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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
       THE SECURITIES EXCHANGE ACT OF 1934

       For the fiscal year ended December 31, 1999

                                       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  [X]

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $111,073,314 as of April 18,
2000. As of April 18, 2000, 22,255,510 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 over 60 offices located in 20 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 currently 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

     - public key infrastructure (PKI) consulting services.

     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, 1998 and 1999, is provided in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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<PAGE>   3

RECENT DEVELOPMENTS

     In September 1999, Kroll-O'Gara announced that it was seeking a buyer for
the Company. Subsequently Kroll-O'Gara entered into an agreement providing,
subject to specified conditions, for a leveraged recapitalization under which
Blackstone Capital Partners III Merchant Bank Fund L.P. would acquire
approximately 90% of Kroll-O'Gara's outstanding common stock for a price of
$18.00 per share and Jules B. Kroll, Kroll-O'Gara's Chairman and Chief Executive
Officer, and certain other members of management would retain an equity interest
of approximately 10% in the Company. On March 27, 2000 Blackstone revised its
offer to $16.00 per share. On April 12, 2000, Kroll-O'Gara announced that
Blackstone had withdrawn its offer. On April 18, 2000 Kroll-O'Gara announced
that its Board of Directors had concluded that management and the Board will
explore a separation of the Security Products and Services Group and the
Investigations and Intelligence Group, the Company's two principal operating
segments. The Board also plans to create a separate stock option plan for the
Information Security Group and to seek an equity investment in that Group by a
strategic or other investor. The Board has directed management to explore
structuring a transaction that will establish the three Groups as stand-alone
companies as soon as practicable. Transactions that will be explored may include
sale, joint venture or spin-off of the Groups to Kroll-O'Gara's shareholders.

     In connection with these decisions, the Board of Directors took the
following actions regarding Kroll-O'Gara's management:

     - Jules B. Kroll and Wilfred T. O'Gara were elected Co-Chief Executive
       Officers of the Company. Mr. Kroll remains Chairman of the Board.

     - Mr. Kroll was elected Chief Executive Officer of the Investigations and
       Intelligence Group. Michael G. Cherkasky remains President and Chief
       Operating Officer of the Group.

     - Mr. O'Gara was elected Chief Executive Officer of the Security Products
       and Services Group. Michael J. Lennon remains President and Chief
       Operating Officer of the Group.

     - Taher Elgamal remains Chief Executive Officer of the Information Security
       Group.

DISCONTINUED OPERATIONS

     On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of its Voice and Data Communications Group. The Voice
and Data Communications Group is engaged in reselling satellite communication
and navigation equipment, selling airtime for satellite telephones and designing
and installing integrated satellite communications systems in vehicles. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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,
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Security Products and Services Group........................  $105,557   $136,844   $120,824
Investigations and Intelligence Group.......................    87,329    117,583    176,837
Information Security Group..................................        --        116      4,345
                                                              --------   --------   --------
                                                              $192,886   $254,543   $302,006
                                                              ========   ========   ========
</TABLE>

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<PAGE>   4

     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,
                                                              ------------------------------
                                                                1997       1998       1999
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Commercial products.........................................  $ 54,541   $ 67,594   $ 67,727
Military products...........................................    43,719     59,839     39,602
Security services...........................................     7,297      9,411     13,495
                                                              --------   --------   --------
                                                              $105,557   $136,844   $120,824
                                                              ========   ========   ========
</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 1999, Kroll-O'Gara shipped
approximately 2,720 commercial armored vehicles.

     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.

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<PAGE>   5

     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 1999, Kroll-O'Gara shipped 557 Up-Armored HMMWVs. Kroll-O'Gara
also supplies engineering design and prototype services in support of the
Up-Armored HMMWV Program, and supplies spare parts and logistic support.

     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 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 both at
its facilities near Washington, D.C., San Antonio, Texas and Mexico City, Mexico
and at customer designated locations. 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, such as the crisis response to a kidnapping
of a company's executive, the safety of consumers, the contamination of a
consumer product or the

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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.

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,
                                                              -----------------------------
                                                               1997       1998       1999
                                                              -------   --------   --------
                                                                     (IN THOUSANDS)
<S>                                                           <C>       <C>        <C>
Financial services..........................................  $20,955   $ 29,044   $ 50,537
Business investigations and intelligence....................   40,295     46,442     58,304
Corporate services..........................................   18,472     31,566     44,925
Corporate security..........................................    7,607     10,531     22,446
Computer forensics..........................................       --         --        625
                                                              -------   --------   --------
                                                              $87,329   $117,583   $176,837
                                                              =======   ========   ========
</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 and litigation and bankruptcy attorneys in 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

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<PAGE>   7

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. 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 uncover and 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 could 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 strategies 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

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<PAGE>   8

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.

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 or 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 admissibility 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

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<PAGE>   9

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 continuing assistance in
monitoring, administering and responding to problems in the operation of e-
commerce sites.

     PKI CONSULTING SERVICES. Kroll-O'Gara is focused on enabling businesses to
take advantage of the available public key infrastructure (PKI) e-commerce
security technologies. Kroll-O'Gara provides expert consulting services
comprised of education, assessment, benefit analysis, architecture and
deployment. Kroll-O'Gara has the following four lines of PKI consulting
services:

     - training programs

     - electronic business assessment

     - general contractor services

     - business development and strategy services

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

                                        8
<PAGE>   10

distribution of 1999 sales of Kroll-O'Gara's commercial armored vehicles, as a
percentage of total 1999 sales for those products, was as follows:

             PERCENTAGE OF 1999 COMMERCIAL SALES BY GEOGRAPHIC AREA

<TABLE>
<S>                                                           <C>
Europe......................................................      43.4%
Central and South America...................................      27.6%
North America...............................................      21.9%
Middle East.................................................       2.4%
Far East....................................................       3.4%
Other.......................................................       1.4%
</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, Luxembourg and Slovenia, 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 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, 1997, 1998 and 1999, 74%,
71%, and 58%, 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

                                        9
<PAGE>   11

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 a time and materials
basis for these services.

MARKETING AND SALES

     COMMERCIAL. On a worldwide basis, Kroll-O'Gara employs 25 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 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 Chevrolet 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, for its
Investigations and Intelligence Group, Kroll-O'Gara employs 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

                                       10
<PAGE>   12

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 and private
enterprises acting as prime contractors on government contracts and to making
sales through the Foreign Military Sales Program and 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.

ENGINEERING AND DEVELOPMENT

     Kroll-O'Gara's engineering and development activities are centered on
products offered by its Security Products and Services Group as well as software
development by its Information Security Group.

     Kroll-O'Gara's Security Products and Services Group 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 reduced both the
time and cost necessary to produce its armored vehicles. Kroll-O'Gara's
ballistic engineer, in conjunction with its design and manufacturing engineers,
develops and tests new ballistic and blast protection systems that meet ever-
changing threats. Advanced engineering is responsible for new product
development in conjunction with design engineering, manufacturing engineering
and ballistic engineering.

     Kroll-O'Gara's Information Security Group emphasizes software development
as a proprietary tool in analyzing and assessing information system and
e-commerce security.

     Kroll-O'Gara estimates that it expended approximately $2.9 million, $3.7
million and $3.5 million in 1997, 1998 and 1999, respectively, on its
engineering and development efforts. These amounts include expensed amounts
reimbursed under a Systems Technical Support Contract described under "U.S.
Government Contracts."

                                       11
<PAGE>   13

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 2297 HMMWVs.
Of these, 2055 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
1999........................................................      557
                                                                -----
          Total.............................................    2,055
                                                                =====
</TABLE>

     Prior to March 2000, Kroll-O'Gara's most recent HMMWV contract with the
U.S. Military was entered into in 1998 and included an option for additional
vehicles which was exercised on April 30, 1999. The 245 Up-Armored HMMWVs for
the U.S. Army and the U.S. Navy covered by the option are to be delivered
through August 2000. On March 30, 2000 Kroll-O'Gara was awarded a new contract
by the U.S. Military for fiscal year 2000. The contract, with options, has a
five-year duration with a baseline quantity of 360 Up-Armored HMMWVs per year
and a potential to reach 3,060 vehicles over the life of the contract. The range
of the contract's total value is between $125.0 million and $215.0 million. The
initial order is for 360 Up-Armored HMMWVs with a value of approximately $25.0
million.

     As the Up-Armored HMMWV fleet grows, Kroll-O'Gara is experiencing continued
growth in fleet management activity and spare parts. The U.S. Military signed a
five year spare parts corporate contract with Kroll-O'Gara in March 1999. This
contract designates Kroll-O'Gara to provide HMMWV armor parts to all U.S.
Military end users. The most recent fleet management contract option with the
U.S. Military was exercised in March 2000.

     Kroll-O'Gara is in the last year of a System Technical Support contract
with the U.S. Military to support continued research and development on the
Up-Armored HMMWV program. This contract, signed in 1997, has required
Kroll-O'Gara to provide up to 25,000 hours per year of engineering and
development time to enhance and study the Up-Armored HMMWV. The last option to
the contract was exercised in August 1999 for year 2000 efforts.

     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
2000 to provide this armoring and believes that it is well positioned for future
engagements.

     Stewart & Stevenson Services, Incorporated has recently subcontracted with
Kroll-O'Gara to develop a ballistically armored and sealed High Mobility
Artillery Rocket System (HIMARS) truck cab. The truck is used to fire missiles
which are a part of either the Multiple Launch Rocket System (MLRS) or the Army
Tactical Missile System (ATACM). Two phases of this contract have been released
to Kroll-O'Gara, totaling $1.5 million. It is anticipated that this will
eventually result in a multi-year production contract.

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.

                                       12
<PAGE>   14

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 competitors on a worldwide basis in the
production of armored commercial vehicles are 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
develop.

     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 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.

                                       13
<PAGE>   15

SEASONALITY, BACKLOG AND RELATED MATTERS

     Approximately 13% of Kroll-O'Gara's net sales during 1999 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 1998,
these percentages were 24% 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, 1998 and 1999 was approximately
$29.3 million and $35.9 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 1999 backlog in 2000. 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 March 31, 2000, Kroll-O'Gara had 3,094 employees, comprised of 150 in
marketing and sales, 1,263 in operations, 820 in professional services, 78 in
engineering, 700 in general and administrative, and 83 part-time employees.
Kroll-O'Gara's U.S. employees are not represented by any union and are not
covered by any collective bargaining agreements. Approximately 224 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 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

                                       14
<PAGE>   16

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.
Kroll-O'Gara believes that it currently conducts its activities and operations
in substantial compliance with applicable governmental laws and regulations.

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 has numerous federally registered trademarks and
copyrights and has registered its trademarks in numerous foreign countries.
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.

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 31 domestic offices or facilities in 17 states
and 34 foreign offices or facilities in 19 foreign countries around the world.
Kroll-O'Gara's principal properties and facilities as of December 31, 1999 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>

                                       15
<PAGE>   17

     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 is used for manufacturing and sales of a
full product line of armored commercial vehicles. It currently is leased for a
term expiring in April 2002; however, either party can terminate the lease on 90
days written notice. 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 2012. 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.

ITEM 3.  LEGAL PROCEEDINGS

     Kroll-O'Gara has been named as a defendant in eight lawsuits alleging that
its officers and directors breached their fiduciary duties in connection with
the now terminated proposed acquisition of a majority of Kroll-O'Gara's shares
by a company formed by Blackstone Capital Partners III Merchant Banking Fund
L.P. Five of the lawsuits were filed in the Court of Common Pleas, Butler
County, Ohio, and were consolidated on November 29, 1999. The remaining three
lawsuits were filed in the United States District Court for the Southern
District of New York and were consolidated on November 30, 1999. The plaintiffs
allege that Kroll-O'Gara's officers and directors breached their fiduciary
duties by negotiating an inadequate acquisition price and by failing to engage
in arms-length negotiations. The plaintiffs also allege that Blackstone Capital
Partners III and AIG aided and abetted the directors' and officers' alleged
breaches of fiduciary duties. The plaintiffs seek class certification. On behalf
of putative plaintiff classes of shareholders, they seek damages and attorneys'
fees in an unspecified amount, as well as an injunction to prevent the mergers
or, to the extent

                                       16
<PAGE>   18

the mergers have been completed, rescission of the mergers. The defendants
believe that the allegations in the complaint are wholly meritless and are, in
any event, now moot in view of the termination of the proposed acquisition.
Defendants will seek the dismissal of the lawsuits.

     Kroll-O'Gara has learned that an individual has filed a qui tam suit, which
is under seal, against Kroll-O'Gara under the Civil False Claims Act, 31 U.S.C.
sec. 3729 alleging that Kroll-O'Gara and three of its vendors knowingly violated
their contractual requirements with the Army. On January 18, 2000, an attorney
for the U.S. Department of Justice stated that it was his intention to recommend
that the Government intervene and take over the suit and estimated
Kroll-O'Gara's liability to be as high as $16,000,000 stemming from its vendors'
alleged failure to have certified welders. Kroll-O'Gara strongly disputes the
Government's contention against it and will vigorously contest the Government's
claims.

     In addition to the matters discussed above, 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 such additional currently
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its business, financial condition, results of
operations or cash flows.

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, 2000, there were approximately 213 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>
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
1999
First Quarter..............................................  $40.88        $26.31
Second Quarter.............................................   29.00         20.00
Third Quarter..............................................   26.31         14.31
Fourth Quarter.............................................   17.19         11.94
</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.

                                       17
<PAGE>   19

SALE OF UNREGISTERED SECURITIES

     Not applicable.

ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)

     The following selected financial data reflects mergers during 1997, 1998
and 1999 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, 1998 and 1999 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, 1998 and 1999 and for
each of the three years ended December 31, 1999, have been derived from the
audited Consolidated Financial Statements of Kroll-O'Gara presented elsewhere in
this document. The selected historical financial data presented as of December
31, 1997 and for the year ended December 31, 1996, have been derived from the
audited Consolidated Financial Statements of Kroll-O'Gara not included in this
document. The consolidated financial data as of December 31, 1995 and 1996 and
for the year ended December 31, 1995 are derived from Kroll-O'Gara's unaudited
consolidated financial statements not included in this document. The selected
financial data should be read 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,
                                       -------------------------------------------------------
                                        1995        1996        1997        1998        1999
                                       -------    --------    --------    --------    --------
<S>                                    <C>        <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................  $92,955    $158,924    $192,886    $254,543    $302,006
Cost of sales........................   65,106     113,264     128,901     164,291     185,941
                                       -------    --------    --------    --------    --------
     Gross profit....................   27,849      45,660      63,985      90,252     116,066
Selling, general and administrative
  expenses, including amortization...   30,912      37,375      46,768      61,294      98,384
Asset impairment.....................       --         125          --          --          --
Restructuring charge.................       --          --          --          --       4,364
Failed merger costs..................       --          --          --          --       1,562
Merger related expenses..............       --          --       7,205       5,727       4,069
                                       -------    --------    --------    --------    --------
     Operating income (loss).........   (3,063)      8,161      10,013      23,231       7,687
Interest expense.....................   (2,827)     (3,049)     (4,877)     (4,382)     (4,747)
Other income (expense), net..........       36         335        (105)      1,615         107
                                       -------    --------    --------    --------    --------
     Income (loss) from continuing
       operations before minority
       interest, provision (benefit)
       for income taxes,
       extraordinary item and
       cumulative effect of change in
       accounting principle..........   (5,854)      5,447       5,030      20,464       3,047
Minority interest....................       --          --        (156)         --          --
                                       -------    --------    --------    --------    --------
     Income (loss) from continuing
       operations before provision
       (benefit) for income taxes,
       extraordinary item and
       cumulative effect of change in
       accounting principle..........   (5,854)      5,447       4,874      20,464       3,047
Provision (benefit) for income
  taxes..............................     (824)        366       3,305       7,353       2,429
                                       -------    --------    --------    --------    --------
</TABLE>

                                       18
<PAGE>   20

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                        1995        1996        1997        1998        1999
                                       -------    --------    --------    --------    --------
<S>                                    <C>        <C>         <C>         <C>         <C>
     Income (loss) from continuing
       operations before
       extraordinary item and
       cumulative effect of change in
       accounting principle..........   (5,030)      5,081       1,569      13,112         617
Income (loss) from operations of
  discontinued Voice and Data
  Communications Group, net..........     (676)        333        (305)     (1,326)     (1,761)
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..........   (5,706)      4,139       1,264      11,786      (1,144)
Extraordinary item, net of tax
  benefit............................       --          --        (194)         --          --
                                       -------    --------    --------    --------    --------
     Income (loss) before cumulative
       effect of change in accounting
       principle.....................   (5,706)      4,139       1,070      11,786      (1,144)
Cumulative effect of change in
  accounting principle, net of tax
  benefit............................       --          --        (360)         --        (778)
                                       -------    --------    --------    --------    --------
Net income (loss)....................  $(5,706)   $  4,139    $    710    $ 11,786    $ (1,921)
                                       =======    ========    ========    ========    ========
Basic earnings (loss) per share from
  continuing operations..............  $ (0.46)   $   0.42    $   0.11    $   0.68    $   0.03
                                       =======    ========    ========    ========    ========
Basic weighted average shares
  outstanding........................   11,019      12,112      14,751      19,337      22,006
                                       =======    ========    ========    ========    ========
Diluted earnings (loss) per share
  from continuing operations.........  $ (0.46)   $   0.39    $   0.10    $   0.66    $   0.03
                                       =======    ========    ========    ========    ========
Diluted weighted average shares
  outstanding........................   11,019      12,670      15,560      19,908      22,596
                                       =======    ========    ========    ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                            --------------------------------------------------
                                             1995      1996       1997       1998       1999
                                            ------    -------    -------    -------    -------
<S>                                         <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Working capital...........................  $5,044    $10,626    $38,329    $84,890    $62,042
Net property, plant, and equipment........   8,325     11,106     18,064     24,572     38,753
Total assets..............................  71,932     91,673    149,071    248,368    291,698
Long-term debt, including current
  portion.................................  29,142     31,249     54,239     41,347     66,584
Shareholders' equity......................  11,404     22,874     42,861    144,496    155,868
</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, 1998 and 1999 (see below), financial results from
period-to-period may lack comparability. Additionally, on April 28, 1999, the
Board of Directors approved a plan to discontinue operations of the Voice and
Data Communications Group. Historical 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

                                       19
<PAGE>   21

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. On April 28, 1999, Kroll-O'Gara's
Board of Directors approved a formal plan to discontinue operations of a fourth
group, the Voice and Data Communications Group. Accordingly, these operations
have been reclassified and reported as discontinued operations.

