices per share ranging from
$20.22 to $28.54 per share.
    
 
   
(12) COMMITMENTS AND CONTINGENCIES
    
 
   
     (a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. As of December 31, 1998, the Company's lender was committed
to providing this letter of credit through May 31, 2000. As of December 31,
1998, the Company had an outstanding letter of credit in the amount of
$1,681,750.
    
 
   
     At December 31, 1998, the Company had standby and purchase letters of
credit, issued by the Company's lender, in the aggregate amount of $3,263,081.
    
 
   
     (b) Employment Agreements -- The Company has employment agreements with its
executive officers and management level personnel with annual compensation
ranging in value from $57,000 to $400,000, over varying periods extending to
December 2003. The agreements generally provide for salary continuation in the
event of termination without cause for the greater of the remainder of the
agreement or one year. The agreements also contain certain non-competition
clauses and generally provide for one year's salary if the agreement is not
renewed.
    
 
   
     As of December 31, 1998, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $32.1 million.
    
 
   
     (c) Legal Matters -- The Company is party to various legal proceedings
arising from its operations. Management of the Company believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's financial position, results of operations or its
cash flows.
    
 
                                       61
<PAGE>   63
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
    
 
   
     The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
    
 
   
     The Company has entered into eight foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
demand loans to two subsidiaries which are denominated in foreign currencies. By
virtue of these contracts, the Company has fixed the total dollar amount which
they will receive under the aforementioned subsidiary loans through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. As
of December 31, 1998, the total notional amount of the contracts, which mature
between January 1999 and December 2000, was $18.3 million. The Company's
cumulative foreign currency translation adjustment component of shareholders'
equity was increased by $346,000 in 1997 and decreased by $702,000 in 1998 as a
result of these agreements.
    
 
   
     The Company has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount the
Company would receive at December 31, 1998 in order to terminate the agreements.
As of December 31, 1998, the Company would have paid approximately $1,031,000
upon cancellation of all contracts.
    
 
   
(14) CUSTOMER AND SEGMENT DATA
    
 
   
     Segment Data -- During 1996 and 1997, the Company operated in two business
segments, the Security Products and Services Group and the Investigations and
Intelligence Group. In addition, in 1998, the Company created the Information
Security Group in connection with the merger with Securify.
    
 
   
     The following summarizes information about the Company's business segments:
    
 
   
<TABLE>
<CAPTION>
                                 SECURITY
                                 PRODUCTS    INVESTIGATIONS
                                   AND            AND          INFORMATION
                                 SERVICES     INTELLIGENCE      SECURITY
                                  GROUP          GROUP            GROUP          OTHER        CONSOLIDATED
                                 --------    --------------    -----------    ------------    ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>               <C>            <C>             <C>
1996
Net sales to unaffiliated
  customers....................  $ 79,156       $ 77,992         $    --        $    --         $157,148
                                 ========       ========         =======        =======         ========
Gross profit...................  $ 20,472       $ 25,036         $    --        $    --         $ 45,508
                                 ========       ========         =======        =======         ========
Operating income...............  $  6,954       $  2,292         $    --        $    --         $  9,246
                                 ========       ========         =======        =======         ========
Identifiable assets at
  year-end.....................  $ 39,343       $ 45,511         $    --        $    --         $ 84,854
                                 ========       ========         =======
Corporate assets...............                                                      --            1,357
Net assets of discontinued
  operation....................                                                      --            3,880
                                                                                -------         --------
          Total assets at
            year-end...........                                                 $    --         $ 90,091
                                                                                =======         ========
1997
Net sales to unaffiliated
  customers....................  $105,557       $ 83,108         $    --        $    --         $188,665
                                 ========       ========         =======        =======         ========
Gross profit...................  $ 30,006       $ 33,206         $    --        $    --         $ 63,212
                                 ========       ========         =======        =======         ========
Operating income...............  $  8,238       $  3,180         $    --        $    --         $ 11,418
                                 ========       ========         =======        =======         ========
Identifiable assets at
  year-end.....................  $ 74,283       $ 53,468         $    --        $    --         $127,751
                                 ========       ========         =======
Corporate assets...............                                                      --            5,386
Net assets of discontinued
  operation....................                                                      --           10,732
                                                                                -------         --------
          Total assets at
            year-end...........                                                 $    --         $143,869
                                                                                =======         ========
</TABLE>
    
 
                                       62
<PAGE>   64
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
<TABLE>
<CAPTION>
                                 SECURITY
                                 PRODUCTS    INVESTIGATIONS
                                   AND            AND          INFORMATION
                                 SERVICES     INTELLIGENCE      SECURITY
                                  GROUP          GROUP            GROUP          OTHER        CONSOLIDATED
                                 --------    --------------    -----------    ------------    ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>               <C>            <C>             <C>
1998
Net sales to unaffiliated
  customers....................  $136,844       $110,232         $   116        $    --         $247,192
                                 ========       ========         =======        =======         ========
Gross profit (loss)............  $ 39,345       $ 49,380         $  (395)       $  (324)        $ 88,006
                                 ========       ========         =======        =======         ========
Operating income (loss)........  $ 22,822       $ 13,282         $(2,194)       $(9,145)        $ 24,765
                                 ========       ========         =======        =======         ========
Identifiable assets at
  year-end.....................  $102,294       $103,657         $ 4,288        $    --         $210,239
                                 ========       ========         =======
Corporate assets...............                                                      --           22,371
Net assets of discontinued
  operation....................                                                      --           11,112
                                                                                -------         --------
          Total assets at
            year-end...........                                                 $    --         $243,722
                                                                                =======         ========
</TABLE>
    
 
   
     Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net sales less
operating expenses. Operating income (loss) does not include the following
items: interest expense, other expenses and income taxes. The Other column
includes the Company's corporate headquarters costs. Depreciation expense and
capital expenditures for each of the Company's business segments for the years
ended December 31, 1996, 1997 and 1998 are as follows:
    
 
   
<TABLE>
<CAPTION>
                                 SECURITY
                                 PRODUCTS    INVESTIGATIONS
                                   AND            AND          INFORMATION
                                 SERVICES     INTELLIGENCE      SECURITY
                                  GROUP          GROUP            GROUP          OTHER        CONSOLIDATED
                                 --------    --------------    -----------    ------------    ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>               <C>            <C>             <C>
1996
Depreciation expense...........  $    841       $  1,071         $    --        $    --         $  1,912
                                 ========       ========         =======        =======         ========
Capital expenditures...........  $  2,627       $    858         $    --        $    --         $  3,485
                                 ========       ========         =======        =======         ========
1997
Depreciation expense...........  $  1,427       $  1,164         $    --        $    --         $  2,591
                                 ========       ========         =======        =======         ========
Capital expenditures...........  $  3,149       $  2,767         $    --        $    --         $  5,916
                                 ========       ========         =======        =======         ========
1998
Depreciation expense...........  $  1,282       $  1,439         $    24        $    13         $  2,758
                                 ========       ========         =======        =======         ========
Capital expenditures...........  $  3,427       $  2,619         $   186        $   647         $  6,879
                                 ========       ========         =======        =======         ========
</TABLE>
    
 
   
     Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash,
marketable securities, computer software, certain intangible assets and certain
prepaid expenses.
    