     On November 15, 1999, Kroll-O'Gara announced that it had entered into a
definitive agreement with Blackstone Capital Partners III Merchant Banking Fund
L.P. (Blackstone) pursuant to which shares held by all Kroll-O'Gara
shareholders, other than certain members of management, would be acquired by
Blackstone for $18.00 per share in cash (subsequently amended to $16.00 per
share in cash). On April 12, 2000, Kroll-O'Gara announced that Blackstone had
withdrawn its offer to acquire Kroll-O'Gara shares. On April 18, 2000,
Kroll-O'Gara announced it will explore structuring a transaction that will
result in the separation of its two principal operating segments, the Security
Products and Services Group and the Investigations and Intelligence Group, as
well as to seek an equity investment for its Information Security Group, as an
ultimate result of which each business Group could become a stand-alone company.
Transactions that will be explored may include sale, joint venture or spin-off
of the Groups to Kroll-O'Gara's shareholders. The possible effects of this
effort and of any resulting transactions on Kroll-O'Gara's future business,
financial condition, results of operations and cash flows currently are unknown.

     1998 Offering.  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 (the "Offering"),
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 being
used through the first quarter of 1999 to fund 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.

     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, 1998 and 1999,
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.

POOLINGS(1)

<TABLE>
<CAPTION>
COMPANY                      BUSINESS               GROUP            DATE ACQUIRED         PRICE
-------                --------------------  --------------------  -----------------  ----------------
<S>                    <C>                   <C>                   <C>                <C>
Laboratory             Drug testing          Investigations and    December 7, 1998   1,209,053 shares
  Specialists of                             Intelligence
  America, Inc.(2)
Securify Inc.          Information security  Information Security  December 31, 1998  1,430,936 shares
                       services
Schiff & Associates,   Security              Investigations and    December 31, 1998   169,521 shares
  Inc.                 architectural         Intelligence
                       services
Financial Research,    Business valuation    Investigations and    March 1, 1999       102,555 shares
  Inc.                 and economic damage   Intelligence
                       analysis services
Background America,    Background            Investigations and    June 16, 1999       899,243 shares
  Inc.                 investigation         Intelligence
                       services
</TABLE>

                                       20
<PAGE>   22

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
                       vehicles and builds   and Services                             cash and 376,597
                       truck bodies in                                                shares
                       France
Next Destination,      Distributes high      Voice and Data        February 1, 1997   170,234 shares
  Limited              technology products   Communications                           and $1.6 million
                       for the global                                                 in financing
                       positioning
                       satellite and
                       satellite
                       communications
                       markets
International          Advanced security     Security Products     March 1, 1997      $0.5 million in
  Training,            training              and Services                             cash, 68,086
  Incorporated                                                                        shares and $1.2
                                                                                      million in
                                                                                      financing
ZAO IMEA               Armors cash-in        Security Products     December 1, 1997   $0.6 million in
                       transit vehicles and  and Services                             cash and 138,889
                       distributes                                                    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
  MacDonald            investigative         Intelligence                             cash and 278,340
  Baskerville, Inc.    accounting services;                                           shares
                       headquartered in
                       Canada
Kizorek, Inc.          Video surveillance    Investigations and    July 1, 1998       $0.8 million in
  (renamed InPhoto     services              Intelligence                             cash and 352,381
  Surveillance)                                                                       shares
Protec S.A.            Armors cars in        Security Products     September 30,      $3.2 million in
                       Colombia              and Services          1998               cash and 38,788
                                                                                      shares
Holder Associates,     Security services in  Investigations and    October 1, 1998    $4.5 million in
  S.A.                 Argentina             Intelligence                             cash and 46,287
                                                                                      shares
Fact Finders Ltd.      Investigates          Investigations and    November 1, 1998   $3.2 million in
                       intellectual          Intelligence                             cash, plus a
                       property                                                       3-year earn-out
                       infringement cases                                             based on profits
                       in Hong Kong and the
                       Peoples Republic of
                       China
The Buchler Phillips   Corporate advisory    Investigations and    June 3, 1999       $12.0 million in
  Group                practices             Intelligence                             cash and 366,469
                                                                                      shares
</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.
                                       21
<PAGE>   23

(3) Kroll-O'Gara's consolidated financial statements include the reported
    results of each entity from its effective date of acquisition forward.

     Revenue recognition.  Kroll-O'Gara recognizes net sales from certain
military 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.

RESTRUCTURING OF OPERATIONS

     Due to the large number of acquisitions Kroll-O'Gara completed in 1997 and
1998, integration of the operations of the acquired companies with existing
operations has become a strategic initiative for Kroll-O'Gara's management. As
part of this initiative, management continuously evaluates its business segments
to ensure that its core businesses within the segments are operating
efficiently. In 1998, most of the businesses were acquired as part of the
Investigations and Intelligence Group. As a result of management's evaluation of
this Group, the decision was made to close several less profitable operating
facilities so that the Group could focus on integration of existing facilities
with the newly acquired businesses. In 1997, the Security Products and Services
Group completed several acquisitions as well. In evaluating the operations of
this Group, management concluded that a cost savings initiative was required and
would be achieved largely through operating process improvements and a
corresponding decrease in personnel.

     In the first quarter of 1999, Kroll-O'Gara began implementation of such a
plan to reduce costs and improve operating efficiencies and recorded a
non-recurring pre-tax restructuring charge of approximately $0.5 million. In the
second quarter of 1999, Kroll-O'Gara completed the restructuring plan with an
additional non-recurring pre-tax restructuring charge of $3.9 million. The
principal elements of the restructuring plan were the closure of two
Investigations and Intelligence Group offices and the elimination of
approximately 82 employees. The primary components of the restructuring charge
were severance costs and lease termination costs. See Note 5 to the Notes to
Consolidated Financial Statements for more information.

                                       22
<PAGE>   24

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,
                                                              -----------------------
                                                              1997     1998     1999
                                                              ----     -----    -----
<S>                                                           <C>      <C>      <C>
Security products and services
  Commercial................................................   32.1%    30.3%    26.9%
  Military..................................................   22.7     23.5     13.1
Investigations and intelligence.............................   45.3     46.2     58.6
Information security........................................     --       --      1.4
                                                              -----    -----    -----
  Total net sales...........................................  100.0%   100.0%   100.0%
Cost of sales...............................................   66.8     64.5     61.6
                                                              -----    -----    -----
  Gross profit..............................................   33.2     35.5     38.4
Operating expenses:
  Selling and marketing.....................................    6.9      7.7      8.3
  General and administrative................................   17.3     16.4     24.3
  Restructuring charge......................................     --       --      1.4
  Failed merger costs.......................................     --       --      0.5
  Merger related costs......................................    3.7      2.3      1.3
                                                              -----    -----    -----
Operating income............................................    5.2      9.1      2.5
Other income (expense):
  Interest expense..........................................   (2.5)    (1.7)    (1.6)
  Interest income...........................................    0.1      0.5      0.1
  Other, net................................................   (0.2)     0.1     (0.1)
                                                              -----    -----    -----
Income from continuing operations before provision for
  income taxes, extraordinary item and cumulative effect of
  accounting change.........................................    2.5      8.0      1.0
Provision for income taxes..................................    1.7      2.9      0.8
                                                              -----    -----    -----
Income from continuing operations before extraordinary item
  and cumulative effect of accounting change................    0.8      5.2      0.2
Loss from operations of discontinued Voice and Data
  Communications Group, net.................................   (0.2)    (0.5)    (0.6)
                                                              -----    -----    -----
Income (loss) before extraordinary item and cumulative
  effect of accounting change...............................    0.7      4.6     (0.4)
Extraordinary item..........................................   (0.1)      --       --
Cumulative effect of accounting change......................   (0.2)      --     (0.3)
                                                              -----    -----    -----
Net income (loss)...........................................    0.4%     4.6%    (0.6)%
                                                              =====    =====    =====
</TABLE>

1999 COMPARED TO 1998

     NET SALES.  Net sales for the year ended December 31, 1999 increased $47.5
million, or 19%, from $254.5 million in 1998 to $302.0 million in 1999.

     Security Products and Services Group.  Net sales for the Security Products
and Services Group decreased $16.0 million, or 12%, from $136.8 million in 1998
to $120.8 million in 1999. The decrease related to a decrease in net sales of
military products and services of $20.2 million, or 34%, from $59.8 million in
1998 to $39.6 million in 1999. In April 1998, Kroll-O'Gara began work on a new
contract with the U.S. Military to supply 738 armored High Mobility
Multi-Purpose Wheeled Vehicles ("HMMWVs") to the U.S. Army and the U.S. Air
Force (the "738 Contract"). In addition, Kroll-O'Gara continued work on a
previous contract with the U.S. Military for 360 Up-Armored HMMWVs through July
of 1998. The combination of production on the two contracts as well as an
aggressive delivery schedule required by the

                                       23
<PAGE>   25

U.S. Air Force relating to the 738 Contract resulted in unusually high levels of
production and net sales in 1998. In 1999, levels of production and net sales
more nearly approximated those of 1997.

     Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and services, which increased $4.2
million, or 5%, from $77.0 million in 1998 to $81.2 million in 1999. Increases
in net sales for security services accounted for the increase in commercial net
sales as these services increased $4.1 million, or 43%, for the year ended
December 31, 1999 in comparison with 1998. The increase in net sales of security
services was primarily the result of increased sales associated with the
introduction of driver's training operations in Texas and Mexico in 1999.

     Investigations and Intelligence Group.  Net sales for the Investigations
and Intelligence Group increased $59.3 million, or 50%, from $117.6 million in
1998 to $176.8 million in 1999. A substantial portion of this increase was a
result of the acquisitions of Lindquist Avey, InPhoto, Corplex, Fact Finders,
Holder and Buchler Phillips. These acquisitions have increased Kroll-O'Gara's
presence in Asia, Europe and Latin America and have strengthened the Business
Investigations and Analysis and Financial Services practices on a global scale.
Excluding net sales reported by these acquired entities, net sales increased
$14.3 million, or 14%, from $100.7 million in 1998 to $115.0 million in 1999.
This increase primarily stems from internal growth in the Group's Corporate
Services practices.

     Information Security Group.  Net sales for the Information Security Group
increased $4.2 million from $0.1 million in 1998 to $4.3 million in 1999. The
Information Security Group initiated operations in February 1998 but had minimal
sales as it was involved in start-up activities for most of the year.

     COST OF SALES AND GROSS PROFIT.  Cost of sales increased $21.6 million, or
13%, from $164.3 million in 1998 to $185.9 million in 1999. The increase in cost
of sales was due to the acquisitions completed in 1998 and 1999. Excluding these
acquisitions, cost of sales decreased $3.5 million. Gross profit as a percentage
of net sales was 35.5% and 38.4% for 1998 and 1999, respectively. The overall
increase in gross profit as a percent of net sales was primarily the result of a
shift in sales mix in which higher margin Investigations and Intelligence Group
and Information Security Group net sales increased as a percentage of total net
sales.

     Gross margins for the Security Products and Services Group were 28.8% and
29.0% in 1998 and 1999, respectively. Gross margin increased as a result of a
planned shift in sales mix in the Security Products and Services Group's
domestic operations to increased commercial armoring sales and military spare
parts sales, both of which have higher margins. However, this gross margin
increase was almost completely offset by poor gross margin performance
experienced in all foreign operations as a result of competitive pricing
pressures and pricing concessions necessitated by foreign economic conditions. A
transition to higher levels of armoring in Latin and South America also slowed
sales and required some inventory writeoffs. Additionally, currency devaluations
in South America hurt margins and slowed sales.

     Gross margins for the Investigations and Intelligence Group were 43.6% and
44.5% in 1998 and 1999, respectively. The increase in gross margin was primarily
a result of the acquisition of Buchler Phillips which historically has had
higher margins than the other Investigations and Intelligence businesses.

     Gross margin at the Information Security Group reflects a full year of
operations and was 52.9% in 1999.

     Historically, Kroll-O'Gara has experienced a higher gross margin associated
with revenue from its Investigations and Intelligence Group in comparison with
the Security Products and Services Group. Management expects the level of gross
margin to remain relatively consistent within each Group.

     OPERATING EXPENSES.  Operating expenses increased $41.4 million, or 62%, to
$108.4 million in 1999 from $67.0 million in 1998. The increase is partially due
to the acquisitions completed in 1998 and 1999. Operating expenses of acquired
companies represented $24.7 million of total operating expenses in 1999 and $6.0
million of total operating expenses in 1998. Excluding operating expenses of
these acquisitions, operating expenses increased $22.7 million net of a $1.5
million recovery of a previously written off bad debt. Included in this increase
was a restructuring charge of $4.4 million and $5.0 million for depreciation and
amortization of intangible assets including goodwill. In addition, approximately
$5.0 million of the

                                       24
<PAGE>   26

increase in expenses related to the additional legal, accounting, insurance and
information systems costs required to administer the growth experienced by
Kroll-O'Gara since the beginning of 1998. A key component of these costs was the
implementation of new enterprise systems at one of the Security Products and
Services Group's subsidiaries and at one of the Investigation and Intelligence
Group's subsidiaries as well as new corporate financial reporting software. The
remaining increase, $9.8 million, related to overall compensation and benefits
increases, an increase in the level of personnel working to administer the
growth experienced by Kroll-O'Gara since the beginning of 1998 and other
administrative, marketing and facility costs.

     In 1998, Kroll-O'Gara recorded approximately $5.7 million in expenses
primarily related to the mergers with Laboratory Specialists, Schiff, Securify
and Background America. In 1999, Kroll-O'Gara recorded approximately $4.1
million in merger and integration related expenses associated with the above
mentioned acquisitions. In addition, Kroll-O'Gara recorded approximately $1.6
million in failed merger expenses associated with the failed recapitalization
merger with Blackstone. See Note 18 to the Notes to Consolidated Financial
Statements for more information on the Blackstone transaction.

     As a percent of net sales, operating expenses, before merger related,
restructuring and failed merger costs, were 24.1% in 1998 and 32.6% in 1999. As
mentioned previously, the increase in operating expenses as a percentage of net
sales is primarily a result of increased fixed costs to administer the growth
experienced by Kroll-O'Gara since the beginning of 1998.

     INTEREST EXPENSE.  Interest expense increased $0.4 million, or 8%, to $4.7
million in 1999, compared to $4.4 million in 1998. With the completion of the
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 continuing through
the first quarter of 1999. However, due to the significant number of
acquisitions completed in the second half of 1998 and first half of 1999,
remaining cash from the Offering was utilized. Kroll-O'Gara began to draw on its
$25.0 million credit facility in 1999, primarily to fund the $12.0 million cash
portion of the Buchler Phillips purchase price and to fund overall growth and
working capital, particularly the additional cash needs of the Information
Security Group.

     INTEREST INCOME.  Interest income decreased $0.9 million, or 68%, to $0.4
million in 1999, compared to $1.3 million in 1998. Net proceeds of the 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 increased interest income in 1998. In 1999, the remaining
investments were liquidated to fund acquisitions and increases in working
capital needs as a result of acquisitions and growth.

     PROVISION FOR INCOME TAXES.  The provision for income taxes was $2.4
million in 1999 in comparison with $7.4 million in 1998. The effective tax rates
for the periods were 36% in 1998 and 80% in 1999. In 1999, 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 as well as increases in nondeductible goodwill
and intangible amortization. The 1999 tax provision also reflects the favorable
impact of the reversal of the valuation allowance related to certain foreign
jurisdiction net operating loss carryforwards, net of other foreign losses that
do not have a current benefit. 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 Certain foreign jurisdictions realized losses in 1999 from
which Kroll-O'Gara was not able to benefit for tax purposes.

     DISCONTINUED OPERATIONS.  The loss from operations of the discontinued
Voice and Data Communications Group increased $0.5 million from $1.3 million in
1998 to $1.8 million in 1999. This increase was due to an increase in the
Group's inventory reserve which resulted from technology changes in the
telecommunications market effectively reducing demand and lowering sales prices
for certain items in the Group's inventory. Due to the uncertainty surrounding
the future realizability of the tax benefit associated

                                       25
<PAGE>   27

with the Voice and Data Communication Group's losses, management concluded that
a valuation allowance for the entire tax benefit was required in both 1998 and
1999. 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.
Although there can be no assurance, management believes it will complete the
discontinuance of this Group by May 2000.

     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.  Kroll-O'Gara had
previously capitalized costs associated with the start-up of activities,
including pre-operating costs, organization costs and other start-up costs.
These capitalized costs were amortized over periods ranging from one to five
years. The capitalized amount, $1.2 million before tax, was expensed in 1999 in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, "Reporting on the Cost of Start-Up Activities." The amount
expensed is shown net of applicable tax benefit of $0.4 million.

     NET INCOME (LOSS).  Net income decreased $13.7 million from $11.8 million
in 1998 to a loss of $1.9 million in 1999. The decrease was due primarily to a
$41.4 million increase in operating expenses, partially offset by $25.8 million
in increased gross profit and a decreased provision for income taxes, as
discussed above.

1998 COMPARED TO 1997

     NET SALES.  Net sales for the year ended December 31, 1998 increased $61.7
million, or 32%, from $192.9 million in 1997 to $254.5 million in 1998.

     Security Products and Services Group.  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 included 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, and acquired Labbe,
IMEA and the assets of Protec.

     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 included 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 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.

     The U.S. Air Force 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.

     Investigations and Intelligence Group.  Net sales for the Investigations
and Intelligence Group increased $30.3 million, or 35%, from $87.3 million in
1997 to $117.6 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 $98.2 million for the year ended December 31, 1998, in comparison with
$87.3 million for the year ended December 31, 1997, an increase of 12%.

     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.

     Information Security Group.  The Information Security Group initiated
operations in 1998, recording net sales of $0.1 million.
                                       26
<PAGE>   28

     COST OF SALES AND GROSS PROFIT.  Cost of sales increased $35.4 million, or
28%, from $128.9 million in 1997 to $164.3 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 33.2% and 35.5% for 1997 and
1998, respectively. This increase was primarily due to an increase, of
approximately 5%, in gross profit as a percent of net sales experienced in the
Investigations and Intelligence Group. This increase 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
28.8% and 28.4% in 1998 and 1997, respectively.