 
                                       63
<PAGE>   65
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The following summarizes information about the Company's different
geographic areas:
    
 
   
<TABLE>
<CAPTION>
                                  UNITED                          OTHER
                                  STATES         FRANCE          FOREIGN      ELIMINATIONS    CONSOLIDATED
                                 --------    --------------    -----------    ------------    ------------
                                                          (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>               <C>            <C>             <C>
1996
Net sales to unaffiliated
  customers....................  $140,547       $  2,142        $ 14,459       $      --        $157,148
Intercompany...................     3,584            316           2,804          (6,704)             --
                                 --------       --------        --------       ---------        --------
     Total net sales...........  $144,131       $  2,458        $ 17,263       $  (6,704)       $157,148
                                 ========       ========        ========       =========        ========
Operating income (loss)........  $  7,736       $   (118)       $  1,628       $      --        $  9,246
                                 ========       ========        ========       =========        ========
Identifiable assets............  $ 76,532       $  1,205        $  7,117       $      --        $ 84,854
                                 ========       ========        ========       =========
Corporate assets...............                                                                    1,357
Net assets of discontinued
  operation....................                                                                    3,880
                                                                                                --------
     Total assets at yearend...                                                                 $ 90,091
                                                                                                ========
1997
Net sales to unaffiliated
  customers....................  $134,802       $ 24,004        $ 29,859       $      --        $188,665
Intercompany...................     7,413            208           4,170         (11,791)             --
                                 --------       --------        --------       ---------        --------
     Total net sales...........  $142,215       $ 24,212        $ 34,029       $ (11,791)       $188,665
                                 ========       ========        ========       =========        ========
Operating income...............  $  6,549       $  1,382        $  3,487       $      --        $ 11,418
                                 ========       ========        ========       =========        ========
Identifiable assets............  $ 86,123       $ 23,706        $ 17,922       $      --        $127,751
                                 ========       ========        ========       =========
Corporate assets...............                                                                    5,386
Net assets of discontinued
  operation....................                                                                   10,732
                                                                                                --------
     Total assets at yearend...                                                                 $143,869
                                                                                                ========
1998
Net sales to unaffiliated
  customers....................  $157,711       $ 28,458        $ 61,023       $      --        $247,192
Intercompany...................     2,960            199           3,318          (6,477)             --
                                 --------       --------        --------       ---------        --------
     Total net sales...........  $160,671       $ 28,657        $ 64,341       $  (6,477)       $247,192
                                 ========       ========        ========       =========        ========
Operating income...............  $ 12,588       $  2,251        $  9,926       $      --        $ 24,765
                                 ========       ========        ========       =========        ========
Identifiable assets............  $135,113       $ 29,047        $ 46,079       $      --        $210,239
                                 ========       ========        ========       =========
Corporate assets...............                                                                   22,371
Net assets of discontinued
  operation....................                                                                   11,112
                                                                                                --------
     Total assets at yearend...                                                                 $243,722
                                                                                                ========
</TABLE>
    
 
   
     The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
    
 
                                       64
<PAGE>   66
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
     The following summarizes the Company's sales in the United States and
foreign locations:
    
 
   
<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1996        1997        1998
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Sales to unaffiliated customers:
  U.S. Government..................................  $ 51,505    $ 43,719    $ 62,149
  Other United States..............................    72,337      73,848      89,853
  Middle East......................................     7,598       5,887       5,958
  Europe...........................................     4,028      26,584      35,274
  Asia.............................................     8,946      10,697      15,467
  Central & South America..........................     5,807      20,123      25,850
  Other Foreign....................................     6,927       7,807      12,641
                                                     --------    --------    --------
                                                     $157,148    $188,665    $247,192
                                                     ========    ========    ========
</TABLE>
    
 
   
     Export sales by the Company's domestic operations were approximately 15%,
16% and 19% of net sales for the years ended December 31, 1996, 1997 and 1998,
respectively.
    
 
   
     The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. Additionally, the Company's laboratory testing operations are
certified and subject to frequent inspections and proficiency tests by certain
federal, state or local jurisdictions. Management believes that potential claims
from such audits and investigations will not have a material adverse effect on
the supplemental consolidated financial statements. In addition, contracts with
the U.S. Government may contain cost or performance incentives or both based on
stated targets or other criteria. Cost or performance incentives are recorded at
the time there is sufficient information to relate actual performance to targets
or other criteria.
    
 
   
     The Company has foreign operations and assets in Argentina, Australia,
Brazil, Canada, China, Colombia, France, Germany, India, Italy, Japan, Mexico,
Russia, Saudi Arabia, Singapore, Switzerland, the Philippines and the United
Kingdom. In addition, the Company sells its products and services in other
foreign countries and continues to increase its level of international activity.
Accordingly, the Company is subject to various risks including, among others,
foreign currency restrictions, exchange rate fluctuations, government
instability and complexities of local laws and regulations.
    
 
   
     (b) Major Customers -- During the years ended December 31, 1996, 1997 and
1998 sales in the Security Products and Services Group to the U.S. Government
approximated 33%, 23% and 25% of the Company's net sales, respectively.
    
 
                                       65
<PAGE>   67
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(15) SUPPLEMENTAL CASH FLOWS DISCLOSURES
    
 
   
     The following is a summary of cash paid related to certain items:
    
 
   
<TABLE>
<CAPTION>
                                                 1996          1997          1998
                                              ----------    ----------    -----------
<S>                                           <C>           <C>           <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
     Cash paid for interest.................  $4,460,514    $4,853,462    $ 4,581,068
                                              ==========    ==========    ===========
     Cash paid for taxes of continuing
       operations...........................  $  729,193    $3,468,474    $ 3,952,951
                                              ==========    ==========    ===========
     Cash paid for taxes of discontinued
       operation............................  $       --    $       --    $   142,398
                                              ==========    ==========    ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
  ACTIVITIES:
     Issuance of restricted stock...........  $  891,066    $1,356,280    $        --
                                              ==========    ==========    ===========
     Affiliate obligation forgiven in
       connection with the reorganization...  $  122,000    $       --    $        --
                                              ==========    ==========    ===========
     Fair value of stock issued in
       connection with acquisition of
       businesses...........................  $       --    $6,608,485    $17,133,300
                                              ==========    ==========    ===========
     Fair value of stock issued in
       connection with acquisition of
       minority interest....................  $       --    $1,243,474    $        --
                                              ==========    ==========    ===========
     Notes issued in connection with
       acquisition of businesses............  $  505,834    $2,906,513    $        --
                                              ==========    ==========    ===========
     Tax benefit of restricted stock
       vesting..............................  $       --    $2,160,341    $        --
                                              ==========    ==========    ===========
     Fair value of stock issued in
       connection with acquisition of
       business of discontinued operation...  $       --    $1,851,284    $        --
                                              ==========    ==========    ===========
</TABLE>
    
 
   
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)-
    
 
   
<TABLE>
<CAPTION>
                                            FIRST     SECOND      THIRD     FOURTH
                                           QUARTER    QUARTER    QUARTER    QUARTER
                                           -------    -------    -------    -------
                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>        <C>        <C>        <C>
1998
Net sales................................  $52,369    $58,845    $68,551    $67,427
Gross profit.............................   18,312     21,021     24,581     24,091
Net income...............................    3,185      4,142      5,311        451
Earnings per share:
  Basic..................................  $  0.21    $  0.23    $  0.26    $  0.02
  Diluted................................  $  0.20    $  0.23    $  0.26    $  0.02
1997
Net sales................................  $41,702    $46,726    $47,092    $53,146
Gross profit.............................   14,259     16,703     15,799     16,462
Net income (loss)........................    1,665      2,640      2,701     (4,959)
Earnings (loss) per share:
  Basic..................................  $  0.12    $  0.19    $  0.19    $ (0.35)
  Diluted................................  $  0.09    $  0.16    $  0.17    $ (0.35)
</TABLE>
    
 
                                       66
<PAGE>   68
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
(17) SUBSEQUENT EVENTS
    
 
   
     (a) Acquisitions -- On January 21, 1999, the Company entered into a
definitive agreement to acquire all of the outstanding capital stock of
Background America, Inc. (BAI) for approximately 989,000 shares of Company
common stock, including approximately 90,000 shares reserved for issuance for
outstanding common stock equivalents. BAI provides employment screening and
compliance services to a variety of industries and will be included in the
Company's Investigations and Intelligence Group. The acquisition is subject to
the approval of the BAI shareholders and upon completion is expected to qualify
as a pooling of interests. Included in the December 31, 1998 consolidated
balance sheet is approximately $573,000 of merger costs incurred by the Company
which, along with other merger costs subsequently incurred, will be expensed
immediately upon consummation of the transaction on a pooling of interests
basis.
    
 
   
     On March 1, 1999, the Company acquired all of the capital stock of
Financial Research, Inc. (FRI) for approximately $3.3 million, consisting of
101,555 shares of common stock. FRI provides business valuation and economic
damage analysis services and will be included in the Company's Investigations
and Intelligence Group. The acquisition has been accounted for as a pooling of
interests. The pro forma restated results for 1996, 1997 and 1998 would not be
materially different from the reported results.
    
 
   
     (b) Discontinued Operation -- Voice and Data Communications Group -- On
April 28, 1999, the Board of Directors approved a formal plan to discontinue
operations of the Voice and Data Communications Group, which offered secure
satellite communication equipment and satellite navigation systems. The Company
received an outside expression of interest for this business in April 1999 and
intends to make the assets of the segment available for sale immediately and
expects to complete the disposal of this segment within the next twelve months.
The results of operations of this Group have been classified as discontinued
operations and all prior periods have been restated accordingly. The results of
the discontinued Voice and Data Communications Group reflect an allocation of
interest expense based on the Group's average net assets. The Group does not
warrant any material income tax expense or benefit for the periods presented.
    
 
   
     Net sales, results of operations and net assets from this discontinued
operation are as follows (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                       ----------------------------
                                                        1996      1997       1998
                                                       ------    -------    -------
<S>                                                    <C>       <C>        <C>
Net sales............................................  $7,770    $17,437    $17,653
Interest expense allocation..........................  $   --    $   367    $   288
Income (loss) from discontinued operations...........  $  333    $  (305)   $(1,325)
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              ------------------
                                                               1997       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Current assets, including $398 of advances on purchase
  agreement.................................................  $12,643    $12,071
Property, plant and equipment, net..........................      125         68
Advances on purchase agreement..............................    1,275      1,130
Other assets................................................    3,305      3,077
Current liabilities.........................................   (6,616)    (5,234)
                                                              -------    -------
          Net assets of discontinued operations.............  $10,732    $11,112
                                                              =======    =======
</TABLE>
    
 
   
     In June 1995, the Voice and Data Communications Group entered into a firm
purchase agreement with Glocom, Inc. ("Glocom"). The agreement provided for an
irrevocable purchase order for the purchase of 4,000 units of the Compact-M
portable satellite telecommunication unit for approximately $12,000,000. In
October 1997, the agreement was amended to provide certain pricing concessions
to the Group for purchases
    
 
                                       67
<PAGE>   69
   
                            THE KROLL-O'GARA COMPANY
    
 
   
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
    
 
   
by the Group of products sold by Glocom and to provide a reduction in the
quantity of the original units that must be purchased. The amendment also
provided certain licensing rights to the Group. In November 1998, the Group
entered into a purchase agreement with Glocom to acquire a new type of portable
satellite telecommunication terminal. This contract provided for approximately a
$3,000,000 purchase commitment. The agreement restated that the pricing
concession provided on units purchased set forth in the above referenced
amendment, in order to continue to amortize the remaining balance of the
original advance, applies to the purchase of the new terminals. At December 31,
1998, the Group was committed to purchase approximately 240 INMARSAT B terminals
at a total cost of approximately $3.0 million. In accordance with the original
agreement, the Group advanced a total of $3,000,000 to Glocom for the funding of
the related production costs. As of December 31, 1997 and 1998, the Group had
advances to the above vendor of $1,673,123 and $1,130,361, respectively.
    
 
   
     In February 1997, the Company completed an acquisition in the Voice and
Data Communications Group which was accounted for as a purchase business
combination. The purchase price of $3.5 million consisted of approximately $1.6
million in seller-provided financing and 170,234 shares of common stock (valued
at approximately $1.9 million or $10.88 per share). The resulting goodwill of
approximately $3.5 million from this transaction is being amortized over fifteen
years.
    
 
   
     One executive in the Voice and Data Communications Group has an employment
agreement subject to similar terms as discussed in Note 12(b). If terminated
without cause, this commitment would approximate $1.1 million as of December 31,
1998.
    
 
   
     The Company will continue to monitor the potential for impairment of the
net assets of the discontinued Voice and Data Communications Group, if any, and
will record impairment as facts and circumstances warrant. Based on its most
recent analysis, the Company believes no impairment exists at December 31, 1998.
    
 
                                       68
<PAGE>   70
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
   
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
 
     The following table sets forth certain information as of March 31, 1999
concerning each of Kroll-O'Gara's executive officers and directors:
 
<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>    <C>
Jules B. Kroll............................  57     Chairman of the Board, Chief Executive
                                                   Officer and Director
Thomas M. O'Gara..........................  48     Vice Chairman of the Board and Director
Wilfred T. O'Gara.........................  41     President, Chief Operating Officer and
                                                   Director
Nicholas P. Carpinello....................  49     Controller and Treasurer
Michael G. Cherkasky......................  49     Chief Operating Officer -- Investigations
                                                   and Intelligence Group and Director
Marshall S. Cogan.........................  61     Director
Abram S. Gordon...........................  35     Vice President, General Counsel and
                                                   Secretary
Michael J. Lennon.........................  42     Chief Operating Officer -- Security
                                                   Products and Services and Director
Raymond E. Mabus..........................  50     Director
Nazzareno E. Paciotti.....................  53     Chief Financial Officer
Hugh E. Price.............................  62     Director
Jerry E. Ritter...........................  64     Director
William S. Sessions.......................  68     Director
Howard I. Smith...........................  54     Director
</TABLE>
 
   
     JULES B. KROLL has been Chairman of the Board and Chief Executive Officer
of Kroll-O'Gara since the Kroll Holdings merger on December 1, 1997. He founded
Kroll-O'Gara's Kroll Associates, Inc. subsidiary in 1972 and has been the
Chairman of the Board and Chief Executive Officer of Kroll Associates and Kroll
Holdings since their foundings. Mr. Kroll also is a director of United Auto
Group, Inc. He has been a director of Kroll-O'Gara since December 1997.
    