     OPERATING EXPENSES.  Operating expenses for the year ended December 31,
1998 increased $13.0 million, or 24%, to $67.0 million from $54.0 million for
the same period in 1997. Included in operating expenses in 1997 were
approximately $7.2 million in expenses related to the merger with Kroll
Holdings. In 1998, Kroll-O'Gara recorded approximately $5.7 million in merger
related expenses primarily associated with the Laboratory Specialists, Schiff,
Securify and Background America mergers.

     Before merger related expenses, operating expenses increased $14.5 million,
or 31%, from $46.8 million in 1997 to $61.3 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 24.2% in 1997 and 24.1% 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 commitments of fixed cost relative to the level of net
sales in 1998.

     INTEREST EXPENSE.  Interest expense for the year ended December 31, 1998
decreased $0.5 million, or 10%, to $4.4 million, compared to $4.9 million in
1997. With the completion of the 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.

     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 changed the interest rate
from 9.56% to 8.56% and 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 636%, to $1.3 million, compared to $0.2 million in
1997. Net proceeds of the 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.

     PROVISION FOR INCOME TAXES.  The provision for income taxes was $7.4
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 68% in
1997 and 36% 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 reflected 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.

     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 the 1997 levels. Due to the uncertainty surrounding the future
realizability of the tax benefit associated with the Voice and Data
                                       27
<PAGE>   29

Communication 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.

     NET INCOME.  Net income increased $11.1 million, or 1,560%, from $0.7
million in 1997 to $11.8 million in 1998. The increase was due primarily to a
$26.3 million increase in gross profit, offset by $13.0 million in increased
operating expenses and an increased provision for income taxes, 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 Facilities.  On June 25, 1999, Kroll-O'Gara amended and restated its
credit agreement with KeyBank National Association to provide for a revolving
line of credit of $25.0 million which matures on May 31, 2001 and a letter of
credit facility of approximately $7.6 million which matures on May 31, 2000.
Advances under the revolving credit facility bear interest at rates ranging from
prime less 1.75% to prime, or, at Kroll-O'Gara's option, LIBOR plus .75% to
LIBOR plus 1.75%, dependent upon a defined financial ratio. The credit agreement
includes financial covenants which, among other restrictions, require the
maintenance of certain financial ratios and other financial requirements,
including an interest coverage ratio and net worth minimum, and impose
limitations on foreign investment, goodwill, additional indebtedness and capital
expenditures. Kroll-O'Gara was not in compliance with certain of these covenants
as of December 31, 1999. All such events of non-compliance were subsequently
waived or amended by the lender. Had the lender not provided a waiver or
amendment, all amounts outstanding under the credit agreement would have been
subject to acceleration by the lender. Borrowings under this line of credit were
approximately $22.8 million at December 31, 1999.

     Effective June 3, 1999, with the acquisition of Buchler Phillips,
Kroll-O'Gara acquired a demand note with maximum borrowings of L2.5 million. The
demand note bears interest at the Bank of England's base rate plus 1.5%. Maximum
borrowings permitted and borrowings outstanding pursuant to this demand note
were approximately $4.0 million and $3.4 million, respectively, as translated at
December 31, 1999.

     As described above, Kroll-O'Gara will explore structuring a transaction
that would result in each of the three Groups becoming a stand-alone company.
Kroll-O'Gara cannot predict at this time what the effect of such a transaction
would be on its funding requirements. However, without giving effect to any such
transaction, additional sources of capital will be required to supplement
operating cash flow for the next twelve months either through amending and
increasing Kroll-O'Gara's credit facilities or through an equity offering of one
or more of its subsidiaries.

     Cash flows from operating activities.  Operating activities used $5.3
million in net cash in 1999 in comparison with $11.4 million in net cash used in
operating activities in 1998. From the inception in 1993 of Kroll-O'Gara's
contract with the U.S. Government to armor the HMMWV through 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 has affected contract progress payments from the
government, and Kroll-O'Gara's cash flow, in two ways. First, since the change,
the progress payments have been determined using a smaller percentage of total
cost committed than before. Second, Kroll-O'Gara has been reimbursed for vendor
invoices paid instead of expenses incurred. Although these changes do 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

                                       28
<PAGE>   30

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 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.

     Cash used in operating activities decreased approximately $6.1 million in
1999 as compared to 1998. Unlike the large increase from 1997 to 1998 as a
result of the change in timing of progress payments for Kroll-O'Gara's HMMWV
contracts, Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts account decreased slightly in 1999. This, combined with the increase
in amortization and depreciation expense, partially offset by a $5.2 million
increase in trade receivables and the overall net loss experienced in 1999,
contributed to the decreased use of cash from operating activities.

     Cash flows from investing activities.  In 1999, Kroll-O'Gara incurred
capital expenditures of $19.1 million. Approximately $7.7 million related to the
acquisition and implementation of two new enterprise systems, one at its
Security Products and Services Group and one at its Investigation and
Intelligence Group, as well as upgrades of general information systems unrelated
to Kroll-O'Gara's Year 2000 compliance efforts. The Information Security Group
incurred approximately $1.3 million of internal use software development costs
which were capitalized in 1999. Additional capital expenditures of $6.2 million
were made for machinery and equipment. The remaining $3.9 million of capital
expenditures related primarily to normal periodic expenditures for leasehold
improvements, vehicles and furniture and fixtures. In 1998, Kroll-O'Gara
incurred normal periodic capital expenditures of $7.4 million. In 1999,
Kroll-O'Gara sold $13.3 million of its marketable securities in order to fund
its increased capital expenditure requirements. Additions to databases totaled
$3.9 million and $4.2 million for the years ended December 31, 1999 and 1998,
respectively.

     The levels of capital expenditures were in excess of the amounts permitted
by the credit agreement between Kroll-O'Gara and KeyBank in 1999. KeyBank has
provided Kroll-O'Gara a waiver from the requirements of this covenant.

     In addition to capital expenditures, 1999 investing activities included the
acquisition of Buchler Phillips which required cash of approximately $12.0
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 $18.6 million, net of cash acquired. Management
anticipates that, to the extent 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 $27.3 million and $58.0 million for the years ended December 31,
1999 and 1998, respectively. Cash provided by financing activities for 1999 was
primarily provided by borrowings under the bank lines of credit as well as
proceeds from the exercise of stock options and warrants. Cash from financing
activities in 1998 included approximately $60.4 million in net proceeds from the
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.

     Cash flows from financing activities in 1998 also included convertible
preferred stock issued by Securify, 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 used in discontinued operations was $0.7 million in 1999 compared
with $1.8 million in 1998. Cash used in 1999 reflects increases in net cash
provided by working capital items offset by the Voice and Data Communications
Group's net loss. 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,

                                       29
<PAGE>   31

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, 1999 nine such contracts, maturing between January
2000 and July 2001, 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 $18.1 million and $1.1 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.  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. One of the new systems became operational
early in the third quarter of 1999 and the other became operational at the end
of the fourth quarter of 1999.

     Additionally, Kroll-O'Gara completed an inventory of all its computer
software and embedded technology and prepared a master database of all
technology potentially impacted by the Year 2000 issue. In conjunction with
outside consultants, Kroll-O'Gara resolved potential problems which were
identified.

     Total Year 2000 compliance cost was approximately $7.8 million, of which
approximately $7.5 million related to the acquisition of new enterprise systems
and was capitalized. The remaining approximately $0.3 million was charged to
expense. Kroll-O'Gara does not anticipate any further expenditures related to
Year 2000 compliance.

     The Year 2000 issue resulted in no disruption of service for Kroll-O'Gara
as there were no significant third party or internal computer software or
systems failures. Kroll-O'Gara anticipates that there will be no adverse effects
relating to the Year 2000 issue in future periods.

     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 on 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.

     New accounting pronouncements.  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 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, as amended, is effective for fiscal
years beginning after June 15, 2000. Kroll-O'Gara has several forward contracts
in place in association with demand notes from certain subsidiaries. These
instruments qualify for hedge accounting. Kroll-O'Gara 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.

     Forward-looking Statements.  This document 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
                                       30
<PAGE>   32

other similar words. Such statements are based upon management's estimates,
assumptions and projections and are subject to substantial risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. Factors that could cause actual
results to differ materially from those in the forward-looking statements
include, among other things: contract delays, reductions or cancellations; cost
overruns with regard to fixed price contracts; problems and costs associated
with integrating past and future business combinations; various political and
economic risks of conducting business outside the United States, including
foreign economic conditions and currency rate fluctuations; changes in laws and
regulations; adjustments associated with percentage-of-completion accounting;
inability of sub-contractors to perform on schedule and meet demand; unexpected
competitive pressures resulting in lower margins and volumes; uncertainties in
connection with start-up operations and opening new offices; higher-
than-anticipated costs of financing the business; loss of senior personnel; and
changes in the general level of business activity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Foreign Operations." In addition, the information set
forth in Note 14 "Fair Value of Financial Instruments" to Kroll-O'Gara's 1999
Consolidated Financial Statements is incorporated herein by reference.

                                       31
<PAGE>   33

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, 1998 and 1999
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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 1997 financial statements of Background
America, Inc., a company acquired during 1999 in a transaction accounted for as
a pooling of interests, as discussed in Note 3. Such statements are included in
the consolidated financial statements of The Kroll-O'Gara Company and reflect
total revenues of 2 percent of the consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Background America, Inc., is based
solely upon the report of the other auditors.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

     As explained in Note 2(r) 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 and, effective in the first quarter of 1999, the Company changed its
method of accounting for costs of start-up activities.

                                        Arthur Andersen LLP

Cincinnati, Ohio
  April 21, 2000

                                       32
<PAGE>   34

                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
Background America, Inc.
Nashville, Tennessee

     We have audited the consolidated statements of operations, redeemable
preferred stock and other shareholders' equity (deficit) and cash flows for the
year ended December 31, 1997 of Background America, Inc. and subsidiaries (the
"Company'). 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 audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 (not presented
separately herein) present fairly, in all material respects, the results of
operations of Background America, Inc. and subsidiaries and their cash flows for
the year ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States of America.

Deloitte & Touche LLP
Nashville, Tennessee

December 18, 1998
(January 21, 1999 as to
first paragraph of Note 15)

                                       33
<PAGE>   35

                            THE KROLL-O'GARA COMPANY

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                  1998            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS (NOTE 8)
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 13,894,481    $ 13,030,534
  Marketable securities.....................................    13,285,322              --
  Trade accounts receivable, net of allowance for doubtful
     accounts of approximately $2,426,824 and $3,663,786 in
     1998 and 1999, respectively (Notes 2 and 5)............    48,937,044      59,261,184
  Unbilled revenues (Note 2)................................     7,766,015      18,033,811
  Related party receivables (Note 7)........................     2,763,108       2,095,810
  Costs and estimated earnings in excess of billings on
     uncompleted contracts (Note 5).........................    26,408,097      24,159,724
  Inventories (Note 5)......................................    18,607,062      21,287,658
  Prepaid expenses and other................................     7,748,236      11,284,003
  Deferred tax asset (Note 6)...............................            --         823,831
  Net current assets of discontinued operations (Note 4)....     6,836,920       7,137,550
                                                              ------------    ------------
          Total current assets..............................   146,246,285     157,114,105
                                                              ------------    ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 9):
  Land......................................................     1,856,003       2,164,197
  Buildings and improvements................................     8,271,967       8,586,985
  Leasehold improvements....................................     6,330,363       7,446,487
  Furniture and fixtures....................................     6,007,570       9,947,051
  Machinery and equipment...................................    19,654,119      36,717,974
  Construction-in-progress..................................     2,915,135              --
                                                              ------------    ------------
                                                                45,035,157      64,862,694
  Less -- accumulated depreciation..........................   (20,462,991)    (26,110,142)
                                                              ------------    ------------
                                                                24,572,166      38,752,552
                                                              ------------    ------------
DATABASES, net of accumulated amortization of $22,788,857
  and $26,187,348 in 1998 and 1999, respectively (Note 2)...     9,238,903       9,696,162
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
  ASSETS, net of accumulated amortization of $3,986,506 and
  $8,336,265 in 1998 and 1999, respectively (Notes 2 and
  3)........................................................    59,152,915      78,907,738
OTHER ASSETS:
  Other assets (Note 5).....................................     4,882,416       4,269,355
  Net non-current assets of discontinued operations (Note
     4).....................................................     4,274,853       2,958,084
                                                              ------------    ------------
                                                                77,549,087      95,831,339
                                                              ------------    ------------
                                                              $248,367,538    $291,697,996
                                                              ============    ============
</TABLE>

          The accompanying notes to consolidated financial statements
           are an integral part of these consolidated balance sheets.
                                       34
<PAGE>   36

                            THE KROLL-O'GARA COMPANY

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                  1998            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Revolving lines of credit (Note 8)........................  $         --    $ 26,582,688
  Current portion of long-term debt (Note 9)................     2,000,299       3,737,227
  Trade accounts payable....................................    32,557,585      33,240,883
  Related party payables (Note 7)...........................       353,233              --
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................       182,656         360,725
  Accrued liabilities (Note 5)..............................    20,750,473      26,190,992
  Income taxes currently payable............................       760,340         768,105
  Deferred income taxes (Note 6)............................       781,575              --
  Customer deposits.........................................     3,970,607       4,191,267
                                                              ------------    ------------
          Total current liabilities.........................    61,356,768      95,071,887
OTHER LONG-TERM LIABILITIES.................................     1,542,588       2,673,092
DEFERRED INCOME TAXES (Note 6)..............................     1,625,363       1,820,815
LONG-TERM DEBT, net of current portion (Note 9).............    39,346,555      36,264,163
                                                              ------------    ------------
          Total liabilities.................................   103,871,274     135,829,957
                                                              ------------    ------------
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 18)
  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, 21,584,872 and 22,255,510 shares issued and
     outstanding in 1998 and 1999, respectively.............       215,848         222,555
  Additional paid-in-capital................................   157,229,936     170,101,929
  Retained deficit..........................................   (10,964,249)    (12,639,574)
  Deferred compensation.....................................    (1,113,936)     (1,629,893)
  Accumulated other comprehensive loss......................      (871,335)       (186,978)
                                                              ------------    ------------
          Total shareholders' equity........................   144,496,264     155,868,039
                                                              ------------    ------------
                                                              $248,367,538    $291,697,996
                                                              ============    ============
</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 STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                 1997            1998            1999
                                                             ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>
NET SALES..................................................  $192,886,256    $254,542,779    $302,006,466
COST OF SALES..............................................   128,900,762     164,290,540     185,940,529
                                                             ------------    ------------    ------------
         Gross profit......................................    63,985,494      90,252,239     116,065,937
OPERATING EXPENSES:
  Selling and marketing....................................    13,349,843      19,473,085      25,129,172
  General and administrative...............................    33,417,926      41,821,029      73,254,967
  Restructuring charge (Note 5)............................            --              --       4,363,566
  Failed merger related costs (Note 18)....................            --              --       1,562,331
  Merger related costs (Note 3)............................     7,204,926       5,727,358       4,069,089
                                                             ------------    ------------    ------------
         Operating expenses................................    53,972,695      67,021,472     108,379,125
                                                             ------------    ------------    ------------
         Operating income..................................    10,012,799      23,230,767       7,686,812
OTHER INCOME (EXPENSE):
  Interest expense.........................................    (4,877,417)     (4,382,010)     (4,747,207)
  Interest income..........................................       173,079       1,273,218         409,892
  Other, net...............................................      (278,164)        342,492        (302,830)
                                                             ------------    ------------    ------------
    Income from continuing operations before minority
      interest, provision for income taxes, extraordinary
      item and cumulative effect of change in accounting
      principle............................................     5,030,297      20,464,467       3,046,667
  Minority interest........................................       156,223              --              --
                                                             ------------    ------------    ------------
    Income from continuing operations before provision for
      income taxes, extraordinary item and cumulative
      effect of change in accounting principle.............     4,874,074      20,464,467       3,046,667
  Provision for income taxes...............................     3,304,993       7,352,931       2,429,410
                                                             ------------    ------------    ------------
    Income from continuing operations before extraordinary
      item and cumulative effect of change in accounting
      principle............................................     1,569,081      13,111,536         617,257
  Discontinued operations:
    Loss from operations of discontinued voice and data
      communications group, net (Note 4)...................      (305,207)     (1,325,471)     (1,761,035)
                                                             ------------    ------------    ------------
  Income (loss) before extraordinary item and cumulative
    effect of change in accounting principle...............     1,263,874      11,786,065      (1,143,778)
  Extraordinary loss, net of applicable tax benefit of
    $129,250 (Note 8)......................................      (193,875)             --              --
                                                             ------------    ------------    ------------
    Income (loss) before cumulative effect of change in
      accounting principle.................................     1,069,999      11,786,065      (1,143,778)
  Cumulative effect of change in accounting principle, net
    of applicable tax benefit of $240,000 in 1997 and
    $408,000 in 1999 (Note 2(r))...........................      (360,000)             --        (778,041)
                                                             ------------    ------------    ------------
    Net income (loss)......................................  $    709,999    $ 11,786,065    $ (1,921,819)
                                                             ============    ============    ============
Earnings (loss) per share (Note 2(o)):
  Basic....................................................  $       0.05    $       0.61    $      (0.09)
                                                             ============    ============    ============
  Diluted..................................................  $       0.05    $       0.59    $      (0.09)
                                                             ============    ============    ============
Weighted average shares outstanding (Note 2(o)):
  Basic....................................................    14,750,676      19,336,580      22,005,632
                                                             ============    ============    ============
  Diluted..................................................    15,560,050      19,908,206      22,005,632
                                                             ============    ============    ============
</TABLE>

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
                                       36
<PAGE>   38