 
   
     THOMAS M. O'GARA has been Vice Chairman of the Board of Kroll-O'Gara since
the Kroll Holdings merger. He served as Chairman of the Board of Kroll-O'Gara
from August 1996 until December 1997. Mr. O'Gara has also been Chairman of the
Board of OHE since 1990 and was OHE's Chief Executive Officer from 1990 until
1995. He has been a director of Kroll-O'Gara since August 1996 and a director of
OHE since 1988. Mr. O'Gara has held numerous executive officer and director
positions with Kroll-O'Gara, its subsidiaries and its predecessors since 1975.
From 1984 until 1986, Mr. O'Gara also was Honorary Consul General for the
Sultanate of Oman. Thomas M. O'Gara and Wilfred T. O'Gara are brothers.
    
 
   
     WILFRED T. O'GARA has been President and Chief Operating Officer of
Kroll-O'Gara since the Kroll Holdings merger prior to which he had served as
Kroll-O'Gara's Chief Executive Officer since August 1996. Mr. O'Gara has been
associated with Kroll-O'Gara, its subsidiaries and its predecessors since 1983
and has held numerous executive officer and director positions, including
serving as Chief Executive Officer of OHE since January 1996, President and
Chief Operating Officer of OHE from 1991 through 1995 and Vice
President -- Sales and Marketing of OHE from 1988 until 1991. Mr. O'Gara has
been a director of Kroll-O'Gara since August 1996 and a director of OHE since
1991. Mr. O'Gara also is a director of LSI Industries, Inc.
    
 
                                       69
<PAGE>   71
 
   
     NICHOLAS P. CARPINELLO has been Controller and Treasurer of Kroll-O'Gara
since the Kroll Holdings merger. From August 1996 until December 1997 he served
as Kroll-O'Gara's Executive Vice President, Chief Financial Officer and
Treasurer, positions he also has held with OHE since 1993. Mr. Carpinello has
been associated with Kroll-O'Gara and its predecessors since 1984. From 1975
until 1984, he was employed by Arthur Andersen LLP where he served as a manager
in the audit and small business consulting divisions.
    
 
   
     MICHAEL G. CHERKASKY became Chief Operating Officer of Kroll-O'Gara's
Investigations and Intelligence Group in December 1997. Prior to the Kroll
Holdings merger he had been an Executive Managing Director of Kroll Holdings
since April 1997 and Chief Operating Officer of Kroll Holdings since January
1997. From November 1995 to January 1997, he was the head of Kroll Holdings'
North American Region and from February 1994 to November 1995 he was the head of
Kroll Holdings' Monitoring Group. From June 1993 to November 1993, Mr. Cherkasky
was a candidate for public office. From 1978 to June 1993, Mr. Cherkasky was
with the District Attorney's office for New York County, his last position being
Chief of the Investigation Division. He became a director of Kroll-O'Gara in
December 1997.
    
 
     MARSHALL S. COGAN has been Vice Chairman of Foamex International, Inc., a
manufacturer of polyurethane foam products, since May 1997 and Chairman and
Chief Executive Officer of United Auto Group, a franchisor of car and light
truck dealerships, since April 1997. Mr. Cogan was Chairman of the Board and
Chairman of the Executive Committee of Foamex International from 1993 until 1997
and was Chief Executive Officer of Foamex International from 1994 until 1997.
Since 1974, Mr. Cogan has been the principal shareholder, Chairman or Co-
Chairman of the Board of Directors, and Chief Executive Officer or Co-Chief
Executive Officer, of Trace International Holdings, Inc., a holding company
operating businesses in the auto sales, foam, textile and publishing industries.
Mr. Cogan has been a director of Kroll-O'Gara since December 1997.
 
     ABRAM S. GORDON is Vice President, General Counsel and Secretary of
Kroll-O'Gara. Prior to joining Kroll-O'Gara in January 1997, he was with the law
firm of Taft, Stettinius & Hollister LLP, Cincinnati, Ohio, from October 1987
until December 1996.
 
     MICHAEL J. LENNON became Chief Operating Officer of Kroll-O'Gara's Security
Products and Services Group in December 1997. He also has been the President and
Chief Operating Officer of OHE since January 1996. Mr. Lennon joined OHE in
February 1994 as Manager of Commercial and Military Programs; he became Vice
President for Sales, Marketing and Program Management in October 1994 and served
OHE in that capacity through 1995. Prior to joining OHE, Mr. Lennon had 15
years' experience in engineering, manufacturing, quality control and marketing
with General Electric Company, which he joined in 1979. From 1990 to 1994, he
was Manager of Advanced Technology Marketing for their G.E. Aircraft Engines
business. He became a director of Kroll-O'Gara in March 1998.
 
   
     RAYMOND E. MABUS is President of International Management and Development
Group Ltd., a provider of workforce analysis, foreign investment planning and
resource generation services, and of counsel to the law firm of Baker,
Donaldson, Bearman and Caldwell. He also manages a family timber business. He
served as the United States Ambassador to the Kingdom of Saudi Arabia from 1994
until 1996, as a consultant to Mobil Telecommunications Technology from 1992
until 1994 and as Governor of the State of Mississippi from 1988 until 1992. Mr.
Mabus has been a director of Kroll-O'Gara since November 1996.
    
 
   
     NAZZARENO E. PACIOTTI has been Chief Financial Officer of Kroll-O'Gara
since the Kroll Holdings merger. Prior to the Kroll Holdings merger he had been
the Chief Financial Officer of Kroll Holdings since 1992. From 1990 to 1992, he
was a Managing Director and the Controller of the Henley Group (the parent of
PneumoAbex Inc. and Fisher Scientific, a laboratory supply company) and from
1988 to 1990, he was a Vice President and the Controller of PneumoAbex Inc., an
aerospace contractor specializing in the manufacture of landing gear and flight
actuating systems.
    
 
     HUGH E. PRICE is engaged in business development activities for
Kroll-O'Gara. During 1995 and 1996, prior to joining Kroll-O'Gara, he was a
consultant to various businesses and organizations. Until his retirement in
1995, Mr. Price had been employed by the Central Intelligence Agency since 1964.
His positions with the Agency included Deputy and Associate Deputy Director for
Operations (1991-1995), Chief
 
                                       70
<PAGE>   72
 
and Deputy Chief for Counterintelligence (1988-1990) and Director of Personnel
(1986-1988). Mr. Price became a director of Kroll-O'Gara in October 1996.
 
     JERRY E. RITTER is currently a consultant to Anheuser-Busch Companies,
Inc., a company engaged in the brewing and family entertainment businesses. He
also is Chairman of the Board of Clark Enterprises, Inc., the general partner of
the Kiel Center and the St. Louis Blues Hockey Club. From 1990 until 1996, Mr.
Ritter served as Executive Vice President and Chief Financial and Administrative
Officer for Anheuser-Busch Companies, Inc. Prior to that time, he served
Anheuser-Busch in various other managerial and executive capacities. Mr. Ritter
also is a director of The Earthgrains Company, Brown Group, Inc. and OmniQuip
International, Inc. He became a director of Kroll-O'Gara in January 1997.
 
     WILLIAM S. SESSIONS is a partner in the law firm of Sessions & Sessions
L.C. and is a consultant to various public and private businesses. From 1987
until 1993, Mr. Sessions was Director of the Federal Bureau of Investigation. He
served as a United States District Judge for the Western District of Texas from
1974 until 1987. Mr. Sessions is a director of Zenith National Insurance
Company. He has been a director of Kroll-O'Gara since November 1996.
 
     HOWARD I. SMITH has been Executive Vice President, Chief Financial Officer
and Comptroller of AIG since 1996. From 1984 until 1996, Mr. Smith was Senior
Vice President and Comptroller of AIG. From 1975 until 1984 Mr. Smith was a
partner in the independent public accounting firm of Coopers & Lybrand. Mr.
Smith also is a director of AIG, 20th Century Industries, International Lease
Finance Corporation and Transatlantic Holdings, Inc. He became a director of
Kroll-O'Gara in December 1997.
 
     Directors of Kroll-O'Gara are elected annually. Officers of Kroll-O'Gara
are elected annually and serve at the discretion of the Board of Directors.
 
   
     SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Securities Exchange Act of 1934 requires Kroll-O'Gara's executive officers
and directors, and persons who beneficially own more than ten percent of
Kroll-O'Gara's equity securities, to file reports of security ownership and
changes in that ownership with the Securities and Exchange Commission. These
persons also are required by SEC regulations to furnish Kroll-O'Gara with copies
of all Section 16(a) forms they file. Based upon a review of copies of these
forms and written representations from its executive officers and directors,
Kroll-O'Gara believes that all Section 16(a) forms were filed on a timely basis
during and for 1998, except that a Form 4 reporting shares sold was filed after
its due date by Mr. Cherkasky and amended Forms 5 are being filed after their
due date by Messrs. Cogan, Ritter, Sessions and Smith reporting phantom stock
units credited under Kroll-O'Gara's new Outside Directors' Deferred Compensation
Plan.
    
 
                                       71
<PAGE>   73
 
   
ITEM 11. EXECUTIVE COMPENSATION
    
 
   
     SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by Kroll-O'Gara
and its subsidiaries, for services in all capacities, to Jules B. Kroll,
Kroll-O'Gara's Chief Executive Officer, and each of the four other most highly
compensated executive officers during 1998. These persons are sometimes referred
to as the "named executive officers."
    
 
   
                           SUMMARY COMPENSATION TABLE
    
 
   
<TABLE>
<CAPTION>
                                                                     LONG TERM
                                   ANNUAL COMPENSATION          COMPENSATION AWARDS
                                --------------------------   -------------------------
                                                    OTHER                  SECURITIES
                                                   ANNUAL    RESTRICTED    UNDERLYING
                                                   COMPEN-     STOCK      STOCK OPTION    ALL OTHER
       NAME AND                 SALARY    BONUS    SATION      AWARDS        GRANTS      COMPENSATION
  PRINCIPAL POSITION     YEAR     ($)      ($)       ($)        ($)           (#)            ($)
-----------------------  ----   -------   ------   -------   ----------   ------------   ------------
<S>                      <C>    <C>       <C>      <C>       <C>          <C>            <C>
Jules B. Kroll(1)        1998   375,000       --      --         --              --         31,915(2)
Chairman and Chief       1997   489,583       --      --         --              --         32,965
Executive Officer        1996   500,000   75,000      --         --              --         31,715
Thomas M. O'Gara         1998   275,000       --      --         --              --          3,909(3)
Vice Chairman            1997   252,083       --      --         --          23,150          4,568
                         1996   379,081    7,000      --         --              --          4,912
Wilfred T. O'Gara        1998   350,000       --      --         --              --          2,292(3)
President and Chief      1997   240,000   45,000      --         --          98,150          4,898
Operating Officer        1996   200,231   45,000      --         --          17,000          4,240
Michael G. Cherkasky(1)  1998   400,000       --      --         --              --         25,930(2)
Chief Operating
  Officer --             1997   400,000       --      --         --          25,000         28,914
Investigations and       1996   300,000   75,000     898         --          68,647         26,767
Intelligence Group
Michael J. Lennon        1998   185,000   74,000      --         --              --          2,237(3)
Chief Operating
  Officer --             1997   148,333   70,000      --         --          20,000          5,401
Security Products and    1996   128,334   60,317      --         --          17,000          4,258
Services Group
Nazzareno E.
  Paciotti(1)            1998   275,520   66,667      --         --              --         19,813(2)
Chief Financial Officer  1997   275,520   66,667      --         --          15,000         26,984
                         1996   225,520   50,000      --         --          68,647         24,984
</TABLE>
    
 
---------------
 
   
(1) Messrs. Kroll, Cherkasky and Paciotti were unaffiliated with Kroll-O'Gara
    prior to the merger with Kroll Holdings in December 1997; however, their
    compensation information is given on a pooling of interests basis, as if
    they had been executive officers of Kroll-O'Gara throughout the periods
    presented.
    
 
   
(2) Represents pension contributions of $14,000 for Mr. Kroll, $16,000 for Mr.
    Cherkasky and $9,662 for Mr. Paciotti as well as profit-sharing
    contributions of $500 for each person, supplemental disability plan benefits
    of $12,465 for Mr. Kroll, $7,516 for Mr. Cherkasky and $6,483 for Mr.
    Paciotti and group term life insurance benefits of $4,950 for Mr. Kroll,
    $1,914 for Mr. Cherkasky and $3,168 for Mr. Paciotti.
    
 
   
(3) Represents profit-sharing contributions to the Company's 401(k) Plan of
    $2,691 for Mr. Thomas M. O'Gara, $1,578 for Mr. Wilfred T. O'Gara and $1,747
    for Mr. Lennon as well as executive disability insurance plan benefits of
    $1,218 for Mr. Thomas M. O'Gara, $714 for Mr. Wilfred T. O'Gara and $490 for
    Mr. Lennon.
    