                            THE KROLL-O'GARA COMPANY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
                                                                               ADDITIONAL
                                                   COMPREHENSIVE    COMMON      PAID-IN-       RETAINED       DEFERRED
                                        SHARES     INCOME (LOSS)    STOCK       CAPITAL        DEFICIT      COMPENSATION
                                      ----------   -------------   --------   ------------   ------------   ------------
<S>                                   <C>          <C>             <C>        <C>            <C>            <C>
BALANCE, December 31, 1996..........  14,035,151                   $140,351   $ 44,143,424   $(21,266,057)  $        --
Issuances of stock under employee
  benefit plans, including related
  tax benefit (Note 12).............     750,725                      7,507      6,301,276             --            --
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             --            --
Private offering of common stock,
  net of issuance cost of $36,373...     307,613                      3,076      5,964,976             --            --
Purchase and retirement of common
  stock (Note 12(c))................    (259,036)                    (2,590)      (498,978)    (2,194,256)           --
Comprehensive income:
  Net income........................          --   $    709,999          --             --        709,999            --
                                                   ------------
  Other comprehensive income (loss),
    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 loss........          --       (240,091)         --             --             --            --
                                                   ------------
      Comprehensive income..........          --   $    469,908          --             --             --            --
                                      ----------   ============    --------   ------------   ------------   -----------
BALANCE, December 31, 1997..........  15,679,545                    156,795     65,837,989    (22,750,314)           --
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 12).....     428,625                      4,286      4,473,859             --            --
Issuance of stock in conjunction
  with the acquisition of businesses
  (Note 3)..........................     767,416                      7,674     17,602,830             --            --
Exercise of stock put option (Note
  3)................................      (7,471)                       (75)      (166,593)            --            --
Deferred compensation related to
  stock options.....................          --                         --      1,192,096             --    (1,113,936)

<CAPTION>
                                      ACCUMULATED OTHER
                                        COMPREHENSIVE
                                        INCOME (LOSS)        TOTAL
                                      -----------------   ------------
<S>                                   <C>                 <C>
BALANCE, December 31, 1996..........      $(143,819)      $ 22,873,899
Issuances of stock under employee
  benefit plans, including related
  tax benefit (Note 12).............             --          6,308,783
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
Private offering of common stock,
  net of issuance cost of $36,373...             --          5,968,052
Purchase and retirement of common
  stock (Note 12(c))................             --         (2,695,824)
Comprehensive income:
  Net income........................             --            709,999

  Other comprehensive income (loss),
    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 loss........       (240,091)          (240,091)

      Comprehensive income..........             --                 --
                                          ---------       ------------
BALANCE, December 31, 1997..........       (383,910)        42,860,560
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 12).....             --          4,478,145
Issuance of stock in conjunction
  with the acquisition of businesses
  (Note 3)..........................             --         17,610,504
Exercise of stock put option (Note
  3)................................             --           (166,668)
Deferred compensation related to
  stock options.....................             --             78,160
</TABLE>

                                       37
<PAGE>   39
<TABLE>
<CAPTION>
                                                                               ADDITIONAL
                                                   COMPREHENSIVE    COMMON      PAID-IN-       RETAINED       DEFERRED
                                        SHARES     INCOME (LOSS)    STOCK       CAPITAL        DEFICIT      COMPENSATION
                                      ----------   -------------   --------   ------------   ------------   ------------
<S>                                   <C>          <C>             <C>        <C>            <C>            <C>
Comprehensive income:
  Net income........................          --   $ 11,786,065          --             --     11,786,065            --
                                                   ------------
  Other comprehensive income (loss),
    net
    of tax:
    Foreign currency translation
      adjustment, net of $318,000
      tax benefit...................          --       (476,956)         --             --             --            --
    Reclassification adjustment for
      gain on securities included in
      net income, net of $7,000 tax
      benefit.......................          --        (10,469)         --             --             --            --
                                                   ------------
    Other comprehensive loss........          --       (487,425)         --             --             --            --
                                                   ------------
      Comprehensive income..........          --   $ 11,298,640          --             --             --            --
                                      ----------   ============    --------   ------------   ------------   -----------
BALANCE, December 31, 1998..........  21,584,872                    215,848    157,229,936    (10,964,249)   (1,113,936)
Net issuances of stock under
  employee benefit plans, including
  related tax benefit (Note 12).....     202,614                      2,026      3,293,084             --            --
Issuance of stock in conjunction
  with acquisition of businesses
  (Note 3)..........................     468,024                      4,681      8,007,248        246,494            --
Deferred compensation related to
  restricted stock and stock options
  (Note 12).........................          --                         --      1,571,661             --      (515,957)
Comprehensive income (loss):
  Net loss..........................          --   $ (1,921,819)         --             --     (1,921,819)           --
                                                   ------------
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment, net of $456,000
      tax provision.................          --        684,357          --             --             --            --
                                                   ------------
    Other comprehensive income
      (loss)........................          --        684,357          --             --             --            --
                                                   ------------
      Comprehensive income (loss)...          --   $ (1,237,462)         --             --             --            --
                                      ----------   ============    --------   ------------   ------------   -----------
BALANCE, December 31, 1999..........  22,255,510                   $222,555   $170,101,929   $(12,639,574)  $(1,629,893)
                                      ==========                   ========   ============   ============   ===========

<CAPTION>
                                      ACCUMULATED OTHER
                                        COMPREHENSIVE
                                        INCOME (LOSS)        TOTAL
                                      -----------------   ------------
<S>                                   <C>                 <C>
Comprehensive income:
  Net income........................             --         11,786,065
  Other comprehensive income (loss),
    net
    of tax:
    Foreign currency translation
      adjustment, net of $318,000
      tax benefit...................             --                 --
    Reclassification adjustment for
      gain on securities included in
      net income, net of $7,000 tax
      benefit.......................             --                 --
    Other comprehensive loss........       (487,425)          (487,425)
      Comprehensive income..........             --                 --
                                          ---------       ------------
BALANCE, December 31, 1998..........       (871,335)       144,496,264
Net issuances of stock under
  employee benefit plans, including
  related tax benefit (Note 12).....             --          3,295,110
Issuance of stock in conjunction
  with acquisition of businesses
  (Note 3)..........................             --          8,258,423
Deferred compensation related to
  restricted stock and stock options
  (Note 12).........................             --          1,055,704
Comprehensive income (loss):
  Net loss..........................             --         (1,921,819)
  Other comprehensive income (loss),
    net of tax:
    Foreign currency translation
      adjustment, net of $456,000
      tax provision.................             --                 --
    Other comprehensive income
      (loss)........................        684,357            684,357
      Comprehensive income (loss)...             --                 --
                                          ---------       ------------
BALANCE, December 31, 1999..........      $(186,978)      $155,868,039
                                          =========       ============
</TABLE>

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

                                       38
<PAGE>   40

                            THE KROLL-O'GARA COMPANY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 16)
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                  1997            1998            1999
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $    709,999    $ 11,786,065    $ (1,921,819)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) continuing operations --
    Loss from discontinued operations.......................       305,207       1,325,471       1,761,035
    Depreciation and amortization...........................     6,564,382       8,859,778      13,828,783
    Bad debt expense........................................     2,034,151       1,242,355       3,298,634
    Shareholder stock compensation..........................     1,356,280              --              --
    Loss on write-off of notes receivable...................        35,434              --              --
    Share in net income of joint ventures...................      (121,650)             --              --
    Gain on sale of marketable securities...................       (14,503)        (10,469)             --
    Noncash compensation expense............................            --         226,074       1,055,704
  Change in assets and liabilities, net of effects of
    acquisitions and dispositions --
    Receivables-trade and unbilled..........................    (6,352,176)    (12,083,029)    (17,300,323)
    Costs and estimated earnings in excess of billings on
      uncompleted contracts.................................     3,290,709     (14,510,296)      2,248,373
    Inventories, prepaid expenses and other assets..........    (6,001,920)     (4,713,109)     (5,135,872)
    Accounts payable and income taxes currently payable.....     8,389,338       2,324,655      (1,182,953)
    Billings in excess of costs and estimated earnings on
      uncompleted contracts.................................      (801,365)        (68,214)        178,069
    Amounts due to/from related parties.....................       412,999      (2,457,191)        731,612
    Deferred taxes..........................................      (156,892)       (838,668)     (1,409,954)
    Accrued liabilities, long-term liabilities and customer
      deposits..............................................        81,167      (2,493,890)     (1,500,935)
                                                              ------------    ------------    ------------
         Net cash provided by (used in) continuing
           operations.......................................     9,731,160     (11,410,468)     (5,349,646)
                                                              ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment, net...........    (5,970,849)     (7,362,975)    (19,080,914)
  Additions to databases....................................    (3,856,914)     (4,186,924)     (3,855,750)
  Acquisitions, net of cash acquired (Note 3)...............   (10,710,128)    (18,595,996)    (12,014,287)
  Sales (purchases) of marketable securities, net...........        35,424     (13,262,353)     13,285,322
  Other.....................................................       266,004              --              --
                                                              ------------    ------------    ------------
         Net cash used in investing activities of continuing
           operations.......................................   (20,236,463)    (43,408,248)    (21,665,629)
                                                              ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loan financing fees.......................................      (723,727)             --              --
  Net borrowings (repayments) under revolving lines of
    credit..................................................    (9,376,835)       (559,112)     24,262,221
  Proceeds from debt........................................    44,902,987         284,877              --
  Payments of long-term debt................................   (10,042,503)    (13,662,425)     (1,345,464)
  Proceeds from notes payable - shareholder.................     1,261,000              --              --
  Repayment of notes payable -- shareholder.................    (8,107,641)       (176,057)             --
  Net proceeds from issuance of common stock................     4,914,317      68,336,923              --
  Purchase and retirement of stock..........................    (2,695,824)       (166,668)             --
  Foreign currency translation..............................      (189,497)       (548,602)      1,096,137
  Proceeds from exercise of stock options and warrants......     2,780,966       4,478,145       3,295,110
                                                              ------------    ------------    ------------
         Net cash provided by financing activities of
           continuing operations............................    22,723,243      57,987,081      27,308,004
                                                              ------------    ------------    ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...................    12,217,940       3,168,365         292,729
Effects of foreign currency exchange rates on cash and cash
  equivalents...............................................       (75,931)        106,049        (411,780)
Net cash used in discontinued operations....................    (5,276,535)     (1,750,396)       (744,896)
                                                              ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, beginning of year................     5,504,989      12,370,463      13,894,481
                                                              ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of year......................  $ 12,370,463    $ 13,894,481    $ 13,030,534
                                                              ============    ============    ============
</TABLE>

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.
                                       39
<PAGE>   41

                            THE KROLL-O'GARA COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively "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'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 4 for a discussion of the discontinuance of the Voice and Data
Communications Group.

     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
O'Gara Company's name was changed to The Kroll-O'Gara Company. The consolidated
financial statements include the historical consolidated financial statements of
Kroll-O'Gara (and the businesses it has acquired, since their respective dates
of acquisition, under the purchase method of accounting) and the financial
position, results of operations and cash flows of entities which were merged
with Kroll-O'Gara 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 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. Kroll-O'Gara
records either billed or unbilled accounts receivable based on case-by-case
invoicing determination.

     (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. Kroll-O'Gara 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 -- Pursuant to the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (SFAS 115), Kroll-O'Gara must classify its debt and
marketable securities as either trading, available-for-sale or held-to-maturity.
Kroll-

                                       40
<PAGE>   42
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O'Gara'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.
Kroll-O'Gara recorded an unrealized net loss of $3,698 as of December 31, 1997.
There were no such unrealized gains or losses as of December 31, 1998 and 1999.

     (e) Concentrations of Credit Risk -- Financial instruments that subject
Kroll-O'Gara 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 Kroll-O'Gara's client base, along with the
different industries and geographic regions in which Kroll-O'Gara's clients
operate. Kroll-O'Gara does not generally require collateral or other security to
support client receivables, although Kroll-O'Gara does require retainers,
up-front deposits or irrevocable letters-of-credit in many situations.
Kroll-O'Gara 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 both straight-line and accelerated
methods over the estimated useful lives of the related assets as follows:

<TABLE>
<S>                                                      <C>
Buildings and improvements.............................     5-40 years
Furniture and fixtures.................................     4-10 years
Machinery and equipment................................     3-12 years
Leasehold improvements.................................  Life of lease
</TABLE>

     (g) Databases -- Databases are capitalized costs incurred to obtain
information from third party providers. Kroll-O'Gara 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, 1997, 1998 and 1999 was $2,937,152, $3,283,232 and
$3,520,624, respectively.

     (h) Impairment of Long-Lived Assets -- Pursuant to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), long-lived assets, certain identifiable
intangibles and goodwill related to those assets must be reviewed for impairment
by asset group for which the lowest level of independent cash flows can be
identified. In accordance with this standard, Kroll-O'Gara 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, Kroll-O'Gara believes no impairment
existed at December 31, 1999. 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.

     (i) 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. Costs in excess of assets
acquired, net of accumulated amortization, as of December 31, 1998 and December
31, 1999 were $49,422,735 and $69,469,509, respectively. Amortization is
recorded on a straight-line basis over periods ranging from 12 to 40 years.
Amortization of costs in excess of assets acquired for the years ended December
31, 1997, 1998 and 1999 were $605,823, $1,471,975 and $3,497,242, respectively.

     (j) 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

                                       41
<PAGE>   43
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

range from six months to fifteen years. Other intangible assets, net of
accumulated amortization, as of December 31, 1998 and December 31, 1999 were
$9,730,180 and $9,438,229, respectively. Amortization of other intangible assets
for the years ended December 31, 1997, 1998 and 1999 was $348,898, $945,202 and
$817,454, respectively.

     (k) 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.

     (l) 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.

     (m) Research and Development -- Research and development costs are expensed
as incurred. Kroll-O'Gara incurred approximately $121,000, $537,000 and $297,000
for the years ended December 31, 1997, 1998 and 1999, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.

     (n) Advertising -- Kroll-O'Gara expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1997, 1998 and
1999 were approximately $992,996, $1,805,233 and $2,160,893, respectively.

     (o) Earnings Per Share -- In 1997, Kroll-O'Gara 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, 1997, 1998
and 1999:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1997
                                                 -----------------------------------------
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic earnings per share.......................  $   709,999     14,750,676       $ 0.05
                                                                                  ======
Effect of dilutive securities:
  Options......................................           --        254,575
  Restricted stock.............................           --        443,152
  Warrants.....................................           --         97,425
  Convertible note payable.....................           --         14,222
                                                 -----------     ----------
Diluted earnings per share.....................  $   709,999     15,560,050       $ 0.05
                                                 ===========     ==========       ======
</TABLE>

                                       42
<PAGE>   44
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1998
                                                 -----------------------------------------
                                                   INCOME          SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic earnings per share.......................  $11,786,065     19,336,580       $ 0.61
                                                                                  ======
Effect of dilutive securities:
  Options......................................           --        568,849
  Warrants.....................................           --          2,777
                                                 -----------     ----------
Diluted earnings per share.....................  $11,786,065     19,908,206       $ 0.59
                                                 ===========     ==========       ======
</TABLE>

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1999
                                                 -----------------------------------------
                                                    LOSS           SHARES        PER SHARE
                                                 (NUMERATOR)    (DENOMINATOR)     AMOUNT
                                                 -----------    -------------    ---------
<S>                                              <C>            <C>              <C>
Basic and diluted loss per share...............  $(1,921,819)    22,005,632       $(0.09)
                                                 ===========                      ======
Effect of dilutive securities:
  Options......................................                     546,614
  Restricted stock.............................                      42,974
  Warrants.....................................                       1,188
                                                                 ----------
Diluted shares.................................                  22,596,408
                                                                 ==========
</TABLE>

     As a result of the net loss recorded in 1999, basic and diluted earnings
per share are identical as all options and warrants are anti-dilutive.

     Basic and diluted earnings per share based on income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle were $0.11 and $0.10, respectively, for the year 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 $0.68 and $0.66, respectively, for the year ended December 31,
1998. The basic and diluted per share impact of the discontinued operation was
$0.07.

     Basic and diluted earnings per share based on income from continuing
operations were $0.03 for the year ended December 31, 1999. The basic and
diluted per share impact of the discontinued operation was $0.08 and the change
in accounting principle was $0.04.

     During 1997, 66,000 warrants to purchase a total of 27,746 shares of common
stock of Kroll-O'Gara 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 Kroll-O'Gara 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.

     During 1999, 8,719 warrants and 597,155 options to purchase an equivalent
amount of shares of common stock of Kroll-O'Gara at $25.69 per warrant and from
$26.94 to $34.88 per option were outstanding but were not included in the
computation of diluted weighted average shares because the warrants' and
options' exercise prices were greater than the average market price of the
common shares.

                                       43
<PAGE>   45
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (p) New Accounting Pronouncements -- In 1998, Kroll-O'Gara 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. Kroll-O'Gara
has chosen to disclose comprehensive income, which encompasses net income,
foreign currency translation adjustments and unrealized holding gains of
marketable securities, in the consolidated statements of shareholder's equity.
Prior years have been restated to conform to the SFAS 130 requirements. The
accumulated other comprehensive income (loss) balance of ($0.4) 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 and ($0.2) million at December 31, 1998 and 1999, respectively,
consisted entirely of foreign currency translation adjustments.

     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 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, as
amended, is effective for fiscal years beginning after June 15, 2000.
Kroll-O'Gara has several forward contracts in place in association with demand
notes from certain subsidiaries. These instruments qualify for hedge accounting.
Kroll-O'Gara 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.

     (q) Stock-Based Compensation -- Kroll-O'Gara 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 12(e).

     (r) Changes in Accounting Principle -- In the fourth quarter of 1997,
Kroll-O'Gara 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, Kroll-O'Gara
expensed costs previously capitalized in earlier quarters of 1997 (approximately
$0.4 million, net of tax benefit of $0.2 million) as a cumulative effect of
change in accounting principle.

     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. Kroll-O'Gara's former practice was to capitalize certain of these
expenses and amortize them over periods ranging from one to five years. Included
in the accompanying December 31, 1998 consolidated balance sheet is
approximately $1.2 million of preoperating, organization and start-up costs
which would have been expensed had this statement already been implemented.
Kroll-O'Gara adopted the provisions of this statement in the first quarter of
fiscal 1999 and recorded a cumulative effect of a change in accounting principle
of $0.8 million, net of a tax benefit of $0.4 million.

                                       44
<PAGE>   46
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (s) Derivative Financial Instruments -- Financial instruments in the form
of foreign currency exchange contracts are utilized by Kroll-O'Gara to hedge its
exposure to movements in foreign currency exchange rates. Kroll-O'Gara 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.

     (t) Reclassifications -- Certain reclassifications have been reflected in
1997 and 1998 to conform with the current period presentation.