 
   
     EMPLOYMENT AGREEMENTS. Commencing December 1, 1997, Kroll-O'Gara has
employment agreements, or amendments to existing employment agreements, which
expire on November 30, 2000, with each of its executive officers except Mr.
Cherkasky providing for annual base salaries in the following amounts: Jules B.
Kroll, $375,000; Thomas M. O'Gara, $275,000; Wilfred T. O'Gara, $350,000;
Michael J. Lennon, $185,000; Nazzareno E. Paciotti, $275,000; Nicholas P.
Carpinello, $180,000; Abram S. Gordon, $150,000. Each
    
 
                                       72
<PAGE>   74
 
   
executive officer, including Mr. Cherkasky, also is entitled to participate in
an annual bonus plan established by the Compensation Committee of the Board of
Directors and to receive up to 50% of his bonus in shares of Kroll-O'Gara's
common stock. Pursuant to these employment agreements, employment may be
terminated by Kroll-O'Gara at any time with or without cause, except that, in a
case of termination without cause, the employee is entitled to receive
compensation for the greater of the balance of the term of the agreement or one
year. The agreements also provide that if Kroll-O'Gara does not renew the
agreement for one year or more at the end of the term, the employee will receive
an amount equal to one year's base salary. Each employment agreement restricts
the executive officer from competing with Kroll-O'Gara during the term of the
agreement, and for two years thereafter if termination of employment is for
cause or at the volition of the employee. Each of Messrs. Thomas M. and Wilfred
T. O'Gara has further agreed that during his employment and for a period of 10
years thereafter he will not directly or indirectly own any interest in or
perform any services for any entity which uses the word "O'Gara" as a business
or trade name and competes with Kroll-O'Gara. Additionally, Mr. Kroll has agreed
that during his employment and for a period of 10 years thereafter he will not
directly or indirectly own any interest in or perform any services for any
entity which uses the word "Kroll" as a business or trade name and competes with
Kroll-O'Gara.
    
 
   
     STOCK OPTIONS. No stock options were granted to the named executive
officers during 1998. With respect to each named executive officer, the
following table sets forth information concerning stock options exercised during
1998 and unexercised stock options held at December 31, 1998.
    
 
   
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
    
   
                            AND FY-END OPTION VALUES
    
 
   
<TABLE>
<CAPTION>
                                                                      NUMBER OF
                                                                     SECURITIES          VALUE OF
                                                                     UNDERLYING         UNEXERCISED
                                                      VALUE          UNEXERCISED       IN-THE-MONEY
                                                   REALIZED ($)      OPTIONS AT         OPTIONS AT
                                                 ----------------    FY-END (#)         FY-END ($)
                                                 (MARKET PRICE ON   -------------   -------------------
                               SHARES ACQUIRED    EXERCISE LESS     EXERCISABLE/       EXERCISABLE/
            NAME               ON EXERCISE (#)   EXERCISE PRICE)    UNEXERCISABLE      UNEXERCISABLE
            ----               ---------------   ----------------   -------------   -------------------
<S>                            <C>               <C>                <C>             <C>
Jules B. Kroll...............          --                 --                   --                    --
Thomas M. O'Gara.............          --                 --         7,716/15,434       210,940/421,935
Wilfred T. O'Gara............       5,000             77,500        44,716/65,434   1,139,384/1,548,312
Michael G. Cherkasky.........          --                 --        98,862/16,667     3,450,378/369,807
Michael J. Lennon............       5,365             98,582        18,301/13,334       512,464/316,692
Nazzareno E. Paciotti........          --                 --        95,529/10,000     3,376,425/221,880
</TABLE>
    
 
   
DIRECTORS' COMPENSATION
    
 
   
     Directors who are not employees of Kroll-O'Gara receive annually a $15,000
fee, plus options to purchase 2,000 shares of common stock, for serving as
directors. These directors also are paid $1,000 for each Board of Directors
meeting attended in person and $750 for Board meetings held by telephone. Each
committee Chairman receives an annual fee of $1,600 and committee members,
including the Chairman, receive $750 per meeting attended, whether in person or
by telephone, unless the meeting occurs on the same day as a Board meeting, in
which case no separate fee is paid. Employee directors are not separately
compensated for their services as directors.
    
 
   
     Under Kroll-O'Gara's Outside Directors' Deferred Compensation Plan, each
nonemployee director is entitled to defer all or a portion of his director's
fees into a bookkeeping account. The account is credited with "phantom"
Kroll-O'Gara common stock units equivalent in value to the amount of each fee
deferred, at the time earned. Unless a later time is selected by a director, the
value of the units in the director's account will be paid in cash when the
director's service on Kroll-O'Gara's Board terminates or at the time of a
"change in control" of Kroll-O'Gara as defined in the Plan.
    
 
                                       73
<PAGE>   75
 
   
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
 
   
     The following table sets forth certain information regarding the beneficial
ownership of Kroll-O'Gara's common stock on March 31, 1999 by each beneficial
owner of more than five percent of the common stock, each director and each
named executive officer individually and all directors and executive officers as
a group. Unless otherwise indicated, all shares are owned directly and the
indicated owner has sole voting and dispositive power with respect to such
shares.
    
 
   
<TABLE>
<CAPTION>
                                                                  BENEFICIAL
                                                                 OWNERSHIP(1)
                                                              -------------------
                            NAME                               NUMBER     PERCENT
                            ----                              ---------   -------
<S>                                                           <C>         <C>
Jules B. Kroll(2)(3)........................................  2,879,991    13.8
Thomas M. O'Gara(2).........................................  2,433,652    11.7
Wilfred T. O'Gara...........................................    280,772     1.3
Michael G. Cherkasky........................................    127,272       *
Marshall S. Cogan...........................................         --      --
Michael J. Lennon...........................................     25,434       *
Raymond E. Mabus............................................      2,000       *
Nazzareno E. Paciotti.......................................    108,845       *
Hugh E. Price...............................................      8,889       *
Jerry E. Ritter.............................................      2,000       *
William S. Sessions.........................................      2,000       *
Howard I. Smith(2)(4).......................................  1,444,212     6.9
All directors and executive officers as a group
(14 persons)(5).............................................  7,401,365    35.0
American International Group, Inc.(2).......................  1,444,212     6.9
</TABLE>
    
 
---------------
 
   
 *  Less than 1%.
    
 
   
(1) Included in the shares listed are the following numbers of shares of common
    stock which may be acquired through the exercise of currently exercisable
    stock options or stock options which become exercisable within 60 days after
    March 31, 1999; Mr. Kroll, none; Mr. Thomas M. O'Gara, 15,433 shares; Mr.
    Wilfred T. O'Gara, 37,730 shares; Mr. Cherkasky, 98,862 shares; Mr. Cogan,
    none; Mr. Lennon, 14,636 shares; Mr. Mabus, 2,000 shares; Mr. Paciotti,
    95,529 shares; Mr. Price, 8,889 shares; Mr. Ritter, 1,000 shares; Mr.
    Sessions, 2,000 shares; Mr. Smith, none; and all directors and executive
    officers as a group, 305,411 shares.
    
 
   
(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. Mr.
    O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. Mr. Smith's
    and AIG's address is 70 Pine Street, New York, New York 10270.
    
 
   
(3) Does not include 192,560 shares held by trusts for the benefit of Mr.
    Kroll's adult children, in which Mr. Kroll disclaims any beneficial
    interest.
    
 
   
(4) Consists of 1,444,212 shares held by AIG. Mr. Smith disclaims any beneficial
    interest in these shares.
    
 
   
(5) Includes 1,444,212 shares held by AIG which are deemed to be owned by Mr.
    Smith and in which he disclaims any beneficial interest.
    
 
   
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
 
   
     In connection with Kroll-O'Gara's initial public offering, the Board of
Directors adopted a policy requiring that any future transactions, including
loans, between Kroll-O'Gara and its officers, directors, principal shareholders
and their affiliates be on terms no less favorable to Kroll-O'Gara than could be
obtained from unrelated third parties and that any such transactions be approved
by a majority of the disinterested members of the Board of Directors.
    
 
                                       74
<PAGE>   76
 
   
     Described below are certain transactions and relationships between
Kroll-O'Gara and its officers, directors and shareholders which have occurred
during the last fiscal year. Except with respect to interest rates charged on
certain of the intercompany notes and accounts payable/receivable, Kroll-O'Gara
believes that the material terms of the various transactions were as favorable
as could have been obtained from unrelated third parties.
    
 
   
VICTORY AVIATION
    
 
   
     Victory Aviation Services, Inc. is a Delaware corporation of which Messrs.
Thomas M. O'Gara, Wilfred T. O'Gara and Carpinello own approximately 92%, 1% and
1%, respectively, of the outstanding capital stock.
    
 
   
     LEASE AGREEMENTS. Kroll-O'Gara has a Master Equipment Lease with Victory
Aviation, entered into in July 1995, under which Kroll-O'Gara leases various
items of equipment from Victory Aviation. As of December 31, 1998, Kroll-O'Gara
had approximately $1,250,000 of equipment under lease for terms up to 36 months,
beginning on various dates between July 1995 and April 1996. Rental expenses
were $396,005 for the year ended December 31, 1998.
    
 
   
     SUPPLIER ARRANGEMENTS. During 1995 and 1996, Kroll-O'Gara purchased the
dual-hard steel required for its vehicle armoring from Victory Aviation, which
distributed the steel for an unrelated third party. At December 31, 1998,
Kroll-O'Gara had receivables of $282,345 from Victory Aviation in connection
with the prior arrangement, which sum is guaranteed by the shareholders of
Victory Aviation. All other aspects of the arrangement have been terminated.
    
 
   
     CORPORATE AIRCRAFT. In February 1995, Kroll-O'Gara entered into a lease for
a Gulfstream G-II aircraft owned by Victory Aviation. Effective June 1, 1998,
Kroll-O'Gara reached an agreement to amend the corporate aircraft lease. The
terms of the aircraft lease addendum provide Kroll-O'Gara with a hourly discount
from the normal commercial hourly rate on future charters of corporate aircrafts
from Victory Aviation in order to amortize the remaining portion of existing
lease deposits from the original aircraft lease. Kroll-O'Gara had approximately
$484,000 in unamortized lease deposits with Victory Aviation as of December 31,
1998. Rental expense related to the Gulfstream lease, including amortization of
the deposit, was $292,000 in 1998.
    
 
   
     In 1998, Kroll-O'Gara paid Victory Aviation $296,000 relating to use of the
G-II aircraft during the roadshow for a stock offering and $270,000 relating to
use of another corporate aircraft in connection with the merger with Securify.
Kroll-O'Gara believes that the rate paid was equivalent to that charged by
Victory Aviation to other unrelated companies for similar services during 1998
and compared favorably to rates charged by another unrelated charter service for
similar aircraft.
    
 
   
INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS
    
 
   
     In 1998, Mr. Thomas M. O'Gara repaid a $120,191 advance made by OHE prior
to Kroll-O'Gara's initial public offering. This amount was not represented by a
promissory note. Also in 1998, Mr. Kroll was repaid $332,490 in principal and
interest owed him on a promissory note issued by a subsidiary of Kroll Holdings
at the time of the merger into Kroll-O'Gara. There were no principal payments
made with respect to this note prior to 1998. During 1998, Kroll-O'Gara and
Messrs. Thomas M. O'Gara and Kroll agreed to reimburse Kroll-O'Gara for a
portion of general and administrative expenses, including outside professional
fees, office rent and travel expenses, which were incurred for the benefit of
both Kroll-O'Gara and the individuals. Amounts due to Kroll-O'Gara at December
31, 1998 pursuant to this agreement were $429,953 from Mr. Thomas M. O'Gara and,
after repayment of the promissory note referred to above, $85,672 from Mr.
Kroll.
    
 
   
     During 1998, Kroll-O'Gara rendered risk management services, including
marketing support, and claims investigations services to AIG and its
subsidiaries. Kroll-O'Gara billed AIG and its subsidiaries $4,877,478 in 1998
for these services. The year-end accounts receivable balance for AIG was
$1,290,558 at December 31, 1998. Since 1995, Kroll-O'Gara has purchased some of
its liability insurance, including Professional Errors
    
 
                                       75
<PAGE>   77
 
   
and Omissions and Directors and Officers liability insurance, from AIG's
subsidiaries. AIG's subsidiaries billed Kroll-O'Gara $474,800 for this insurance
during 1998. Kroll-O'Gara obtains the coverage through an independent insurance
broker and where possible obtains competitive proposals from unrelated third
parties.
    
 
   
BUILDING LEASE
    
 
   
     OLG, Limited, an Ohio limited liability company of which Messrs. Thomas M.
O'Gara, Wilfred T. O'Gara, Carpinello and Lennon own approximately 91%, 5%, 1%
and 1% of the outstanding capital stock, was formed in March 1996 for the
purpose of acquiring and leasing to Kroll-O'Gara a facility located at 4175
Muhlhauser Road, Fairfield, Ohio. OLG sold the building in August 1998. Total
lease payments made in 1998 by Kroll-O'Gara to OLG, prior to its sale of the
building, were $150,837.
    
 
                                       76
<PAGE>   78
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
 
(a)(1) The following consolidated financial statements of Kroll-O'Gara and its
       subsidiaries are included in
         Item 8:
 
          Reports of Independent Public Accountants
 
             - Arthur Andersen LLP
 
             - Deloitte & Touche LLP
 
          Consolidated Balance Sheets
 
             - As of December 31, 1997 and 1998
 
          Consolidated Statements of Operations
 
             - For the Years Ended December 31, 1996, 1997 and 1998
 
          Consolidated Statements of Shareholders' Equity
 
             - For the Years Ended December 31, 1996, 1997 and 1998
 
          Consolidated Statements of Cash Flows
 
             - For the Years Ended December 31, 1996, 1997 and 1998
 
          Notes to Consolidated Financial Statements
 
(a)(2) Financial Statement Schedules
 
          Schedules have been omitted because they are either not applicable or
     not required or the information has been furnished in the consolidated
     financial statements.
 
(b)   Reports on Form 8-K
 
        During the quarter ended December 31, 1998, Kroll-O'Gara filed the
      following current reports on
           Form 8-K:
 
        - Date of Report: September 1, 1998 (filed October 23, 1998); Items 7(a)
               and 7(b), reporting the pro forma financial statements of
               Kroll-O'Gara and Kizorek, Inc. and the historical financial
               statements of Kizorek, Inc.
 
        - Date of Report: September 22, 1998 (filed October 6, 1998); Item 5,
               reporting the completion of the acquisition of all of the assets
               of Protec, S.A.
 