(3) MERGERS AND ACQUISITIONS

     Kroll-O'Gara has completed numerous business combinations in the periods
presented. The 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 O'Gara 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 12), were converted into 62.52 shares of common
stock of Kroll-O'Gara or 6,098,561 shares of Kroll-O'Gara 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 Kroll-O'Gara common stock (See
Note 12).

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

     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 Kroll-O'Gara's presentations. The results of operations
for the separate companies and the combined amounts included 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
</TABLE>

     In connection with the Kroll merger, Kroll-O'Gara recorded, in the fourth
quarter in 1997, a charge to operating expenses of approximately $7.2 million
($5.7 million after taxes, or $0.37 per diluted share) for direct and other
merger-related costs pertaining to the 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 Kroll-O'Gara 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 Kroll-O'Gara or
1,209,053 shares of Kroll-O'Gara's common stock in total. Outstanding stock
options and stock warrants

                                       45
<PAGE>   47
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of LSAI were converted at the same exchange factor into options to purchase
39,094 and 24,386 shares, respectively, of Kroll-O'Gara's common stock (See Note
12). The financial position and results of operations of LSAI are reported as
part of Kroll-O'Gara's Investigations and Intelligence Group.

     In December 1998, a wholly owned subsidiary of Kroll-O'Gara 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 Kroll-O'Gara or
169,521 shares of Kroll-O'Gara's common stock in total. The financial position
and results of operations of Schiff are reported as part of Kroll-O'Gara's
Investigations and Intelligence Group.

     In December 1998, a wholly owned subsidiary of Kroll-O'Gara 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
Kroll-O'Gara'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,
Kroll-O'Gara 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 Kroll-O'Gara's
common stock. Effective with the consummation of the merger, Kroll-O'Gara
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 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 Kroll-O'Gara.

     There were no transactions between Kroll-O'Gara and LSAI, Schiff and
Securify prior to the combinations and immaterial adjustments were recorded to
conform LSAI's, Schiff's and Securify's accounting policies. Certain
reclassifications were made to Kroll-O'Gara'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 included 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
</TABLE>

     In 1998, Kroll-O'Gara recorded, in the fourth quarter, a charge to
operating expenses of approximately $5.7 million ($4.1 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 $4.5 million which consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing,

                                       46
<PAGE>   48
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

travel and other related charges. Integration costs relate primarily to the
merger with Kroll consummated in December 1997 and were approximately $0.4
million.

     In March 1999, a wholly owned subsidiary of Kroll-O'Gara was merged with
and into Financial Research, Inc. (FRI). Effective upon the consummation of the
merger, each then issued and outstanding share of FRI common stock was converted
into 101.555 shares of common stock of Kroll-O'Gara or 101,555 shares of
Kroll-O'Gara's common stock in total. The merger constituted a tax-free
reorganization and has been accounted for as a pooling of interests. The prior
period consolidated financial statements would not be materially different from
the reported results and accordingly have not been restated.

     In June 1999, a wholly owned subsidiary of Kroll-O'Gara was merged with and
into Background America, Inc. (BAI). Effective upon the consummation of the
merger, each then issued and outstanding share of BAI common and preferred stock
was converted into .2689628 shares of common stock of Kroll-O'Gara or 899,243
shares of Kroll-O'Gara's common stock in total. Outstanding stock options and
stock warrants of BAI were converted at the same exchange factor into options to
purchase 86,844 and 2,018 shares, respectively, of Kroll-O'Gara's common stock
(see Note 12). The financial position and results of operations of BAI are
reported as part of Kroll-O'Gara's Investigations and Intelligence Group.

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

     There were no transactions between Kroll-O'Gara and BAI prior to the
combination. Immaterial adjustments were recorded to conform the accounting
practices of Kroll-O'Gara and BAI and certain reclassifications were made to the
BAI financial statements to conform to Kroll-O'Gara's presentation.

     The combined companies recorded an income tax benefit of $113,533 in 1998
to reflect a reduction in a valuation allowance applicable to certain domestic
net operating loss carryforwards. Included in the December 31, 1998 consolidated
balance sheet is approximately $573,000 of merger costs incurred by Kroll-
O'Gara which, along with other merger costs subsequently incurred, were expensed
immediately upon consummation of the transaction on a pooling of interests basis
in 1999. 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         BAI        ADJUSTMENTS      COMBINED
                                       ------------    -----------    -----------    ------------
<S>                                    <C>             <C>            <C>            <C>
Three months ended March 31, 1999
  (unaudited)
  Revenue............................  $ 65,573,000    $ 2,492,000     $     --      $ 68,065,000
  Loss from discontinued operation...      (170,000)            --           --          (170,000)
  Cumulative effect of change in
     accounting principle............      (778,041)            --           --          (778,041)
  Net income.........................     2,418,000        110,000           --         2,528,000
Year ended December 31, 1998
  Revenue............................  $247,192,113    $ 7,350,666     $     --      $254,542,779
  Loss from discontinued operation...    (1,325,471)            --           --        (1,325,471)
  Net income (loss)..................    13,088,906     (1,416,374)     113,533        11,786,065
</TABLE>

                                       47
<PAGE>   49
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                       KROLL-O'GARA
                                        HISTORICAL         BAI        ADJUSTMENTS      COMBINED
                                       ------------    -----------    -----------    ------------
<S>                                    <C>             <C>            <C>            <C>
Year ended December 31, 1997
  Revenue............................  $188,665,197    $ 4,221,059     $     --      $192,886,256
  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 (loss)..................     2,046,643     (1,336,644)          --           709,999
</TABLE>

     In 1999, Kroll-O'Gara recorded a charge to operating expenses of
approximately $4.1 million ($3.2 million after taxes, or $0.14 per diluted
share) for direct and other merger and integration related costs. Merger
transaction costs are non-recurring and include $0.3 million for stay bonuses,
$0.4 million for stock based compensation costs triggered by the change in
control of BAI and $2.4 million which consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing, travel and other related
charges. Integration costs relate primarily to the mergers and acquisitions
completed in the fourth quarter of 1998 and were approximately $1.0 million.

     (b) Purchase Transactions -- In addition to the merger with Kroll,
Kroll-O'Gara completed five other acquisitions in 1997 which were accounted for
as purchase business combinations. Three of the 1997 purchase acquisitions have
been included in Kroll-O'Gara'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, Kroll-O'Gara 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, Kroll-O'Gara 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.

     Kroll-O'Gara 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
Kroll-O'Gara'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 Kroll-O'Gara from that date forward.

     In addition to the mergers with LSAI, Schiff and Securify, Kroll-O'Gara
completed nine other acquisitions in 1998, all of which were accounted for as
purchase business combinations. Eight of the 1998 purchase acquisitions have
been included in Kroll-O'Gara's Investigations and Intelligence Group and the
ninth has been included in the Security Products and Services Group. The
aggregate purchase price of these nine acquisitions amounted to approximately
$37.1 million and consisted of $19.5 million in cash and 767,416 shares of
common stock (valued at approximately $17.6 million or an average of $22.93 per
share). The $37.1 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. Approximately $1.1 million
was earned and accrued at December 31, 1999 pursuant to this earnout agreement.
In conjunction with one of the 1998 purchase acquisitions, the shareholders of
the acquired entity had the option to put the shares of common stock received
for cash of $22.31 per share for a certain defined period. The put option
relating to 7,471 shares

                                       48
<PAGE>   50
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issued in connection with this acquisition was exercised for $166,668 in cash
with the remaining put options expiring unexercised. In addition, in connection
with several of these acquisitions, Kroll-O'Gara 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 twelve to twenty-five
years.

     Kroll-O'Gara made one significant acquisition in 1998 which is included
above. In September 1998, Kizorek, Inc., now renamed InPhoto Surveillance, Inc.
(InPhoto), a company located in Illinois specializing in video surveillance
services, was acquired for approximately $9.1 million, consisting of $0.9
million in cash and 352,381 shares of Kroll-O'Gara'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
InPhoto are included in the consolidated results of operations of Kroll-O'Gara
from that date forward. The following unaudited pro forma combined results of
operations for the years ended December 31, 1997 and 1998 assumes the InPhoto
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..........................................   $207,362      $260,928
Income from continuing operations before
  extraordinary item and cumulative effect of
  accounting change............................   $  2,021      $ 13,006
Net income.....................................   $  1,162      $ 11,680
Earnings per share:
  Basic........................................   $   0.08      $   0.59
  Diluted......................................   $   0.07      $   0.58
</TABLE>

     In addition to the mergers with BAI and FRI, during 1999 Kroll-O'Gara
completed an additional acquisition in 1999 which was accounted for as a
purchase business combination. In June, 1999 Kroll-O'Gara completed the
acquisition of substantially all of the assets and liabilities of The Buchler
Phillips Group (BP). BP provides financial recovery, restructuring, insolvency
and turnaround services throughout the United Kingdom and Europe and has been
included in the Investigations and Intelligence Group. The purchase price
amounted to approximately $20.0 million and consisted of approximately $12.0
million in cash and 366,469 shares of Kroll-O'Gara's common stock (valued at
approximately $8.0 million or an average of $21.86 per share). For accounting
purposes, the acquisition was effective on April 1, 1999 and the results of
operations of BP are included in the consolidated results of operations of
Kroll-O'Gara from that date forward. The allocation of purchase price was based
on estimates and may be revised at a later date pending the completion of
certain appraisals and other analyses. The resulting goodwill from this
acquisition is being amortized over twenty-five years.

     In connection with the 1997, 1998 and 1999 purchase acquisitions, the
original assets acquired and liabilities assumed were as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                         OTHER 1997               OTHER 1998       1999
                                              LABBE     ACQUISITIONS   INPHOTO   ACQUISITIONS   ACQUISITION
                                             --------   ------------   -------   ------------   -----------
<S>                                          <C>        <C>            <C>       <C>            <C>
FAIR VALUE OF ASSETS
  ACQUIRED INCLUDING:
  Cash.....................................  $  3,501     $   125      $   192     $    701      $      4
  Accounts receivable......................     4,689         242        1,743        5,300         1,174
  Inventories..............................     3,392         553           --           --            --
  Unbilled revenue.........................        --          --          269        1,561         5,441
  Other current assets.....................       316          11          450          551           852
</TABLE>

                                       49
<PAGE>   51
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                         OTHER 1997               OTHER 1998       1999
                                              LABBE     ACQUISITIONS   INPHOTO   ACQUISITIONS   ACQUISITION
                                             --------   ------------   -------   ------------   -----------
<S>                                          <C>        <C>            <C>       <C>            <C>
  Property, plant and equipment............     3,360         298          955        1,243         1,233
  Other non-current assets.................     2,357           4           --          271           319
  Costs in excess of assets acquired and
     other intangible assets...............     7,802       8,268        9,790       28,874        20,835
                                             --------     -------      -------     --------      --------
                                               25,417       9,501       13,399       38,501        29,858
  Less: Cash paid for net assets...........   (10,730)     (2,700)        (854)     (18,689)      (12,018)
  Fair value of debt issued................        --      (2,551)          --           --            --
  Fair value of stock issued...............    (3,431)     (3,178)      (8,228)      (9,381)       (8,012)
                                             --------     -------      -------     --------      --------
                                             $ 11,256     $ 1,072      $ 4,317     $ 10,431      $  9,828
                                             ========     =======      =======     ========      ========
LIABILITIES ASSUMED INCLUDING:
  Liabilities assumed and acquisition
     costs.................................  $  9,287     $ 1,053      $ 4,117     $  9,583      $  7,508
  Debt.....................................     1,969          19          200          848         2,320
                                             --------     -------      -------     --------      --------
                                             $ 11,256     $ 1,072      $ 4,317     $ 10,431      $  9,828
                                             ========     =======      =======     ========      ========
</TABLE>

(4) 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.
Kroll-O'Gara received an outside expression of interest for this business in
April 1999, has made the assets of the segment available for immediate sale and
expects to complete the disposal of this segment by May 2000. 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,
                                                        -----------------------------
                                                         1997       1998       1999
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Net sales.............................................  $17,437    $17,653    $19,931
Interest expense allocation...........................  $   367    $   288    $   218
Loss from discontinued operations, net................  $  (305)   $(1,325)   $(1,761)
</TABLE>

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                              ------------------
                                                               1998       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Current assets..............................................  $12,071    $14,698
Property, plant and equipment, net..........................       68        155
Advances on purchase agreement..............................    1,130         --
Other assets................................................    3,077      2,803
Current liabilities.........................................   (5,234)    (7,560)
                                                              -------    -------
          Net assets of discontinued operations.............  $11,112    $10,096
                                                              =======    =======
</TABLE>

     A valuation allowance for the Voice and Data Communication Group's net
operating loss carryforwards has been provided as it is not certain that the tax
benefit will be realized in the foreseeable future.

                                       50
<PAGE>   52
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In February 1997, Kroll-O'Gara 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 Kroll-O'Gara's 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 13(b). If terminated
without cause, this commitment would approximate $0.6 million as of December 31,
1999.

     Kroll-O'Gara 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 reserves as facts and circumstances warrant. Based on its
most recent analysis, Kroll-O'Gara believes no impairment existed at December
31, 1999.

(5) 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,
                                                            --------------------------
                                                               1998           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
United States Military:
  Billed receivables......................................  $ 3,225,664    $ 4,877,570
  Costs and estimated earnings in excess of billings on
     uncompleted contracts................................   21,042,185     13,827,929
                                                            -----------    -----------
          Total United States Military....................  $24,267,849    $18,705,499
                                                            ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1998           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
Other contracts and receivables:
  Billed receivables......................................  $45,711,380    $54,383,614
  Costs and estimated earnings in excess of billings on
     uncompleted contracts................................    5,365,912     10,331,795
                                                            -----------    -----------
          Total other contracts and receivables...........  $51,077,292    $64,715,409
                                                            ===========    ===========
Total trade accounts receivable, net......................  $48,937,044    $59,261,184
                                                            ===========    ===========
Total costs and estimated earnings in excess of billings
  on uncompleted contracts................................  $26,408,097    $24,159,724
                                                            ===========    ===========
</TABLE>

     Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $107,374,834 and $131,582,751 of progress billings to the United
States Military at December 31, 1998 and 1999, 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.

                                       51
<PAGE>   53
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 1997.....  $2,470,819    $2,043,814    $(1,521,162)   $2,993,471
Year ended December 31, 1998.....  $2,993,471    $1,242,355    $(1,809,002)   $2,426,824
Year ended December 31, 1999.....  $2,426,824    $3,298,634    $(2,061,672)   $3,663,786
</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,
                                                            --------------------------
                                                               1998           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
Raw materials.............................................  $ 7,102,009    $14,494,953
Vehicle costs and work-in-process.........................   11,505,053      6,792,705
                                                            -----------    -----------
                                                            $18,607,062    $21,287,658
                                                            ===========    ===========
</TABLE>

     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, 1997...........  $252,114      $112,000      $(23,782)    $340,332
Year ended December 31, 1998...........  $340,332      $  9,668      $     --     $350,000
Year ended December 31, 1999...........  $350,000      $116,752      $     --     $466,752
</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>
                                                     USEFUL           DECEMBER 31,
                                                      LIFE      ------------------------
DESCRIPTION                                          (YEARS)       1998          1999
-----------                                          -------    ----------    ----------
<S>                                                  <C>        <C>           <C>
Preoperating and start-up costs....................   --        $1,185,574    $       --
Security deposits..................................   --         1,003,666       971,405
Pending acquisition costs..........................   --           573,035            --
Long-term receivable...............................   --           380,000     1,112,681
Non-refundable deposit on an equipment lease with a
  related party....................................    5           537,784       537,784
Deferred financing fees............................  7-30          906,667       920,492
Investment in unconsolidated subsidiary............   --                --       520,695
Other long-term assets.............................   --           504,899       619,290
                                                                ----------    ----------
                                                                 5,091,625     4,682,347
Less -- accumulated amortization...................               (209,209)     (412,992)
                                                                ----------    ----------
                                                                $4,882,416    $4,269,355
                                                                ==========    ==========
</TABLE>

     Preoperating and start-up costs in 1998 included costs applicable to bids
in process which were deferred when management believed it was probable that
future contracts would be obtained. These costs were transferred to contract
costs when contracts were awarded or were expensed when the contract award was
no longer considered probable. Preopening and start-up costs also included
certain costs incurred in connection
                                       52
<PAGE>   54
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with establishing operations in new locations. In accordance with SOP 98-5, all
such costs were expensed in the first quarter of fiscal 1999 (see Note 2(r)).

     (d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
DESCRIPTION                                                    1998           1999
-----------                                                 -----------    -----------
<S>                                                         <C>            <C>
Payroll and related benefits..............................  $ 9,860,811    $11,019,288
Accrued professional fees.................................    3,993,486      2,113,264
Property, sales and other taxes payable...................    2,160,417      2,636,732
Accrued hedge contract settlement.........................      710,760             --
Accrued medical costs.....................................      483,038        645,132
Accrued interest..........................................      460,923        497,576
Accrued warranty reserve..................................      451,773        442,597
Accrued payments to former owners of acquired
  businesses..............................................      515,538      2,868,569
Accrued restructuring costs...............................           --        664,900
Other accruals............................................    2,113,727      5,302,934
                                                            -----------    -----------
                                                            $20,750,473    $26,190,992
                                                            ===========    ===========
</TABLE>

     (e) Restructuring of Operations -- In the first quarter of 1999,
Kroll-O'Gara began implementation of a restructuring plan (the "Plan") to reduce
costs and improve operating efficiencies. The Plan was substantially completed
by the end of the second quarter of 1999. The total non-recurring pre-tax
restructuring charge recorded pursuant to the Plan was approximately $4.4
million. Total payments or writeoffs made pursuant to the Plan through December
31, 1999 were $3.1 million. Kroll-O'Gara does not expect to incur any other
significant restructuring charges in future periods related to this Plan. The
principal elements of the restructuring plan were the closure of two
Investigations and Intelligence Group offices and the elimination of
approximately 82 employees. The primary components of the restructuring charge,
including accrued balances as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
DESCRIPTION                                                    EXPENSE       ACCRUAL
-----------                                                   ----------    ----------
<S>                                                           <C>           <C>
Severance and related costs.................................  $3,116,303    $  540,667
Writedown of property, plant and equipment..................     150,166            --
Lease termination costs.....................................   1,064,270       686,301
Other.......................................................      32,827            --
                                                              ----------    ----------
                                                              $4,363,566     1,226,968
                                                              ==========
Less -- Current portion.....................................                  (664,900)
                                                                            ----------
                                                                            $  562,068
                                                                            ==========
</TABLE>

(6) INCOME TAXES

     Kroll-O'Gara 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.

                                       53
<PAGE>   55
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Kroll-O'Gara's provision (benefit) for income taxes on income (loss) from
continuing operations for all periods is summarized as follows:

<TABLE>
<CAPTION>
                                                  1997           1998          1999
                                               -----------    ----------    -----------
<S>                                            <C>            <C>           <C>
Currently payable:
  Federal....................................  $ 2,800,720    $5,530,085    $ 1,887,333
  State and local............................      576,837       965,158        333,059
  Foreign....................................    1,364,873     1,834,143      2,235,172
                                               -----------    ----------    -----------
                                                 4,742,430     8,329,386      4,455,564
                                               -----------    ----------    -----------
Deferred:
  Federal....................................   (1,213,147)     (847,018)    (1,352,885)
  State and local............................     (224,290)     (129,437)      (238,745)
  Foreign....................................           --            --       (434,524)
                                               -----------    ----------    -----------
                                                (1,437,437)     (976,455)    (2,026,154)
                                               -----------    ----------    -----------
                                               $ 3,304,993    $7,352,931    $ 2,429,410
                                               ===========    ==========    ===========
</TABLE>

     A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:

<TABLE>
<CAPTION>
                                         1997                  1998                  1999
                                  ------------------    ------------------    -------------------
                                    AMOUNT      RATE      AMOUNT      RATE      AMOUNT      RATE
                                  ----------    ----    ----------    ----    ----------    -----
<S>                               <C>           <C>     <C>           <C>     <C>           <C>
Provision for income taxes at
  the federal statutory rate....  $1,657,185    34.0%   $7,039,777    34.4%   $1,035,866     34.0%
State and local income taxes,
  net of federal benefit........     295,119     6.1       637,004     3.1        47,750      1.6
Nondeductible expenses..........   1,357,517    27.9       197,446     1.0     1,747,864     57.4
Change in valuation allowance...    (319,283)   (6.6)     (194,744)   (1.0)     (928,095)   (30.5)
Effect of foreign (income)
  loss..........................     577,743    11.8       (47,924)   (0.2)      737,777     24.2
Other...........................    (263,288)   (5.4)     (278,628)   (1.4)     (211,752)    (7.0)
                                  ----------    ----    ----------    ----    ----------    -----
  Provision for income taxes....  $3,304,993    67.8%   $7,352,931    35.9%   $2,429,410     79.7%
                                  ==========    ====    ==========    ====    ==========    =====
</TABLE>

                                       54
<PAGE>   56
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The components of Kroll-O'Gara's consolidated deferred income tax assets
and liabilities as of December 31 are summarized below:

<TABLE>
<CAPTION>
                                                               1998           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
Deferred tax assets:
  Allowance for doubtful accounts.........................  $   432,027    $ 1,051,436
  Depreciation and amortization...........................      244,693        320,653
  Net operating loss carryforwards........................    3,580,761      3,312,439
  Payroll and other benefits..............................    1,721,081      1,452,718
  Restructuring...........................................           --        658,246
  Other accruals..........................................      707,708        961,809
  Acquisition costs.......................................    1,697,885      1,694,866
  Other...................................................      512,382        779,765
                                                            -----------    -----------
                                                              8,896,537     10,231,932
  Valuation allowance.....................................   (3,109,974)    (2,649,047)
                                                            -----------    -----------
          Net deferred tax assets.........................    5,786,563      7,582,885
                                                            -----------    -----------
Deferred tax liabilities:
  Nonaccrual service fee receivable.......................     (156,804)      (181,579)
  Deferred revenue........................................   (3,540,825)    (4,220,953)
  Database capitalization.................................   (2,951,351)    (3,107,610)
  Customer lists, net of amortization.....................     (310,667)      (121,399)
  Percentage of completion on foreign subsidiaries........     (381,917)      (201,148)
  Foreign leasing transactions............................     (125,827)      (147,146)
  Other...................................................     (726,110)      (600,034)
                                                            -----------    -----------
                                                             (8,193,501)    (8,579,869)
                                                            -----------    -----------
          Net deferred tax liability......................  $(2,406,938)   $  (996,984)
                                                            ===========    ===========
</TABLE>

     Kroll-O'Gara has certain foreign and domestic net operating loss
carryforwards, which approximated $3.6 million and $3.3 million at December 31,
1998 and 1999, respectively. The foreign net operating loss carryforwards relate
primarily to the United Kingdom, Mexico 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.

(7) RELATED PARTY TRANSACTIONS

     (a) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                             ------------------------------------
                                                                1997         1998         1999
                                                             ----------   ----------   ----------
<S>                                                          <C>          <C>          <C>
Sales
  to Shareholder...........................................  $6,412,244   $4,877,478   $4,779,449
  to affiliated entities...................................   1,294,800      821,400       70,595
Purchases
  from Shareholder.........................................     814,154      474,800      361,320
  from affiliated entities.................................     447,525    1,406,210      296,100
</TABLE>

                                       55
<PAGE>   57
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                             ------------------------------------
                                                                1997         1998         1999
                                                             ----------   ----------   ----------
<S>                                                          <C>          <C>          <C>
Lease expense to affiliated entities.......................     856,300      916,600      792,979
Legal services expense provided by former Director.........     170,000      190,000           --
Non-interest bearing advances to shareholders..............     525,996      568,213      581,779
Air charter fees included in costs of the offering or
  merger costs.............................................     576,000      566,000           --
Interest on shareholder notes payable......................      78,950        1,100           --
Forgiveness of note payable to affiliated
  entity/shareholder.......................................   1,053,735           --           --
Non-interest bearing advances to affiliates................     282,346      615,851      282,346
Trade accounts receivable due from shareholder.............     897,361    1,290,558    1,231,685
</TABLE>

     (b) Notes Payable-Shareholders -- BAI had certain notes payable to
shareholders. Interest expense associated with these obligations approximated
$78,950 and $1,100 in 1997 and 1998, respectively. In June 1997, approximately
$1,053,735 of the principal and accrued interest payable by BAI to certain
shareholders was canceled in part consideration for the issuance of stock. The
remaining outstanding balance of $152,000 was paid in full during 1998.

     (c) Sales-Shareholder -- During 1997, 1998 and 1999, Kroll-O'Gara rendered
services to American International Group, Inc. and its subsidiaries (AIG) which
is also a shareholder of Kroll-O'Gara. Total revenue recognized for the years
ended December 31, 1997, 1998 and 1999 was $6,412,244, $4,877,478 and
$4,779,449, respectively. Additionally, AIG provides certain services to
Kroll-O'Gara which have been included in cost of sales and operating expenses in
the accompanying consolidated statements of operations. These costs were
approximately $814,154, $474,800 and $361,320 for the years ended December 31,
1997, 1998 and 1999, respectively. The year-end accounts receivable balance for
AIG was approximately $1,290,558 and $1,231,685 at December 31, 1998 and 1999,
respectively.

     (d) Building and Equipment Leases -- Affiliated Entities -- Effective June
1, 1998, Kroll-O'Gara 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 provide Kroll-O'Gara 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 $234,000, $292,000 and
$82,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Kroll-O'Gara also paid this affiliated entity $576,000 in fiscal 1997 for usage
of the aircraft to consummate the merger with Kroll and included such amount in
merger-related costs. Kroll-O'Gara 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. Kroll-O'Gara 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 Kroll-O'Gara 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, 1998 and 1999, Kroll-O'Gara had approximately $484,371 and
$402,801, respectively in unamortized lease deposits with this affiliated
entity.

     Kroll-O'Gara is also currently leasing various equipment, a manufacturing
facility, and office space from several affiliated entities under various three
year and month-to-month lease agreements. Rental expense, net of sub-lease
income, approximated $622,000, $625,000 and $711,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.

(8) REVOLVING LINES OF CREDIT

     On June 25, 1999, Kroll-O'Gara amended its credit agreement to provide for
a revolving line of credit of $25.0 million that matures on May 31, 2001.
Additionally, the existing credit facility provides for a letter of

                                       56
<PAGE>   58
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

credit facility of approximately $7.6 million which matures on May 31, 2000.
Advances under the revolving credit facility bear interest at rates ranging from
prime less 1.75% to prime, or, at Kroll-O'Gara's option, LIBOR plus .75% to
LIBOR plus 1.75%, dependent upon a defined financial ratio. Average borrowings
under the revolving line of credit and its predecessors were $4,568,994,
$1,659,131 and $10,838,273 during 1997, 1998 and 1999, respectively, at
approximate weighted average interest rates of 8.46%, 7.96% and 7.02%,
respectively. The maximum borrowings outstanding during 1997, 1998, and 1999
were $11,600,000, $7,735,029 and $22,822,706, respectively. Borrowings under
this line of credit were approximately $22.8 million at December 31, 1999. There
were no outstanding borrowings pursuant to line of credit agreements at December
31, 1998.

     This credit agreement includes financial covenants which, among other
restrictions, require the maintenance of certain financial ratios and other
financial requirements, including an interest coverage ratio and net worth
minimum, and impose limitations on foreign investment, goodwill, additional
indebtedness and capital expenditures. Kroll-O'Gara was not in compliance with
certain of these covenants as of December 31, 1999. All such events of
non-compliance were subsequently waived or amended by the lender. Had the lender
not provided a waiver or amendment, all amounts outstanding under the credit
agreement would have been subject to acceleration by the lender.

     Effective June 3, 1999, with the acquisition of BP, Kroll-O'Gara acquired a
demand note with maximum borrowings of L2.5 million. The demand note bears
interest at the Bank of England's base rate plus 1.5%. Average borrowings during
1999 under the demand note were $2,836,905, as translated, at an approximate
weighted average interest rate of 6.71%. The maximum borrowings outstanding
during 1999 were $3,675,097, as translated. Maximum borrowings permitted and
borrowings outstanding pursuant to this demand note were approximately $4.0
million and $3.4 million, respectively, as translated at December 31, 1999.

     Kroll-O'Gara also has borrowings of approximately $0.4 million outstanding
as of December 31, 1999, pursuant to various overdraft facilities of certain
subsidiaries.

     In connection with a refinancing in 1997, Kroll-O'Gara fully amortized the
remaining deferred financing costs from a previous agreement, resulting in an
extraordinary charge to Kroll-O'Gara's net income of $193,875, after income tax
benefits of $129,250, or $0.01 per diluted share.

(9) LONG-TERM DEBT

     The components of long-term debt are as follows at:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1998           1999
                                                            -----------    -----------
<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 5.17% at December 31, 1999, payable in
  scheduled installments through September 2016, subject
  to optional tender by the bondholders and a
  corresponding remarketing agreement, secured by certain
  property, plant and equipment and a bank letter of
  credit (Note 13)........................................    1,357,224      1,275,974
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..........    2,526,361      1,994,414
</TABLE>

                                       57
<PAGE>   59
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1998           1999
                                                            -----------    -----------
<S>                                                         <C>            <C>
Notes payable to banks, variable interest rate at prime
  plus 1.5%, fixed rates ranging from 6.39% to 20.66%,
  payable in scheduled installments through December 2010
  with certain instruments subject to prepayment
  penalties, collateralized by certain real and personal
  property................................................    1,001,204        452,806
Other notes payable, interest at 7% to 10.9%, payable in
  scheduled installments through September 2007, certain
  notes secured by various equipment......................    1,462,065      1,278,196
                                                            -----------    -----------
                                                             41,346,854     40,001,390
Less -- current portion...................................   (2,000,299)    (3,737,227)
                                                            -----------    -----------
                                                            $39,346,555    $36,264,163
                                                            ===========    ===========
</TABLE>

     Kroll-O'Gara's $35.0 million of senior unsecured notes payable also
contains financial covenants, which among other restrictions, require the
maintenance of a minimum level of net worth and a fixed charge coverage ratio.

     Scheduled maturities of long-term debt at December 31, 1999 are as follows:

<TABLE>
<S>                                                       <C>
2000....................................................  $ 3,737,227
2001....................................................      430,759
2002....................................................      255,031
2003....................................................      203,775
2004....................................................   35,209,848
Thereafter..............................................      464,750
                                                          -----------
                                                          $40,001,390
                                                          ===========
</TABLE>

(10) OPERATING LEASES

     Kroll-O'Gara leases office space and certain equipment and supplies under
agreements with terms from one to fifteen 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, 1999:

<TABLE>
<S>                                                       <C>
2000....................................................  $ 9,228,655
2001....................................................    8,595,380
2002....................................................    6,029,952
2003....................................................    5,191,308
2004....................................................    4,057,019
Thereafter..............................................   13,434,484
                                                          -----------
                                                          $46,536,798
                                                          ===========
</TABLE>

     Rental expense charged against current operations amounted to approximately
$4,294,000, $6,640,000 and $10,182,000, for the years ended December 31, 1997,
1998 and 1999, respectively.

                                       58
<PAGE>   60
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) DEFINED CONTRIBUTION AND BONUS PLANS

     As of December 31, 1999, Kroll-O'Gara had the following employee benefit
plans in place:

     (a) Defined Contribution Plans -- Kroll-O'Gara and its subsidiaries have
established various profit sharing/401(k) plans covering substantially all of
Kroll-O'Gara's employees. Contributions to the plans are discretionary and are
determined annually by Kroll-O'Gara's Board of Directors. Certain plans also
offer a matching contribution whereby Kroll-O'Gara 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 $1,211,140, $797,003 and $1,189,841, for the years
ended December 31, 1997, 1998 and 1999, respectively.

     (b) Profit and Revenue Sharing Plans -- Kroll-O'Gara and its subsidiaries
have established various profit and revenue sharing plans covering substantially
all of Kroll-O'Gara's employees. The plans were established to provide employees
an annual cash incentive bonus based on various operating and non-operating
criteria. Kroll-O'Gara may amend, modify or terminate these plans at any time.

     Kroll-O'Gara expensed approximately $516,000, $476,000 and $1,235,000
associated with the profit and revenue sharing plans in 1997, 1998 and 1999,
respectively.

(12) EQUITY ARRANGEMENTS

     (a) Stock Option Plans -- In 1996, Kroll-O'Gara adopted a stock option plan
(the 1996 Plan) for employees, non-employee directors and consultants.
Kroll-O'Gara may grant options for up to 1,757,000 shares under the 1996 Plan.
Options for 482,050, 360,000 and 647,195 shares were granted during 1997, 1998
and 1999, 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,
Securify and BAI each outstanding stock option was converted at the respective
exchange factor into options to purchase Kroll-O'Gara common stock. After
conversion, total stock options granted under the previously existing Kroll,
LSAI, Securify and BAI stock option plans in 1997 and 1998 were 174,887 and
248,497, respectively. No options were granted under previously existing stock
option plans in 1999.

     In connection with stock options granted by Securify during the year ended
December 31, 1998, Kroll-O'Gara recorded deferred compensation of $1,192,096,
representing the difference between the deemed 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 and $298,000 was expensed in 1998 and 1999, respectively,
and the balance will be expensed ratably over the next three 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. Kroll-O'Gara 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.

     Kroll also entered into other agreements with certain of its senior
executives which provided additional grants. 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 Kroll-O'Gara 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

                                       59
<PAGE>   61
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

benefits based on compensation expense recognized, Kroll-O'Gara 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 Kroll-O'Gara 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, Kroll-O'Gara adopted a stock incentive plan (the
1998 Stock Incentive Plan) for employees. Kroll-O'Gara may grant up to 500,000
shares under the 1998 Stock Incentive Plan. There were no shares granted under
the plan during 1998, however, during fiscal 1999, 47,500 shares were granted
under the plan. In connection with the shares granted under the Stock Incentive
Plan in 1999, Kroll-O'Gara recorded deferred compensation of $1,571,661,
representing the difference between the fair market value of Kroll-O'Gara common
stock on the date of grant and the purchase price of the shares. This amount is
presented as a reduction of shareholders' equity and will be amortized ratably
over the vesting periods of the applicable grants. Approximately $758,000 was
expensed in 1999 and the balance will be expensed ratably over the next two
years as the grants vest.

     (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 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 Kroll-O'Gara and one warrant for .4204 additional
shares of common stock of Kroll-O'Gara, 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 Kroll-O'Gara
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
Kroll-O'Gara 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 Kroll-O'Gara 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
                                       60
<PAGE>   62
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1999, 8,775 warrants granted by LSAI were still
outstanding.

     As of December 31, 1999, BAI had outstanding warrants to purchase 135
shares of common stock at $13.01 per share and 1,076 shares of common stock at
$4.65 per share. These warrants were issued in June and July of 1996 to certain
consultants and other non-employees of BAI with exercise prices equal to or
greater than the then fair value of BAI's common stock on those dates.
Additionally, as of December 31, 1999, BAI also had outstanding warrants to
purchase 807 shares of common stock at $19.52 per share which were issued in
January of 1998.

     As of December 31, 1999, Kroll-O'Gara had a total of 10,793 warrants 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, Kroll-O'Gara's net income (loss) and diluted earnings (loss) per share
for the years ended December 31, 1997, 1998 and 1999 would have been as follows:

<TABLE>
<CAPTION>
                                                  1997          1998           1999
                                                ---------    -----------    -----------
<S>                                             <C>          <C>            <C>
Net income (loss):
  As reported.................................  $ 709,999    $11,786,065    $(1,921,819)
  Pro forma...................................  $(403,461)   $ 9,315,427    $(4,844,407)
Diluted earnings (loss) per share:
  As reported.................................  $     .05    $       .59    $      (.09)
  Pro forma...................................  $    (.03)   $       .47    $      (.22)
</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 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                         ------------------------------------------------
                                             1997             1998              1999
                                         ------------    ---------------    -------------
<S>                                      <C>             <C>                <C>
Dividend yield.........................       --               --                --
Expected volatility....................   0% - 40.5%       40% - 41.4%          41.4%
Risk-free interest rate................  5.8% - 6.76%      4.2% - 5.7%      5.29% - 5.44%
Expected lives.........................    5 - 7.5       1.5 - 7.5 years      7.5 years
                                            years
</TABLE>

     Option grants by Kroll-O'Gara during 1997 had a weighted-average exercise
price of $14.56, a weighted-average fair value of $7.28 and contractual lives,
on a weighted-average basis, of 9.4 years. The 608,497 options granted by
Kroll-O'Gara during 1998 had a weighted-average exercise price of $12.78, a
weighted-average fair value of $9.35 and contractual lives, on a
weighted-average basis, of 9.4 years. The 647,195 options granted by
Kroll-O'Gara during 1999 had a weighted-average exercise price of $27.31, a
weighted-average fair value of $15.49 and contractual lives, on a
weighted-average basis, of 9.2 years.