        - Date of Report: October 22, 1998 (filed November 23, 1998); Item 5,
               reporting the pro forma financial statements of Kroll-O'Gara and
               Laboratory Specialists of America, Inc. and the historical
               financial statements of Laboratory Specialists of America, Inc.
 
        - Date of Report: December 7, 1998 (filed December 22, 1998); Items 2
               and 7(c), reporting the completion of the acquisition of
               Laboratory Specialists of America, Inc.
 
   
(c)   Exhibits: See the List of Exhibits beginning on page E-1.
    
 
(d)   Financial Statements: Not applicable
 
                                       77
<PAGE>   79
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, as of the
10th day of May, 1999.
    
 
                                          THE KROLL-O'GARA COMPANY
 
   
                                          By /s/ NICHOLAS P. CARPINELLO
    
 
                                            ------------------------------------
   
                                             Nicholas P. Carpinello
    
   
                                             Controller and Treasurer
    
   
    
 
                                       78
<PAGE>   80
 
                                LIST OF EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
3.1        Amended and Restated Articles of Incorporation of the
           Company (1)
3.2        Code of Regulations of the Company (2)
4.1        Note Purchase Agreement, dated as of May 30, 1997, between
           and among the Company, Connecticut General Life Insurance
           Company, Life Insurance Company of North America,
           Massachusetts Mutual Life Insurance Company, The Traveler's
           Insurance Company, and the Guardian Life Insurance Company
           of America (3)
10.1       Agreement to armor HMMWVs between the Company and the United
           States Army Tank and Automotive Command, dated May 12, 1994,
           as amended (2)
10.2       Systems Technical Support Agreement between the Company and
           the United States Army, dated January 20, 1997 (4)
10.3       Aircraft Lease between O'Gara-Hess & Eisenhardt Armoring
           Company and Longline Leasing, Inc. and Excel Armor Products,
           Inc., dated February 13, 1995, as amended (2)
10.4       1996 Stock Option Plan, as amended (12)*
10.5       Employment Agreement between the Company and Thomas M.
           O'Gara, dated August 23, 1996 (2)*
10.6       Employment Agreement between the Company and Wilfred T.
           O'Gara, dated August 23, 1996 (2)*
10.7       Employment Agreement between the Company and Nicholas P.
           Carpinello, dated August 23, 1996 (2)*
10.8       Employment Agreement between O'Gara-Hess & Eisenhardt
           Armoring Company and Michael J. Lennon, dated August 23,
           1996 (2)*
10.9       Plan and Agreement to Merge, dated as of August 8, 1997, by
           and among The O'Gara Company, VDE, Inc., Kroll Holdings,
           Inc. and Jules B. Kroll (6)
10.10      Amended and Restated Loan Agreement, dated as of December 1,
           1997, between The O'Gara Company, O'Gara-Hess & Eisenhardt
           Armoring Company, Kroll Holdings, Inc., Kroll Associates,
           Inc. and KeyBank National Association (1)
10.11      Supplemental Agreement Modification to acquire 360
           additional armored HMMWVs between United States Army Tank
           and Automotive Armaments Command and O'Gara-Hess and
           Eisenhardt Armoring Company, dated March 31, 1997 (5)
10.12      AUI Retainer Agreement (6)
10.13      Amended and restated lease of office space in New York, New
           York between Progress Partners and Kroll Associates, Inc.
           (6)
10.14      Registration Rights Agreement, dated August 8, 1997, among
           Thomas M. O'Gara, Jules B. Kroll and the Company (6)
10.15      Registration Rights Agreement between American International
           Group, Inc. and the Company (1)
10.16      Employment Agreement, dated October 17, 1997, between the
           Company and Jules B. Kroll (6)*
10.17      Employment Agreement, dated October 17, 1997, between the
           Company and Nazzareno E. Paciotti (6)*
10.18      Employment Agreement, dated October 17, 1997, between the
           Company and Abram S. Gordon (6)*
10.19      Amendment to Employment Agreement, dated October 17, 1997,
           between O'Gara-Hess & Eisenhardt Armoring Company and
           Michael J. Lennon (6)*
10.20      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Thomas M. O'Gara (6)*
10.21      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Wilfred T. O'Gara (6)*
</TABLE>
 
                                       E-1
<PAGE>   81
 
   
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10.22      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Nicholas P. Carpinello (6)*
10.23      Form of Promissory Note between Jules B. Kroll and Kroll
           Associates (6)
10.24      Supplemental Agreement Modifications to acquire 738
           additional armored HMMWVs between the United States Army
           Tank and Automotive Armaments Command and O'Gara-Hess &
           Eisenhardt Armoring Company, dated March 31, 1998 and April
           13, 1998 (7)
10.25      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 (8)
10.26      Agreement and Plan of Merger dated June 30, 1998 among The
           Kroll-O'Gara Company, Kroll-O'Gara Acquisition Co., Inc.,
           Kizorek, Inc. and William Kizorek (9)
10.27      Agreement and Plan of Merger by and among The Kroll-O'Gara
           Company, Kroll-O'Gara Oklahoma, Inc. and Laboratory
           Specialists of America, Inc. dated as of October 21, 1998
           (10)
10.28      Amended and Restated Loan Agreement, dated October 30, 1998,
           among The Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt
           Armoring Company, Kroll Holdings, Inc., Kroll Associates,
           Inc. and Keybank National Association (10)
10.29      Agreement and Plan of Merger dated as of December 31, 1998
           among The Kroll-O'Gara Company, TKOG Delaware, Inc. and
           Securify Inc. (11)
10.30      Agreement and Plan of Merger by and among The Kroll-O'Gara
           Company, Kroll-O'Gara Tennessee, Inc. and Background
           America, Inc. dated as of January 21, 1999 and amended as of
           April 20, 1999 (12)
21.1       Subsidiaries of the Company**
23.1       Consent of Arthur Andersen LLP
23.2       Consent of Deloitte & Touche LLP
24.1       Power of Attorney**
27.1       Financial Data Schedules (Exhibits 27.1-27.3)
</TABLE>
    
 
---------------
 
  * Executive compensation agreement
 
   
 ** Previously filed.
    
---------------
 
 (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
     No. 333-48099 and incorporated herein by reference.
 
 (2) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
     No. 333-11093 and incorporated herein by reference.
 
 (3) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
     Report: May 30, 1997) and incorporated herein by reference.
 
 (4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
     year ended December 31, 1996 and incorporated herein by reference.
 
 (5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1997 and incorporated herein by reference.
 
 (6) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
     No. 333-35845 and incorporated herein by reference.
 
 (7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q/A for
     the quarter ended March 31, 1998 and incorporated herein by reference.
 
 (8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1998 and incorporated herein by reference.
 
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<PAGE>   82
 
 (9) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
     Report: September 1, 1998) and incorporated herein by reference.
 
(10) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
     No. 333-66959 and incorporated herein by reference.
 
(11) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
     Report: December 31, 1998) and incorporated herein by reference.
 
(12) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
     No. 333-74063 and incorporated herein by reference.
 
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