                                       61
<PAGE>   63
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of Kroll-O'Gara's stock option plans at December
31, 1997, 1998 and 1999, and the change during the years then ended is presented
in the table below:

<TABLE>
<CAPTION>
                                              1997                   1998                   1999
                                      --------------------   --------------------   --------------------
                                                  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......    812,749    $ 6.68    1,371,808    $10.11    1,459,990    $11.54
  Granted...........................    656,937     14.56      608,497     12.78      647,195     27.31
  Exercised.........................     (6,745)     8.50     (477,894)     8.52     (194,371)     9.11
  Forfeited/Expired/Cancelled.......    (91,133)    11.74      (42,421)    17.05      (82,775)    23.06
                                      ---------    ------    ---------    ------    ---------    ------
Outstanding, end of year............  1,371,808    $10.11    1,459,990    $11.54    1,830,039    $17.06
                                      =========    ======    =========    ======    =========    ======
  Exercisable, end of year..........    761,825    $ 6.52      855,122    $ 8.31      983,510    $10.53
                                      =========    ======    =========    ======    =========    ======
</TABLE>

     Of the options outstanding at December 31, 1999, 274,173 options are
exercisable at prices per share ranging from $0.52 to $2.79 per share, 673,898
options are exercisable at prices per share ranging from $4.65 to $18.59 per
share and 881,968 options are exercisable at prices per share ranging from
$20.22 to $34.88 per share.

(13) COMMITMENTS AND CONTINGENCIES

     (a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, Kroll-O'Gara is required to maintain a letter of credit
supporting the debt. As of December 31, 1999, Kroll-O'Gara's lender was
committed to providing this letter of credit through May 31, 2000. As of
December 31, 1999, Kroll-O'Gara had an outstanding letter of credit in the
amount of $1,437,625.

     At December 31, 1999, Kroll-O'Gara had standby and purchase letters of
credit, issued by Kroll-O'Gara's lender, in the aggregate amount of $1,678,241.

     (b) Employment Agreements -- Kroll-O'Gara has employment agreements with
its executive officers and management level personnel with annual compensation
ranging in value from $55,000 to $486,000, over varying periods extending to
April 2005. 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, 1999, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $22.3 million.

     (c) Legal Matters -- Kroll-O'Gara has been named as a defendant in eight
lawsuits alleging that its officers and directors breached their fiduciary
duties in connection with the now terminated proposed mergers between
Kroll-O'Gara and Blackstone Capital Partners III Merchant Banking Fund L.P.
(Blackstone). Five of the lawsuits were filed in the Court of Common Pleas,
Butler County, Ohio, and were consolidated on November 29, 1999. The remaining
three lawsuits were filed in the United States District Court for the Southern
District of New York and were consolidated on November 30, 1999. The plaintiffs
allege that Kroll-O'Gara's officers and directors breached their fiduciary
duties by negotiating an inadequate acquisition price and by failing to engage
in arms-length negotiations. The plaintiffs seek class certification. The
plaintiffs seek damages and attorneys' fees in an unspecified amount, as well as
an injunction to prevent the mergers or, to the extent the mergers have been
completed, rescission of the mergers. The defendants believe that the
allegations in the complaint are wholly meritless and are, in any event, now
moot in view of the termination of the proposed acquisition. Defendants will
seek the dismissal of the lawsuits.

                                       62
<PAGE>   64
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Kroll-O'Gara has learned that an individual has filed a qui tam suit, which
is under seal, against Kroll-O'Gara under the Civil False Claims Act, 31 U.S.C.
sec. 3729 alleging that Kroll-O'Gara and three of its vendors knowingly violated
their contractual requirements with the Army. On January 18, 2000, an attorney
for the U.S. Department of Justice stated that it was his intention to recommend
that the Government intervene and take over the suit and estimated
Kroll-O'Gara's liability to be as high as $16,000,000 stemming from its vendors'
alleged failure to have certified welders. Kroll-O'Gara strongly disputes the
Government's contention against it and will vigorously contest the Government's
clams.

     In addition to the matters discussed above, 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 such additional currently
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its financial position, results of operations or its
cash flows.

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.

     Kroll-O'Gara has entered into nine 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, Kroll-O'Gara has fixed the total dollar amount which
it will receive under the aforementioned subsidiary loans through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. As
of December 31, 1999, the total notional amount of the contracts, which mature
between January 2000 and July 2001, was $18.1 million. Kroll-O'Gara's cumulative
foreign currency translation adjustment component of shareholders' equity was
decreased by $0.7 million in 1998 and increased by $1.9 million in 1999 as a
result of these agreements.

     Kroll-O'Gara has estimated the fair value of the foreign exchange contracts
based on information obtained from the counterparty of the amount Kroll-O'Gara
would receive at December 31, 1999 in order to terminate the agreements. As of
December 31, 1999, Kroll-O'Gara would have received approximately $1.1 million
upon cancellation of all contracts.

(15) CUSTOMER AND SEGMENT DATA

     (a) Segment Data -- During 1997, Kroll-O'Gara operated in two business
segments, the Security Products and Services Group and the Investigations and
Intelligence Group. In 1998, Kroll-O'Gara created the Information Security Group
in connection with the merger with Securify.

                                       63
<PAGE>   65
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following summarizes information about Kroll-O'Gara's business
segments:

<TABLE>
<CAPTION>
                                        SECURITY       INVESTIGATIONS
                                        PRODUCTS            AND           INFORMATION
                                      AND SERVICES      INTELLIGENCE       SECURITY
                                         GROUP             GROUP             GROUP       OTHER     CONSOLIDATED
                                      ------------   ------------------   -----------   --------   ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                   <C>            <C>                  <C>           <C>        <C>
1997
Net sales to unaffiliated
  customers.........................    $105,557          $ 87,329          $    --     $     --     $192,886
                                        ========          ========          =======     ========     ========
Gross profit........................    $ 30,006          $ 33,979          $    --     $     --     $ 63,985
                                        ========          ========          =======     ========     ========
Operating income....................    $  8,238          $  1,775          $    --     $     --     $ 10,013
                                        ========          ========          =======     ========     ========
Identifiable assets at year-end.....    $ 74,283          $ 58,670          $    --     $     --     $132,953
                                        ========          ========          =======     ========
Corporate assets....................                                                                    5,386
Net assets of discontinued
  operation.........................                                                                   10,732
                                                                                                     --------
Total assets at year-end............                                                                 $149,071
                                                                                                     ========
1998
Net sales to unaffiliated
  customers.........................    $136,844          $117,583          $   116     $     --     $254,543
                                        ========          ========          =======     ========     ========
Gross profit (loss).................    $ 39,345          $ 51,627          $  (395)    $   (325)    $ 90,252
                                        ========          ========          =======     ========     ========
Operating income (loss).............    $ 22,822          $ 11,748          $(2,194)    $ (9,145)    $ 23,231
                                        ========          ========          =======     ========     ========
Identifiable assets at year-end.....    $102,294          $108,303          $ 4,288     $     --     $214,885
                                        ========          ========          =======     ========
Corporate assets....................                                                                   22,371
Net assets of discontinued
  operation.........................                                                                   11,112
                                                                                                     --------
Total assets at year-end............                                                                 $248,368
                                                                                                     ========
1999
Net sales to unaffiliated
  customers.........................    $120,824          $176,837          $ 4,345     $     --     $302,006
                                        ========          ========          =======     ========     ========
Gross profit........................    $ 35,004          $ 78,762          $ 2,300     $     --     $116,066
                                        ========          ========          =======     ========     ========
Operating income (loss).............    $ 12,786          $ 13,167          $(1,764)    $(16,502)    $  7,687
                                        ========          ========          =======     ========     ========
Identifiable assets at year-end.....    $107,786          $155,534          $ 3,359     $     --     $266,679
                                        ========          ========          =======     ========
Corporate assets....................                                                                   14,923
Net assets of discontinued
  operation.........................                                                                   10,096
                                                                                                     --------
Total assets at year-end............                                                                 $291,698
                                                                                                     ========
</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 Kroll-

                                       64
<PAGE>   66
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O'Gara's corporate headquarters costs. Depreciation expense and capital
expenditures for each of Kroll-O'Gara's business segments for the years ended
December 31, 1997, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
                                           SECURITY
                                           PRODUCTS      INVESTIGATIONS    INFORMATION
                                         AND SERVICES   AND INTELLIGENCE    SECURITY
                                            GROUP            GROUP            GROUP      OTHER    CONSOLIDATED
                                         ------------   ----------------   -----------   ------   ------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                      <C>            <C>                <C>           <C>      <C>
1997
Depreciation expense...................     $1,427           $1,373          $   --      $   --     $ 2,800
                                            ======           ======          ======      ======     =======
Capital expenditures...................     $3,149           $3,263          $   --      $   --     $ 6,412
                                            ======           ======          ======      ======     =======
1998
Depreciation expense...................     $1,282           $1,760          $   24      $   13     $ 3,079
                                            ======           ======          ======      ======     =======
Capital expenditures...................     $3,427           $3,001          $  186      $  647     $ 7,261
                                            ======           ======          ======      ======     =======
1999
Depreciation expense...................     $2,188           $3,400          $   93      $  400     $ 6,081
                                            ======           ======          ======      ======     =======
Capital expenditures...................     $5,969           $9,687          $1,673      $1,752     $19,081
                                            ======           ======          ======      ======     =======
</TABLE>

     Identifiable assets by segment are those assets that are used in
Kroll-O'Gara's operations in each segment. Corporate assets are principally
cash, marketable securities, computer software, certain intangible assets and
certain prepaid expenses.

     The following summarizes information about Kroll-O'Gara's different
geographic areas:

<TABLE>
<CAPTION>
                                              UNITED               OTHER
                                              STATES    FRANCE    FOREIGN    ELIMINATIONS   CONSOLIDATED
                                             --------   -------   --------   ------------   ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                          <C>        <C>       <C>        <C>            <C>
1997
Net sales to unaffiliated customers........  $139,023   $24,004   $ 29,859     $     --       $192,886
Intercompany...............................     7,413       208      4,170      (11,791)            --
                                             --------   -------   --------     --------       --------
          Total net sales..................  $146,436   $24,212   $ 34,029     $(11,791)      $192,886
                                             ========   =======   ========     ========       ========
Operating income...........................  $  5,144   $ 1,382   $  3,487     $     --       $ 10,013
                                             ========   =======   ========     ========       ========
Identifiable assets........................  $ 91,325   $23,706   $ 17,922     $     --       $132,953
                                             ========   =======   ========     ========
Corporate assets...........................                                                      5,386
Net assets of discontinued operation.......                                                     10,732
                                                                                              --------
          Total assets at year-end.........                                                   $149,071
                                                                                              ========
</TABLE>

                                       65
<PAGE>   67
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                              UNITED               OTHER
                                              STATES    FRANCE    FOREIGN    ELIMINATIONS   CONSOLIDATED
                                             --------   -------   --------   ------------   ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                          <C>        <C>       <C>        <C>            <C>
1998
Net sales to unaffiliated customers........  $165,062   $28,458   $ 61,023     $     --       $254,543
Intercompany...............................     2,960       199      3,318       (6,477)            --
                                             --------   -------   --------     --------       --------
          Total net sales..................  $168,022   $28,657   $ 64,341     $ (6,477)      $254,543
                                             ========   =======   ========     ========       ========
Operating income...........................  $ 11,054   $ 2,251   $  9,926     $     --       $ 23,231
                                             ========   =======   ========     ========       ========
Identifiable assets........................  $139,759   $29,047   $ 46,079     $     --       $214,885
                                             ========   =======   ========     ========
Corporate assets...........................                                                     22,371
Net assets of discontinued operation.......                                                     11,112
                                                                                              --------
          Total assets at year-end.........                                                   $248,368
                                                                                              ========
1999
Net sales to unaffiliated customers........  $176,910   $27,483   $ 97,613     $     --       $302,006
Intercompany...............................     5,137     1,858      5,746      (12,741)            --
                                             --------   -------   --------     --------       --------
          Total net sales..................  $182,047   $29,341   $103,359     $(12,741)      $302,006
                                             ========   =======   ========     ========       ========
Operating income (loss)....................  $ (4,331)  $ 2,245   $  9,773     $     --       $  7,687
                                             ========   =======   ========     ========       ========
Identifiable assets........................  $156,919   $26,784   $ 82,976     $     --       $266,679
                                             ========   =======   ========     ========
Corporate assets...........................                                                     14,923
Net assets of discontinued operation.......                                                     10,096
                                                                                              --------
          Total assets at year-end.........                                                   $291,698
                                                                                              ========
</TABLE>

     Kroll-O'Gara accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.

     The following summarizes Kroll-O'Gara's sales in the United States and
foreign locations:

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1997        1998        1999
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Sales to unaffiliated customers:
  U.S. Government..................................  $ 43,719    $ 62,149    $ 54,953
  Other United States..............................    78,069      97,204     119,019
  Middle East......................................     5,887       5,958       1,640
  Europe...........................................    26,584      35,274      58,018
  Asia.............................................    10,697      15,467      22,763
  Central & South America..........................    20,123      25,850      33,428
  Other Foreign....................................     7,807      12,641      12,185
                                                     --------    --------    --------
                                                     $192,886    $254,543    $302,006
                                                     ========    ========    ========
</TABLE>

     Export sales by Kroll-O'Gara's domestic operations were approximately 16%,
18% and 3% of net sales for the years ended December 31, 1997, 1998 and 1999,
respectively.

     Kroll-O'Gara is subject to audit and investigation by various agencies
which oversee contract performance in connection with Kroll-O'Gara's contracts
with the U.S. Government. Additionally, Kroll-

                                       66
<PAGE>   68
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O'Gara'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 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.

     Kroll-O'Gara has foreign operations and assets in Argentina, Australia,
Brazil, Canada, Chile, China, Colombia, France, Germany, India, Italy, Japan,
Mexico, Russia, Singapore, South Africa, Switzerland, the Philippines and the
United Kingdom. In addition, Kroll-O'Gara sells its products and services in
other foreign countries and continues to increase its level of international
activity. Accordingly, Kroll-O'Gara 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, 1997, 1998 and
1999 sales in the Security Products and Services Group to the U.S. Government
approximated 23%, 24% and 18% of Kroll-O'Gara's net sales, respectively.

(16) SUPPLEMENTAL CASH FLOWS DISCLOSURES

     The following is a summary of cash paid related to certain items:

<TABLE>
<CAPTION>
                                                               1997         1998          1999
                                                            ----------   -----------   ----------
<S>                                                         <C>          <C>           <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest..................................  $4,960,504   $ 4,593,326   $4,581,720
                                                            ==========   ===========   ==========
  Cash paid for taxes of continuing operations............  $3,468,474   $ 3,952,951   $6,055,244
                                                            ==========   ===========   ==========
  Cash paid for taxes of discontinued operation...........  $       --   $   142,398   $       --
                                                            ==========   ===========   ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Issuance of restricted stock............................  $1,356,280   $        --   $       --
                                                            ==========   ===========   ==========
  Deferred compensation related to options and restricted
     stock................................................  $       --   $ 1,192,096   $1,571,661
                                                            ==========   ===========   ==========
  Accrued contingent consideration incurred in connection
     with acquisition of business.........................  $       --   $        --   $1,071,688
                                                            ==========   ===========   ==========
  Fair value of stock issued in connection with
     acquisition of businesses............................  $6,608,485   $17,610,504   $8,011,929
                                                            ==========   ===========   ==========
  Fair value of stock issued in connection with
     acquisition of minority interest.....................  $1,243,474   $        --   $       --
                                                            ==========   ===========   ==========
  Notes issued in connection with acquisition of
     businesses...........................................  $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   $        --   $       --
                                                            ==========   ===========   ==========
  Cancellation of shareholder's note payable obligation
     and issuance of stock................................  $1,053,735   $        --   $       --
                                                            ==========   ===========   ==========
  Note issued in connection with consulting agreement
     entered into with former shareholder of an acquired
     business.............................................  $       --   $   147,914   $       --
                                                            ==========   ===========   ==========
</TABLE>

                                       67
<PAGE>   69
                            THE KROLL-O'GARA COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) 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>
1999
Net sales.........................................  $68,065    $76,513    $80,980    $76,449
Gross profit......................................   25,698     31,967     31,463     26,938
Net income (loss).................................    2,528        265      3,654     (8,369)
Earnings (loss) per share:
  Basic...........................................  $  0.12    $  0.01    $  0.16    $ (0.38)
  Diluted.........................................  $  0.11    $  0.01    $  0.16    $ (0.38)
1998
Net sales.........................................  $53,650    $60,605    $70,537    $69,751
Gross profit......................................   18,621     21,496     25,277     24,858
Net income (loss).................................    2,792      3,955      5,293       (254)
Earnings (loss) per share:
  Basic...........................................  $  0.18    $  0.21    $  0.25    $ (0.01)
  Diluted.........................................  $  0.17    $  0.21    $  0.24    $ (0.01)
</TABLE>

(18) SUBSEQUENT EVENTS

     Failed Merger with Blackstone and Other Strategic Alternatives -- On
November, 15, 1999, Kroll-O'Gara announced that it had entered into a definitive
agreement with Blackstone pursuant to which shares held by all Kroll-O'Gara
shareholders, other than certain members of management, would be acquired by
Blackstone for $18.00 per share in cash (subsequently amended to $16.00 per
share in cash). On April 12, 2000, Kroll-O'Gara announced that Blackstone had
withdrawn its offer to acquire Kroll-O'Gara shares. Costs associated with the
failed merger through December 31, 1999 were approximately $1.6 million ($0.9
million after taxes, or $0.04 per diluted share) and consisted primarily of fees
for attorneys, accountants, travel and other related charges. Kroll-O'Gara
anticipates additional expenses will be incurred in fiscal 2000.

     On April 18, 2000, Kroll-O'Gara announced it will explore structuring a
transaction that will result in the separation of its two principal operating
segments, the Security Products and Services Group and the Investigations and
Intelligence Group, as well as to seek an equity investment for its Information
Security Group. The Board has directed management to explore structuring a
transaction that will establish the three Groups as stand-alone companies as
soon as practicable. Transactions that will be explored may include sale, joint
venture or spin-off of the Groups to Kroll-O'Gara's shareholders.

                                       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 April 18, 2000
concerning each of Kroll-O'Gara's executive officers and directors:

<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>    <C>
Jules B. Kroll............................  58     Chairman of the Board, Co-Chief Executive
                                                   Officer and Director; Chief Executive
                                                   Officer -- Investigations and Intelligence
                                                   Group
Thomas M. O'Gara..........................  49     Vice Chairman of the Board and Director
Wilfred T. O'Gara.........................  42     Co-Chief Executive Officer and Director;
                                                   Chief Executive Officer -- Securities
                                                   Products and Services Group
Nicholas P. Carpinello....................  50     Controller and Treasurer
Michael G. Cherkasky......................  50     President and Chief Operating Officer --
                                                   Investigations and Intelligence Group and
                                                   Director
Marshall S. Cogan.........................  62     Director
Abram S. Gordon...........................  36     Vice President, General Counsel and
                                                   Secretary
Michael J. Lennon.........................  43     President and Chief Operating
                                                   Officer -- Security Products and Services
                                                   Group and Director
Raymond E. Mabus..........................  51     Director
Nazzareno E. Paciotti.....................  54     Chief Financial Officer
Hugh E. Price.............................  63     Director
Jerry E. Ritter...........................  65     Director
William S. Sessions.......................  69     Director
</TABLE>

     JULES B. KROLL has been Chairman of the Board since the Kroll Holdings
merger on December 1, 1997. Mr. Kroll was named Co-Chief Executive Officer of
Kroll-O'Gara and Chief Executive Officer of the Investigations and Intelligence
Group in April 2000. Previously he had served as Kroll-O'Gara's Chief Executive
Officer since the Kroll Holdings merger. 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 Prudential Life Insurance Company and
Security Technologies 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 Kroll-O'Gara's O'Gara-Hess & Eisenhardt Armoring Company ("OHE")
subsidiary 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 was named Co-Chief Executive Officer of Kroll-O'Gara and
Chief Executive Officer of the Security Products and Services Group in April
2000. Previously he had served as Kroll-O'Gara's President and Chief Operating
Officer since the Kroll Holdings merger and as its Chief Executive Officer from
August 1996 until that merger. Mr. O'Gara has been associated with Kroll-O'Gara,
its subsidiaries and
                                       69
<PAGE>   71

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.

     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 has been President and Chief Operating Officer of
Kroll-O'Gara's Investigations and Intelligence Group since 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 Chairman of Foamex International, Inc., a
manufacturer of polyurethane foam products, since May 1997. Mr. Cogan was
Chairman and Chief Executive Officer of United Auto Group, a franchisor of car
and light truck dealerships, from 1997 to 1999. He was 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 he 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 is a director of United Auto Group.
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 has been President and Chief Operating Officer of
Kroll-O'Gara's Security Products and Services Group since 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

                                       70
<PAGE>   72

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 head of Kroll-O'Gara's Crisis Management Group and its
Kroll Information Services Group, both of which are part of the Security
Products and Services Group. 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 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.

     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 1999.

                                       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 during 1999, and each of the four other
most highly compensated executive officers during 1999. 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     ($)       ($)       ($)       ($)(1)         (#)           ($)(2)
----------------------  ----   -------   -------   -------   ----------   ------------   ------------
<S>                     <C>    <C>       <C>       <C>       <C>          <C>            <C>
Jules B. Kroll          1999   375,000        --      --         --              --         14,661
Chairman and Chief      1998   375,000        --      --         --              --         31,915
Executive Officer       1997   489,583        --      --         --              --         32,965
Thomas M. O'Gara        1999   275,000        --      --         --              --          3,324
Vice Chairman           1998   275,000        --      --         --              --          3,909
                        1997   252,083        --      --         --          23,150          4,568
Wilfred T. O'Gara       1999   350,000        --      --         --          17,000          2,967
President and Chief     1998   350,000        --      --         --              --          2,292
Operating Officer       1997   240,000    45,000      --         --          98,150          4,898
Michael G. Cherkasky    1999   400,000   100,000      --     155,628         50,000          9,740
Chief Operating         1998   400,000    40,000      --         --              --         25,930
Officer --              1997   400,000        --      --         --          25,000         28,914
Investigations and
  Intelligence Group
Nazzareno E. Paciotti   1999   275,520    66,667      --         --          10,000          8,777
Chief Financial
  Officer               1998   275,520    66,667      --         --              --         19,813
                        1997   275,520    66,667      --         --          15,000         26,984
</TABLE>

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

(1) Represents 6,000 shares of restricted stock for Mr. Cherkasky, awarded on
    March 25, 1999 under Kroll-O'Gara's 1998 Stock Incentive Plan and having an
    aggregate value at December 31, 1999 of $93,000. No other shares of
    restricted stock are held by Mr. Cherkasky. The shares vest over a three
    year period, with 50% vesting ratably over the first 12 months after the
    date of grant and an additional 25% vesting ratably over each of the second
    and third 12 months after the date of grant. Until vested, the shares have
    no dividend rights.

(2) Represents profit-sharing contributions of $2,400 for each named executive
    officer; supplemental disability plan benefits of $7,694 for Mr. Kroll,
    $4,639 for Mr. Cherkasky and $4,002 for Mr. Paciotti; group term life
    insurance benefits of $4,567 for Mr. Kroll, $2,701 for Mr. Cherkasky and
    $2,375 for Mr. Paciotti; and executive disability insurance plan benefits of
    $924 for Mr. Thomas M. O'Gara and $567 for Mr. Wilfred T. O'Gara.

     EMPLOYMENT AGREEMENTS. Kroll-O'Gara has employment agreements expiring on
November 30, 2000 with each of the following executive officers providing for
annual base salaries in the listed 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 of these executive officers, 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 the bonus in shares of Kroll-
O'Gara's common stock. Pursuant to these employment agreements, employment may
be terminated by

                                       72
<PAGE>   74

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.

     In May 1999 Mr. Cherkasky entered into an employment agreement with
Kroll-O'Gara for an "evergreen" two year term. The agreement provides for a base
salary of $400,000 for 1999 and for subsequent annual calendar year increases of
at least 4%. Mr. Cherkasky also is entitled to participate in Kroll-O'Gara's
annual bonus, stock option, stock incentive and other benefit plans. In
connection with the agreement, he received a signing bonus of $140,000, payable
$40,000 in May 1999 and $100,000 in January 2000. On each three-year anniversary
of the agreement he will receive an additional $350,000. In the event the
agreement is terminated due to Mr. Cherkasky's death or disability or by
Kroll-O'Gara for other than cause or by Mr. Cherkasky for good reason, he is
entitled to receive a lump sum payment equal to the value of his salary, annual
bonus, the three-year anniversary payment, stock options and incentive stock for
the remainder of the term. During his employment and for two years after his
employment terminates, if the termination occurs during the first two years of
the agreement and is by Kroll-O'Gara for cause or by him for other than good
reason, Mr. Cherkasky is restricted from directly or indirectly engaging in the
investigations and intelligence business. For purpose of the agreement, "cause"
means conviction of a felony and "good reason" includes a change in duties or
responsibilities, a reduction in compensation or any person or group other than
Jules Kroll becoming the beneficial owner of 35% or more of the voting power of
Kroll-O'Gara's securities.

     STOCK OPTIONS. The following table presents information on option grants to
the named executive officers during 1999 pursuant to the Company's 1996 Stock
Option Plan. The Plan does not provide for the grant of stock appreciation
rights ("SARs").

                       OPTIONS GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                              INDIVIDUAL GRANTS(1)
                               ---------------------------------------------------    POTENTIAL REALIZABLE
                               NUMBER OF                                                VALUE AT ASSUMED
                               SECURITIES    % OF TOTAL                               ANNUAL RATES OF STOCK
                               UNDERLYING     OPTIONS       EXERCISE                 PRICE APPRECIATION FOR
                                OPTIONS      GRANTED TO        OR                          OPTION TERM
                                GRANTED     EMPLOYEES IN   BASE PRICE   EXPIRATION   -----------------------
            NAME                  (#)       FISCAL YEAR      ($/SH)        DATE        5%($)       10%($)
            ----               ----------   ------------   ----------   ----------   ---------   -----------
<S>                            <C>          <C>            <C>          <C>          <C>         <C>
Jules B. Kroll...............        --           --            --             --          --            --
Thomas M. O'Gara.............        --           --            --             --          --            --
Wilfred T. O'Gara............    17,000          2.6        26.938        3/24/09     288,021       729,902
Michael G. Cherkasky.........    50,000          7.7        26.938        3/24/09     847,121     2,146,771
Nazzareno E. Paciotti........    10,000          1.5        26.938        3/24/09     169,424       429,354
</TABLE>

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

(1) All options vest one-third per year beginning one year after the date of
    grant. The exercise price of all options may be paid in cash or by the
    transfer of shares of Kroll-O'Gara's common stock valued at their fair
    market value on the date of exercise. Each option becomes exercisable in
    full in the event of the execution of an agreement of merger, consolidation
    or reorganization pursuant to which Kroll-O'Gara is not to be the surviving
    corporation or the execution of an agreement of sale or transfer of all or
    substantially all of the assets of Kroll-O'Gara.

                                       73
<PAGE>   75

     With respect to each named executive officer, the following table sets
forth information concerning stock options exercised during 1999 and unexercised
stock options held at December 31, 1999.

                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................           --                 --         15,433/7,717    67,905/33,955
Wilfred T. O'Gara...............       14,703            341,240        62,730/49,717    86,612/42,444
Michael G. Cherkasky............           --                 --       109,445/62,084     1,188,931/--
Nazzareno E. Paciotti...........           --                 --       100,529/15,000     1,188,931/--
</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.

                                       74
<PAGE>   76

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 April 18, 2000 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    12.9
Thomas M. O'Gara(2).........................................  2,441,369    11.0
Wilfred T. O'Gara...........................................    319,156     1.4
Michael G. Cherkasky........................................    155,521       *
Marshall S. Cogan...........................................      2,000       *
Michael J. Lennon...........................................     38,334       *
Raymond E. Mabus............................................      4,000       *
Nazzareno E. Paciotti.......................................    117,178       *
Hugh E. Price...............................................     14,889       *
Jerry E. Ritter.............................................      4,000       *
William S. Sessions.........................................      4,000       *
All directors and executive officers as a group
(13 persons)................................................  6,083,067    26.8
American International Group, Inc.(2).......................  1,444,212     6.5
Lord, Abbett & Co.(2).......................................  1,865,950     8.4
</TABLE>

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

 *  Less than 1%.

(1) Includes 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 April 18, 2000;
    Mr. Kroll, none; Mr. Thomas M. O'Gara, 23,150 shares; Mr. Wilfred T. O'Gara,
    76,113 shares; Mr. Cherkasky, 123,861 shares; Mr. Cogan, 2,000 shares; Mr.
    Lennon, 25,303 shares; Mr. Mabus, 4,000 shares; Mr. Paciotti, 103,862
    shares; Mr. Price, 14,889 shares; Mr. Ritter, 3,000 shares; Mr. Sessions,
    4,000 shares; and all directors and executive officers as a group, 425,842
    shares. Also includes for Messrs. Cherkasky and Lennon, 250 shares and 104
    shares, respectively, of restricted stock that vest within 60 days after
    April 18, 2000.

(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. AIG's address
    is 70 Pine Street, New York, New York 10270. Lord, Abbett & Co.'s address is
    767 Fifth Avenue, New York, New York 10153.

(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.

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.

     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

                                       75
<PAGE>   77

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, 1999, 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 $566,213 for the year ended December 31, 1999.

     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, 1999,
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
$403,000 in unamortized lease deposits with Victory Aviation as of December 31,
1999. Rental expense related to the Gulfstream lease, including amortization of
the deposit, was $82,000 in 1999.

INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS

     During 1999, Kroll-O'Gara and Mr. 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 Mr. Kroll. Amounts due to Kroll-O'Gara at
December 31, 1999 pursuant to this agreement were $281,561.

     During 1999, 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 $4,779,449 in 1999
for these services. The year-end accounts receivable balance for AIG was
$1,231,685 at December 31, 1999. Since 1995, Kroll-O'Gara has purchased some of
its liability insurance, including Professional Errors and Omissions and
Directors and Officers liability insurance, from AIG's subsidiaries. AIG's
subsidiaries billed Kroll-O'Gara $361,320 for this insurance during 1999.
Kroll-O'Gara obtains the coverage through an independent insurance broker and
where possible obtains competitive proposals from unrelated third parties.

                                       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, 1998 and 1999

          Consolidated Statements of Operations

             - For the Years Ended December 31, 1997, 1998 and 1999

          Consolidated Statements of Shareholders' Equity

             - For the Years Ended December 31, 1997, 1998 and 1999

          Consolidated Statements of Cash Flows

             - For the Years Ended December 31, 1997, 1998 and 1999

          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, 1999, Kroll-O'Gara filed the
      following current reports on
           Form 8-K:

        - Date of Report: September 23, 1999 (filed October 4, 1999); Items 5
               and 7(c).

        - Date of Report: November 15, 1999 (filed December 2, 1999); Items 5
               and 7(c).

        - Date of Report: December 22, 1999 (filed December 22, 1999); Item 5
               (includes restated Selected Financial Data, Management's
               Discussion and Analysis of Financial Condition and Results of
               Operations and Consolidated Financial Statements at December 31,
               1997 and 1998 and for the three years ended December 31, 1998
               giving effect to the acquisition of Background 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 report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 24th day of
April, 2000.

                                          THE KROLL-O'GARA COMPANY

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the 24th day of April, 2000.

<TABLE>
<CAPTION>
                  SIGNATURE                                             TITLE
                  ---------                      ----------------------------------------------------
<S>                                              <C>

/s/ JULES B. KROLL                               Chairman of the Board and Co-Chief Executive Officer
---------------------------------------------    (co-principal executive officer)
Jules B. Kroll

/s/ THOMAS M. O'GARA                             Vice Chairman of the Board
---------------------------------------------
Thomas M. O'Gara

/s/ WILFRED T. O'GARA                            Co-Chief Executive Officer and Director
---------------------------------------------    (co-principal executive officer)
Wilfred T. O'Gara

/s/ NAZZARENO E. PACIOTTI                        Chief Financial Officer (principal financial
---------------------------------------------    officer)
Nazzareno E. Paciotti

/s/ NICHOLAS P. CARPINELLO                       Controller and Treasurer (principal accounting
---------------------------------------------    officer)
Nicholas P. Carpinello

/s/ MICHAEL G. CHERKASKY                         Director
---------------------------------------------
Michael G. Cherkasky

/s/ MARSHALL S. COGAN                            Director
---------------------------------------------
Marshall S. Cogan

/s/ MICHAEL J. LENNON                            Director
---------------------------------------------
Michael J. Lennon

/s/ RAYMOND E. MABUS                             Director
---------------------------------------------
Raymond E. Mabus

/s/ HUGH E. PRICE                                Director
---------------------------------------------
Hugh E. Price

/s/ JERRY E. RITTER                              Director
---------------------------------------------
Jerry E. Ritter

/s/ WILLIAM S. SESSIONS                          Director
---------------------------------------------
William S. Sessions
</TABLE>

                                       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       1996 Stock Option Plan, as amended (12)*
10.4       Employment Agreement between the Company and Thomas M.
           O'Gara, dated August 23, 1996 (2)*
10.5       Employment Agreement between the Company and Wilfred T.
           O'Gara, dated August 23, 1996 (2)*
10.6       Employment Agreement between the Company and Nicholas P.
           Carpinello, dated August 23, 1996 (2)*
10.7       Employment Agreement between O'Gara-Hess & Eisenhardt
           Armoring Company and Michael J. Lennon, dated August 23,
           1996 (2)*
10.8       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)
10.9       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)
10.10      Amended and restated lease of office space in New York, New
           York between Progress Partners and Kroll Associates, Inc.
           (6)
10.11      Registration Rights Agreement, dated August 8, 1997, among
           Thomas M. O'Gara, Jules B. Kroll and the Company (6)
10.12      Registration Rights Agreement between American International
           Group, Inc. and the Company (1)
10.13      Employment Agreement, dated October 17, 1997, between the
           Company and Jules B. Kroll (6)*
10.14      Employment Agreement, dated October 17, 1997, between the
           Company and Nazzareno E. Paciotti (6)*
10.15      Employment Agreement, dated October 17, 1997, between the
           Company and Abram S. Gordon (6)*
10.16      Amendment to Employment Agreement, dated October 17, 1997,
           between O'Gara-Hess & Eisenhardt Armoring Company and
           Michael J. Lennon (6)*
10.17      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Thomas M. O'Gara (6)*
10.18      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Wilfred T. O'Gara (6)*
10.19      Amendment to Employment Agreement, dated October 17, 1997,
           between the Company and Nicholas P. Carpinello (6)*
10.20      Form of Promissory Note between Jules B. Kroll and Kroll
           Associates (6)
</TABLE>

                                       E-1
<PAGE>   81

<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10.21      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)
10.22      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)
10.23      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)
10.24      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)
10.25      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)
10.26      Agreement and Plan of Merger dated as of December 31, 1998
           among The Kroll-O'Gara Company, TKOG Delaware, Inc. and
           Securify Inc. (11)
10.27      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)
10.28      Employment Agreement between Kroll Associates, Inc., The
           Kroll-O'Gara Company and Michael G. Cherkesky, dated May 17,
           1999 (13)*
10.29      Amended Loan Agreement, dated June 25, 1999, among The
           Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt Armoring
           Company, Kroll Holdings, Inc., Kroll Associates, Inc. and
           KeyBank National Association (13)
21.1       Subsidiaries of the Company
23.1       Consent of Arthur Andersen LLP
27.1       Financial Data Schedules (Exhibits 27.1-27.3)
</TABLE>

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  * Executive compensation agreement
---------------

 (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.

                                       E-2
<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.

(13) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1999 and incorporated herein by reference.

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